s17 latest key tax developments paper sme restructure rollover now law the tax laws amendment (small...

S17 Latest key tax developments

Paper

Copyright © 2016 Chartered Accountants Australia and New Zealand. All rights reserved. ABN 50 084 642 571.

2

Disclaimer

This paper represents the opinion of the author(s) and not necessarily those of Chartered Accountants Australia

and New Zealand or its members.

The contents are for general information only. They are not intended as professional advice - for that you should

consult a Chartered Accountant or other suitably qualified professional.

Chartered Accountants Australia and New Zealand expressly disclaims all liability for any loss or damage arising

from reliance upon any information in these papers.


3

1. Latest key tax legislative & policy developments

1.1 Tax Bill No 6 now law

The Tax and Superannuation Laws Amendment (2015 Measures No 6) Bill 2015 on 25 February 2016

received Royal Assent as the Tax and Superannuation Laws Amendment (2015 Measures No 6) Act

2016 (Act No 10 of 2016). It had passed all stages without amendment and contains the following

amendments:

Look-through earnout rights - Amends the ITAA 1997 to change the CGT treatment of the sale

and purchase of businesses involving certain earnout rights - rights to future payments linked to the

performance of an asset or assets after sale. As a result of these amendments, capital gains and

losses arising in respect of look-through earnout rights will be disregarded. Instead, payments

received or paid under the earnout arrangements will affect the capital proceeds and cost base of

the underlying asset or assets to which the earnout arrangement relates. Date of effect: These

amendments will apply from 24 April 2015.

Foreign resident CGT withholding regime - Amends the TAA to introduce a new regime that

imposes withholding obligations on the purchasers of certain Australian assets. The amendments

will impose a 10% non-final withholding obligation on the purchasers of certain Australian assets

where they acquire it from a relevant foreign resident. The obligation will apply to the acquisition of


4

an asset that is: (i) TARP (taxable Australian real property); (ii) an indirect Australian real property

interest; or (iii) an option or right to acquire such property or such an interest. The purpose of the

regime is to assist in the collection of foreign residents' CGT liabilities. Date of effect: 1 July 2016.

1.2 SME restructure rollover now law

The Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 on 8 March 2016 received

Royal Assent as Act No 18 of 2016. It had passed all stages without amendment and amends the ITAA

1997 to provide greater flexibility for small businesses to change their legal structure. The Bill effectively

seeks to allow small businesses to change the legal structure of their business and have the CGT liability

disregarded and deferred until eventual disposal.

Optional roll-over relief for:

Active assets; transferred between

Small business entities; as part of a

Genuine restructure of an ongoing business

Start date: 1 July 2016.


5

1.3 GST and digital products Bill receives

Royal Asset

The Tax and Superannuation Laws Amendment (2016 Measures No 1) Bill 2016 on 5 May 2016 received

Royal Assent as Act No 52 of 2016. It had passed all stages with amendments. The House of Reps had

agreed to four government amendments moved in the Senate. The amendments allow non-residents

and their resident agents to agree that the resident agent will be the liable entity for GST despite the

operation of the other amendments in Sch 2 to the Bill.

The Bill makes the following amendments:

GST treatment of digital products and other services (B2C supplies) - amends the GST Act to

ensure that digital products and other imported services supplied to Australian consumers by foreign

entities are subject to GST in a similar way to equivalent supplies made by Australian entities.

Date of effect: The changes apply in determining net amounts for tax periods starting on or after

1 July 2017. For supplies made over a period spanning this date, the amendments apply to that

portion of the supply made after 1 July 2017.

GST treatment of cross-border transactions between businesses (B2B supplies) - amends the

GST Act to better target the way Australia's GST rules apply to cross-border supplies that involve

non-resident entities. The amendments are designed to prevent non-resident businesses

inappropriately being drawn into the Australian GST system unnecessarily through business-to-

business transactions.

Date of effect: The changes apply to taxable supplies in determining net amounts for tax periods that

commence from the second quarterly tax period starting after Sch 2 receives Royal Assent.

Farm Management Deposits (FMDs) - amends the tax law to increase the flexibility of FMDs to

assist primary producers - e.g. doubles the amount a primary producer may hold in their FMDs from

$400,000 to $800,000.


6

Date of effect: The amendments apply to assessments for the 2016-17 income year and later income

years.

1.4 Innovation tax incentives

The Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 on 5 May 2016 received Royal

Assent as Act No 54 of 2016. It had passed all stages without amendment and makes the following

amendments:

For early stage innovation companies - Amends the ITAA 1997 to encourage new investment in

Australian early stage innovation companies with high growth potential by providing investors, who

invest in such companies, with tax incentives. These incentives include a 20% carry-forward non-

refundable offset on investments capped at $200,000 per year, and a 10-year exemption on CGT for

investments held in the form of shares in the innovation company for at least 12 months, provided

that the shares held do not constitute more than a 30% interest in the innovation company. The tax

offset will be available upon investment, not when the funds are used by the innovation company,

and any sale of the shares will be taxed on a "deemed capital account" basis. These amendments

form part of the tax incentive for early stage investors measure.

Date of effect: Amendments apply to shares issued on or after the later of 1 July 2016.

For venture capital investment - Amends the Early Stage Venture Capital Limited Partnership

(ESVCLP) and Venture Capital Limited Partnership (VCLP) regimes within the Venture Capital Act

2002 and ITAA 1997 to improve access to venture capital investment and make the regimes more

attractive to investors. The amendments provide an additional tax incentive for limited partners in new

ESVCLPs, relax restrictions on ESVCLP investments and fund size and clarify the legal framework

for venture capital investment in Australia. Under the changes, there will be:

o A non-refundable tax offset of 10% of the value of new capital invested into early stage

venture capital limited partnerships during the income year;


7

o An increase in the maximum fund size of early stage venture capital limited partnerships

from $100m to $200m;

o Improved access to funding from managed investment trusts; and

o Broadened and simplified rules for both venture capital limited partnerships and early

stage venture capital limited partnerships.

Date of effect: The amendments broadly apply on and after 1 July 2016. However, the ESVCLP tax

offset will be available for any qualifying contributions made to ESVCLPs that become unconditionally

registered on or after 7 December 2015 - i.e. the date the measure was announced in the

Government's Innovation Statement.


8

1.5 Options share buy-back

Cable & Wireless Australia & Pacific Holding BV (in liq) v FCT [2016] FCA 78

Brief summary of the case

Non-resident taxpayer got $3.9bn from Optus for share buy-back

Amount debited to ‘Buy-back Reserve’ account

Taxpayer claimed it was a form of ‘Share Capital’ account

Taxpayer sought refund of $452m withheld

Federal Court held amount correctly withheld - $3.9bn was paid out of profits.

Overview of the case

The Federal Court has held that a foreign resident taxpayer was not entitled to a refund of

some $452m that had been withheld as dividend withholding tax from an amount paid to the

taxpayer for the buyback of the shares it held in Optus. In doing so, the Court agreed with

the FCT that the amount paid to the taxpayer and debited to the buy-back reserve account

by Optus for this purpose was a dividend paid out of profits pursuant to s 159GZZZP(1) of

the ITAA 1936, and from which dividend withholding tax was required to be withheld: Cable

& Wireless Australia & Pacific Holding BV (in liquidatie) v FCT [2016] FCA 78 (Federal Court,

Pagone J, 11 February 2016).

Background

The taxpayer was a non-resident that held shares in Optus. In 2001, as part of a takeover of

Optus by a Singaporean telecommunications company (Singtel), it was agreed that Singtel

would lend Optus funds for the purpose of buying back shares - including 43% of the shares

the taxpayer held in Optus - for a total consideration of $6.2bn. At the time, Optus had $5.3bn

standing to the credit of its share capital account and debited $2.3bn of the total consideration

to that account and $3.9bn of the consideration to the buy-back reserve account.


9

At the time, the amount paid to the taxpayer from the "buy-back reserve account" of Optus

was treated by all parties as a dividend on which withholding tax was to be paid. However,

following the decision of the High Court in FCT v Consolidated Media Holdings Ltd [2012]

HCA 55, the taxpayer sought repayment of the amount on the basis that it was "paid in error".

In that case the High Court held that a share buy-back undertaken by Crown Casino for the

purpose of returning capital in excess of its needs, and which was undertaken by way of

debiting the amount paid to an account labelled as "share buy-back reserve account", was

an amount paid out of an share capital account and therefore was a non-assessable return

of capital.

The issue in the current proceedings turned on the nature of the debit made by Optus to the

buy-back reserve account for the purpose of the buy-back. To the extent that the debit was

in respect of a share capital account in terms of s 6D of the ITAA 1936, then the buy-back

would be a return of the capital contributed to the company and the payment would be non-

assessable, and the taxpayer would be entitled to a refund of the tax previously withheld.

Decision

In finding that the amount paid for the buy-back had been debited to something other than a

share capital account and that therefore it was a dividend paid out of profits pursuant to

s 159GZZZP(1) of the ITAA 1936, the Court first distinguished the decision in Consolidated

Media essentially on the basis that, in that case, the buy-back of shares by Crown was for

the purpose of returning to its shareholder "capital that was in excess of its needs", while in

this case the buy-back was undertaken to facilitate the sale of Optus to Singtel, and had been

funded by Singtel without decreasing or increasing Optus's capital.

Specifically, the Court found that Optus, unlike Crown Casino, was neither reducing nor

seeking to reduce its capital by the proposed buy-back, but was seeking to facilitate the

substitution of its shareholders as part of its sale to Singtel.

The Court then noted that under the buy-back arrangement part of the consideration to be

paid to shareholders for the buy-back was repayment of capital which had been contributed

to Optus and was to be treated as such, but that the balance of the consideration was not a

return of capital which had been contributed to Optus but that it had, nevertheless, been

reflected in the accounts as "a matter of equity". It also noted that capital contributed to a

company is not the same as the equity in the company.


10

Accordingly, the Court found that the role played by the buy-back reserve account was to

facilitate the payment of the consideration to the shareholders for the buy-back and that to

the extent that the consideration exceeded the amount standing in the accounts of Optus as

capital contributed by them it was a "return on their equity". As a result, it concluded that the

payment for the buy-back was from sources other than the share capital and therefore

s 159GZZZP(1) operated to deem the amount to be a dividend.

In arriving at this decision, the Court also took into account the following matters:

The Optus buy-back reserve account was not "a record of the financial position of the

company in relation to Optus' share capital";

Journal entries confirmed the source of the payment to the taxpayer as being from

the moneys borrowed by Optus for the purposes of the buy-back;

The fact that an outgoing has an impact upon a company's equity does not stamp

upon the outgoing the character of a reduction in capital; and

Under the Corporations law there was no restriction on the source of funds that Optus

could use to effect its buy-back.

Finally, the Court emphasised that s 159GZZZP was not limited to deeming a dividend only

to an off-market purchase funded "from a company's distributable profits" as it deems any

part of the consideration for a buy-back to be treated as profit, unless the consideration is

debited against amounts standing to the credit of a genuine share capital account.


11

1.6 Taxpayer not carrying on share trading

business

Re Devi v FCT [2016] AATA 67


Childcare worker turned over $600,000 in share transactions

$20,000 loss incurred

AAT found taxpayer was an investor, not a share trader

No deduction for losses allowed

Transactions not regular, systematic or sophisticated


The AAT has found that a taxpayer was not carrying on a business of share trading, and

accordingly was not entitled to claim a loss resulting from her share transactions: Re Devi and

FCT [2016] AATA 67 (AAT, File No 2014/4297, Lazanas SM, 9 February 2016).

Background

The taxpayer, a childcare worker, began trading shares in the 2011 income year. She incurred a

$20,000 loss for the income year, which she sought to claim as a deduction. As a childcare

worker, the taxpayer earned around $40,000 in the 2011 income year. In contrast, she turned

over approximately $600,000 in share transactions (including both purchases and sales) for the

relevant income year.

The taxpayer told the FCT that she usually spent five to 10 hours per week conducting research

and share trading. This information was later altered by the taxpayer to be approximately 15 to

25 hours weekly. Contradicting this later statement, the taxpayer's oral evidence before the AAT

demonstrated that she had very little knowledge of the companies she had invested in, as she

was unable to list many of the names of the "blue chip" companies she had purchased shares in

or recall what industries they operated in. Furthermore, the AAT noted that the single-paged

business plan the taxpayer produced (which was not previously shown to the FCT) was written

for the current proceedings and did not exist in the 2011 income year.


12

1.7 Cents per kilometre car deductions

The Treasury Laws Amendment (2016 Measures No 1) Regulation 2016 was registered on 26 February 2016.

It repeals provisions in the Income Tax Assessment Regulations 1997 relating to the "cents per kilometre"

method used for calculating a deduction for car expenses for an income year. The Tax and Superannuation

Laws (2015 Measures No 5) Bill 2015, which received Royal Assent on 30 November 2015, has reformed the

cents per kilometre deduction rules in the ITAA 1997. Under the new law, the FCT will now set the rate of

cents per kilometre deductions for the purposes of Div 28 of the ITAA 1997. The Regulation repeals cents

per km rates based on engine capacity. From 2015-16, a single rate ($0.66 per business km) applies. The

FCT has the power to set rates from 2016-17.

The amending Regulation also makes various amendments to the Corporations Regulations 2001, the

Competition and Consumer Regulations 2010 and the Australian Securities and Investments Commission

Regulations 2001 principally to prescribe new professional standards schemes for computer specialists and

surveyors at the Commonwealth level and amend names and dates of existing schemes e.g. for CA ANZ and

Decision

In deciding that the taxpayer was a share investor and not a share trader, the AAT considered

each of the key indicators established in case law, in particular those listed in AAT Case 6297

(1990) 21 ATR 3747. The AAT decided that a lack of regular and systematic trade, especially in

the second half of the 2011 income year when only 10 transactions were made, went against the

taxpayer's contention that she was conducting a share trading business. It was more likely, the

AAT said, that the taxpayer was only spending her originally purported five hours per week on

researching and trading stock. Furthermore, the AAT found that the taxpayer's methods of

research (e.g. reading financial newspapers) lacked the "sophistication to constitute a share

trading business". In particular, the AAT commented that the taxpayer lacked the knowledge and

experience to trade in shares, and was likely relying on the advice of her husband. While the AAT

did concede that the capital involved in the taxpayer's transactions was substantial, it noted that

this could indicate either share investment or a business of share trading. Accordingly, as the

relevant factors weighed against the taxpayer, the AAT affirmed the FCT's decision to treat the

taxpayer as a share investor and to deny a deduction for her losses.


13

CPA Australia. It also amends the Retirement Savings Accounts Regulations 1997 and the Superannuation

Industry (Supervision) Regulations 1994 to recognise online and electronic interactions between

superannuation providers and Retirement Savings Account (RSA) holders or fund members for the purposes

of identifying lost RSA holders and lost members.

1.8 Interest expense had no nexus with income

Re Jarvis and FCT [2016] AATA 99


• Couple sought interest deductions on home loan facility

• AAT held interest not deductible

• No nexus with taxpayer’s income

• Business carried on by other entities


The AAT has found that interest paid by a married couple on three loan accounts was not

deductible as they failed to establish that the interest was incurred in deriving their assessable

income or in carrying on a business: Re Jarvis and FCT [2016] AATA 99 (AAT, File Nos

2014/5984-5985, Frost DP, 24 February 2016).

Background

The taxpayers, Mr and Mrs J, sought to claim deductions for interest incurred on three loan

accounts that they had not included in their tax returns for the 2010 and 2011 income years. The

taxpayers were out of time to request amended assessments, so they objected to the original

assessments. The FCT disallowed the objections and the taxpayers applied to the AAT to review

those objections decisions.


14

1.9 Exposure draft legislation

The government had released draft legislation for comment to implement its December 2015 Innovation

Agenda measure to allow increased access to company tax losses.

The government had announced a package of measures designed to incentivise and reward innovation

as part of its National Innovation and Science Agenda. One of those measures will allow businesses that

have changed ownership to access past year tax losses if they satisfy a similar business test. Under the

current law, businesses that have changed ownership must satisfy the same business test to access

The evidence presented to the AAT did not make the situation clear and neither taxpayer gave

oral evidence before the Tribunal. Their statement of facts asserted that they were the directors

of a company, which formed a partnership with a second company. However, Mrs J's statutory

declaration provided that she, and not the company, was in partnership with the second company.

The taxpayers also claimed to have spent $30,000 in December 2003 to purchase a backhoe and

$50,000 in September 2004 to buy out their "partners' share of the business". The taxpayers said

they financed these purchases by drawing money from their home loan facility.

Decision

The AAT found that the taxpayers failed to discharge their burden of proving that they were

entitled to the deductions sought. There was no documentation at all to support their claim that

they purchased a $30,000 backhoe. Furthermore, the documentation relating to the $50,000

share purchase left "many questions… unanswered." For example, the share sale agreement

was dated May 2005, contradicting the taxpayers' evidence.

The AAT speculated that the most likely scenario was that the partnership was originally carried

on by the two companies, and then - after May 2005 - operated by the first company alone. In this

situation, any interest paid on the three loan accounts would have been incurred in producing the

assessable income of another entity and not the taxpayers' income.

Accordingly, due to the lack of evidence, the AAT affirmed the FCT's objection decisions.


15

past year tax losses. This measure is designed to encourage entrepreneurship by allowing loss-making

businesses to seek out new opportunities to return to profitability.

The draft legislation would amend the ITAA 1997 and ITAA 1936 to supplement the existing same

business test with a more flexible "similar business test" to improve access to losses for companies that

have changed ownership. Under the proposed amendments, those companies would be able to deduct

losses if they satisfy the similar business test, which is framed to allow companies to seek out

opportunities to innovate and grow without losing access to losses.

The proposed similar business test would also supplement the same business test for the other purposes

for which the same business test currently applies (such as in working out whether a debt written off as

bad can be deducted in an income year, and for certain purposes with respect to listed widely held trusts).

As with the same business test, the focus of the similar business test is on the identity of the business. It

is not sufficient that the current business is of a similar "kind" or "type" to the former business. For

example, it is not enough to say that the former business was in the hospitality industry and the current

business is in the hospitality industry. Instead, the test looks at all of the commercial operations and

activities that the former business carried on and compares them with all of the commercial operations

and activities that the current business carries on, to work out if the businesses are similar.

Where a company has undergone a change of ownership or control, it may also access losses from years

preceding that change if it passes the similar business test. A company passes the similar business test

if its current business is a similar business to its former business. Under the proposed changes, in working

out whether the business carried on throughout the business continuity test period (the "current

business") is similar to the business carried on immediately before the test time (the "former business"),

regard must be had to three factors, which are not exhaustive:

Factor 1: same assets used to generate income - the extent to which the assets (including

goodwill) that are used in its current business to generate assessable income were also used in the

company's former business to generate assessable income;

Factor 2: assessable income generated from the same sources - the extent to which the sources

from which the current business generates assessable income were also the sources from which the

former business generated assessable income; and


16

Factor 3: changes to a similarly placed business - whether any changes to the former business

are changes that would reasonably be expected to have been made to a similarly placed business.

This factor requires taking a hypothetical business that is similarly placed to the company's former

business, and asking whether or not a reasonable person would expect the changes to be made to

that business. Importantly, this factor looks at the business of the company, rather than the company

itself. That is, it focuses on the commercial operations and activities that the company carries on,

rather than the structure of the company itself.


17

1.10 Capital gains tax (CGT) issues

1.10.1 $2.0 million turnover test and Division 152

Re PFGG v FCT [2015] AATA 972


$5.4m capital gain from sale of mining tenements

AAT found taxpayer not entitled to CGT small business concessions

Small business entity test failed

Annual turnover of connected entity over $2.0m

Reimbursement of fuel expenses was ordinary income ($55k = 2.5%)

Taxpayer has appealed to the Federal Court


The AAT has confirmed that a taxpayer involved in the mining industry which made a capital

gain of $5.4m from the sale of Western Australia mining tenements was not eligible for the CGT

small business concessions as it failed the $2m "Small Business Entity" (SBE) test in Subdiv

328-C of the ITAA 1997. In particular, the AAT found that a connected entity of the taxpayer

(Drilling Co) failed to pass the SBE test in the relevant years as some $55,000 of diesel "fuel

reimbursement" received from its clients was to be included in its gross turnover in the year in

question under the SBE test.

The reimbursements of the fuel costs arose under an arrangement with its customers for whom

it drilled holes etc that Drilling Co would pay for the fuel and then charge or invoice it to the

customers who would in turn reimburse Drilling Co for the cost of the fuel.

Before the AAT, the taxpayer argued that the reimbursement amounts received by Drilling Co

for the amounts it expended on the fuel was not ordinary income derived by it "in the ordinary

course of carrying on its drilling business" for the purposes of s 328-120(1) - which provides

that "an entity's annual turnover for an income year is the total *ordinary income that the

entity *derives in the income year in the ordinary course of carrying on a business".


18

The taxpayer also argued that the payment of the amounts invoiced in respect of the fuel

disbursements must be excluded from Drilling Co's "annual turnover" because the monies were

derived from "sales of retail fuel" for the purpose of s 328-120(3) - which provides that "in

working out an entity's *annual turnover for an income year, do not include any amounts of

*ordinary income the entity *derives from sales of *retail fuel".

However, in dismissing both arguments, the AAT first found that in terms of the High Court

decision in FCT v Myer Emporium [1987] HCA 18; (1987) 18 ATR 693 and the Explanatory

Memorandum to the Bill which introduced the definition of annual turnover in s 328-120(1) into

the tax law, receipts such as the fuel reimbursements which were not regularly derived as part

of the normal activities of the business, was meant to be specifically included in the meaning of

"annual turnover" for the purposes of s 328-120(1).

Furthermore, the AAT commented that the reimbursements were an "incident of, or directly

related to, the carrying on of the normal day to day activities of its drilling business, and,

therefore, income derived in the ordinary course of carrying on a business for the purposes of s

328-120(1)".

In relation to the second argument, the AAT found (after examining the definition of "retail

fuel" in s 995-1 and noting the fact that the term retail "sale" was not defined in the tax law

and therefore took its usual meaning of requiring "a sale to an ultimate consumer") there was

no basis to the taxpayer's claim that the fuel was acquired "on the client's behalf". To the

contrary, the AAT found that the fuel was purchased by and paid for by Drilling Co, and that it

was then used to run its own drilling rig in the course of providing the relevant contracted drilling

services to its customers - and that it subsequently recovered that cost from the customers'

clients. In short, the AAT found there was no evidence of any intention to transfer property in

the fuel to the customers as required under a retail "sale".


19

1.10.2 $6 million NAV test and Division 152

1.10.2.1 Breakwell v FCT [2015] FCA 1471

Breakwell v FCT [2015] FCA 1471


• Taxpayer made capital gain in 2008 via sale of business by trust

• Taxpayer owed over $2m to a related trust, including $1.1m pre Div 7A debt

• Argued these were not assets of trust, not included in $6.0m NAV test

• Federal Court dismissed taxpayer’s appeal

• Held that loans included in NAV test of trust – not statute-barred


The Federal Court has confirmed that the face value of a debt of $1.1m owed to a taxpayer

had to be taken into account under the maximum net asset value test for the purposes of

determining if the taxpayer qualified for the CGT small business concessions. This was despite

the taxpayer's claim that the debt was statute barred from recovery under relevant state

legislation and therefore had a nil value. As a result, the amount of the debt was included

in the test and the taxpayer failed to qualify for the concessions: Breakwell v FCT [2015] FCA

1471.


20

Background

The taxpayer was both a beneficiary and the trustee of a family trust that held units in a unit trust

which operated a finance broking business. The unit trust sold the business in the 2008 income

year for a capital gain of $500,000 to which the taxpayer was entitled. The taxpayer argued that

in determining whether the "Maximum Net Asset Value" (MNAV) test was satisfied, a debt of

$1.1m owed to the family trust (a connected entity), resulting from a loan it made to him, had a

nil value and was not to be taken into account under the MNAV test. He did so on the basis

of arguing that the debt was "statute-barred" from recovery under the 6-year statute of limitations

in s 35(a) or 42(1) of the Limitation of Actions Act 1936 (SA).

However, in Re Breakwell and FCT [2015] AATA 628 the AAT found that this was not the

case on the basis that the debt had been legally acknowledged by the trustee of the family trust

as being recoverable (by way of signing the relevant balance sheets) and was legally in

existence at the relevant time. Therefore, the AAT found that the face value of the debt was to

be included in the MNAV test and that the taxpayer failed to qualify for the concessions.

Before the Federal Court, the taxpayer first argued that the AAT wrongly determined that the

debt was recoverable and had wrongly found there was no acknowledgement contained in

writing signed by the taxpayer or by his agent as required by s 42(1) of the Act to find that

the debt was still in existence and not statute barred from recovery. Alternatively, the taxpayer

argued if this issue was not an appealable question of law, then the signing of the balance sheet

could not amount to an acknowledgement of a debt for the purposes of s 42 of the

Act as it at best was an acknowledgement of an asset, and not of "a debt owing".


21

1.10.2.2 Re Miley v FCT [2016] AATA 73

Re Miley v FCT [2016] AATA 73


• 3 equal shareholders sold 100% of shares to arm’s length buyer

• Taxpayer’s share of proceeds: $5.9m

• Issue whether taxpayer satisfied $6.0m NAV test

• AAT held MV of shares was reduced by 16% to reflect minority shareholding


In a noteworthy decision, the AAT has ruled that the "market value" of a parcel of shares that a

taxpayer sold in a private company in an arm's length transaction (together with the other two

shareholders' shares in the company) was not his share of the sale price received from the sale

of all the shares, but a discounted amount to cater for the fact that the market value of his shares

alone as a "non-controlling" shareholder was a lesser amount. As a result, the taxpayer passed

the $6m "maximum net asset value test" for the purposes of qualifying for the CGT small business

concessions: Re Miley and FCT [2016] AATA 73 (AAT, File No 2013/6008, 2013/6009, Frost DP,

15 February 2016).


22

Background

The taxpayer was one of three equal shareholders in a private company. The three shareholders

sold their shares in the company under a contract of sale to an arm's length purchaser for $17.7m

- with the taxpayer being entitled to $5.9m in respect of his 1/3rd shareholding in the company.

The issue for consideration was whether the taxpayer passed the $6m "Maximum Net Asset

Value" (MNAV) test. If the market value of the shares sold were $5.9m he would, together with

the market value of other assets, fail the test.

However, the taxpayer argued that in terms of the established test in Spencer v The

Commonwealth [1907] HCA 82; (1907) 5 CLR 418 for determining the market value of an asset

(namely, what "willing but not anxious parties" would be prepared to buy and sell the assets for),

the market value of the shares was not necessarily equal to the amount paid by an arm's length

purchaser and, in his case, was something less. The FCT on the other hand essentially argued

that in an arm's length transaction the market value of an asset was its selling price.

Decision

The AAT first noted that it is often the case, but not always, that the actual selling price of an

asset at a particular time represents its "market value" just before that time and that is it entirely

"uncontroversial" in finding that the market value of an asset in an arm's length transaction is its

actual selling price - provided the parties are "willing and not anxious" and that the subject matter

of the contract is identical to the property whose "market value" needs to be determined.

However, the AAT then found that this was not the case in this situation as the subject matter of

the sale agreement was the entire 300 shares in the company - and which "armed the buyer with

complete control of the company, which the sale of [the taxpayer's] shares alone would not have

done". It therefore agreed with the approach taken by the taxpayer's valuer to apply a discount to

his 1/3rd share of the total capital proceeds received for the sale of all the shares "because of the

relative 'lack of control' enjoyed by the taxpayer as a result of his owning only one-third of the

total shares in the company".


23

In short, the AAT agreed with the taxpayer's valuer that "all other things being equal, the average

price per share of a controlling shareholding will be higher than the average price per share of a

non-controlling shareholding because of the value of control".

As a result, the AAT ruled that "the correct enquiry is directed towards determining the market

value of the taxpayer's shares alone – not as part of a package comprising the entire 300 shares

in the company". It therefore found that the consideration that the taxpayer received for his shares

was more than a hypothetical willing but not anxious purchaser would have paid if it had

purchased the taxpayer's shares alone.

Accordingly, the AAT concluded that while the actual consideration received by the taxpayer

should not be ignored as an indicator of the market value of his shares just before the time of the

CGT event, it is not determinative of that market value - and that in these circumstances, the

market value of the taxpayer's shares was $5.9m less a 16.7% discount for the "lack of control"

factor. As a result, the taxpayer passed the $6m MNAV test for the purposes of qualifying for the

CGT small business concessions, where otherwise he would not have.


24

1.10.3 90% SBP test and Division 152

Re Devuba Pty Ltd and FCT [2015] AATA 255


Company claimed Div 152 concessions re sale of shares in another company

FCT argued concessions not available due to dividend access share

AAT held concessions available - 90% SBP test passed by company

Full Court dismissed FCT’s appeal

Court held dividend couldn’t be declared to dividend access shareholder


The Full Federal Court has unanimously dismissed the FCT's appeal from the decision

in Re Devuba Pty Ltd and FCT [2015] AATA 255 that the taxpayer could claim the CGT small

business concessions in relation to a sale of shares, despite the existence of a dividend access

share: FCT v Devuba Pty Ltd [2015] FCAFC 168.

Facts

On 19 May 2010, the taxpayer company made a capital gain of over $4.3m from the sale of

shares held in another company. Immediately before the sale, the issued shares in the taxpayer

comprised a dividend access share (held by Mrs V) and 2 ordinary shares (held by Mr V and the

corporate trustee of the V's family trust).

In its 2010 tax return, the taxpayer applied three CGT small business concessions (the active

asset reduction, the retirement exemption and the CGT roll-over) to reduce the capital gain to

nil. After auditing the taxpayer's 2010 tax return, the ATO issued amended assessments denying


25

the CGT small business concessions claimed. The FCT argued that the concessions were not

available in the factual circumstances due to the existence of a dividend access share

arrangement.

In the FCT's view, the dividend access share had the effect that no person could have a

Small Business Participation Percentage (SBPP) in the taxpayer. (A condition for the taxpayer

to access the small business concessions was that CGT concession stakeholders in the other

company together had an SBPP in the taxpayer of at least 90%.)

The AAT found in favour of the taxpayer, concluding that the CGT concession stakeholders

together had a small business participation percentage in the taxpayer of 95%. In the Tribunal's

view, the fact that a CGT concession stakeholder held a dividend access share did not mean

that person failed the 90% SBPP test.

The FCT appealed to the Full Federal Court, arguing that the percentage of "any dividend that

the company may pay" in s 152-70(1)(b) of the ITAA 1997 included dividends payable by the

taxpayer to Mrs V, the holder of the dividend access share. The taxpayer argued that no

dividend was payable to Mrs V immediately before the sale of the shares on 19 May 2010.

(The case was conducted differently before the AAT, which decided that immediately before

19 May 2010 the taxpayer could have paid dividends only in favour of the ordinary shareholders.)

Decision

The Full Federal Court agreed with the taxpayer that no dividend was payable under the dividend

access share arrangement immediately before the sale of the shares. In reaching this decision,

the Court examined the taxpayer's Memorandum and Articles of Association, finding that they

revealed a number of limitations on the entitlement of shareholders to dividends. The dividend

access share was similarly issued with a restriction on declaring dividends.

The Full Federal Court also noted that a 2008 resolution expressly limited the taxpayer's ability

to declare and pay a dividend to Mrs V. In the Court's view, the determination of the directors

contemplated by the 2008 resolution was that the holder of the dividend access share "should be

determined to become entitled to the future exercise of a discretion which had otherwise been

removed". As no such determination was made by the directors in respect of the dividend access

share, the Court concluded that the taxpayer could not declare a dividend to Mrs V as at 19 May

2010. Accordingly, the FCT's appeal was dismissed.


26

1.10.4 Allocable cost of pre-CGT assets

Financial Synergy Holdings Pty Ltd v FCT [2016] FCAFC 31


• Taxpayer won appeal against decision re allocable cost of pre-CGT assets

• Full Federal Court held MV of cost base for ACA determined at joining time

• This was at date of acquisition by consolidated group


The Full Federal Court has unanimously allowed the taxpayer's appeal and held that for the

purposes of determining the "allocable cost amount" (or cost base) of an asset that came to be

owned by a consolidated group on consolidation (in circumstances where the asset was originally

a pre-CGT asset that had been subject to a roll-over that preserved its pre-CGT status), the time

for determining its market value cost base for these purposes was not its time of "deemed"

acquisition under the roll-over (i.e. pre-CGT), but its date of "actual" acquisition by the group at

"joining time". This meant that its cost base for consolidation purposes was $30m and not some

$1.5m: Financial Synergy Holdings Pty Ltd v FCT [2016] FCAFC 31 (Full Federal Court,

Middleton, Logan and Davies JJ, 10 March 2016).


27

Financial Synergy Holdings Pty Ltd v FCT [2016] FCAFC 31

Background

The taxpayer was the corporate trustee of a unit trust and the head company of a consolidated

group engaged in the financial services industry. The taxpayer formed a consolidated group

comprising itself and three other related entities with effect from 1 July 2007. This in turn required

that it determine the "allocable cost amount" (or the CGT cost base) of the units in the unit trust

(by reference to the market value of 30m fully paid shares of $1 each that were issued as part of

the consolidation process).

Just before the consolidation, however, a related entity which had carried on the business since

1978 transferred its pre-CGT units to the taxpayer and applied CGT roll-over relief under Div 122

of the ITAA 1997. For CGT purposes, this meant there were no CGT consequences on the

transfer and that the taxpayer was "deemed" to have acquired the units "pre-CGT" also. (Note

that the FCT had previously given an Advance Opinion that the original business structure and

units in the unit trust were "pre-CGT", despite the relevant documentation not being formalised

until several years after 20 September 1985.)

The taxpayer lodged tax returns for the 2008 to 2013 years of income on the basis that the cost

base of the units for consolidation purposes was $30m. The FCT issued amended assessments

for each of those years on the basis that the cost base of the units was $33,909 (as later increased

to $1.5m on the basis of the value of the taxpayer's original business as

at June 1985). Objections against relevant assessments were disallowed, and the taxpayer

appealed to the Federal Court.

The issue for determination before the Court was whether the taxpayer acquired the units for their

market value at the time of (a) their "actual" acquisition in 2007 at "joining time" on consolidation

(in which case their market value was $30m), or (b) their "deemed" pre-CGT acquisition date

under the s 122-70(3) of the Div 122 roll-over (in which case their market value was only $1.5m).

This determination was necessary in the circumstances as s 110-25(2)(b) provides that the cost

base of an asset includes "the market value of any other property [the taxpayer] gave or [was]

required to give, in respect of acquiring it (worked out as at the time of the acquisition)" [emphasis

added].


28

At first instance, in Financial Synergy Holdings Pty Ltd v FCT [2015] FCA 53, the Federal Court

held that the time for determining its market value cost base for these purposes was its time of

"deemed" acquisition under the roll-over (i.e. pre-CGT), and not its date of "actual" acquisition by

the group at "joining time". In this case, this meant that the cost base for consolidation purposes

was only some $1.5m, and not $30m. On the appeal, the taxpayer argued that the court at first

instance identified the wrong asset in applying s 110-25(2)(b) by valuing the units, not the shares

given in consideration for the acquisition of the units. It also argued that the court erred in finding

that the effect of s 122-70(3) was that, for the purposes of s 110-25(2), the taxpayer was taken to

have acquired the units before 20 September 1985.

Decision

In unanimously allowing the taxpayer's appeal, the Full Court first found that the court at first

instance had in fact correctly identified the right asset by valuing the units, and not the shares

given in consideration for the acquisition of the units. In this regard, it stated that one of the

requirements for a Div 122 roll-over is that the market value of the shares given in consideration

for the acquisition of the CGT asset must be substantially the same as the market value of that

asset and that on this basis the cost base of the units at the deemed acquisition date were the

relevant assets to be valued.

However, it then found that s 122-70(3) did not operate to deem the time of acquisition for the

purposes of s 110-25(2) to be a date before 20 September 1985. Rather, it found that the time of

acquisition was its date of "actual" acquisition by the group at "joining time". In arriving at this

conclusion, the Full Court emphasised that the purpose of s 122-70(3) is to preserve the status

of the asset as a pre-CGT asset in the hands of the recipient company, and not to have a deeming

effect upon the time of acquisition for the purposes of s 110-25(2).

In doing so, the Full Court noted that the meaning of "acquire" in relation to a CGT asset is

prescribed in the circumstances worked out under Div 109, and that Subdiv 109-B does not of its

own force have the effect that the time deemed by s 122-70(3) is to govern the time of acquisition

for the purpose of s 110-25(2). It also noted that the legislature specifically introduced s 716-855

to contain a special rule for consolidated groups in relation to Subdiv 126-B roll-overs - which has

the effect that the owner's cost base of a pre-CGT asset will be the same as that of the transferor,

as in the case of post-CGT assets, and that there "is no such cognate provision in respect of a

Div 122 roll-over".


29

1.10.5 SBRR and genuine restructures

The ATO has issued two Draft Law Companion Guidelines on the new small business restructure roll-

over. The Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016, which was assented

to on 8 March 2016, introduced new Subdiv 328-G into the ITAA 1997 to provide optional roll-over relief

where a small business entity transfers an active asset of the business to another small business entity

as part of a genuine business restructure, without changing the ultimate economic ownership of the asset.

Discretionary trusts that have made a family trust election may be able to access the roll-over if the assets

continue to be held for the benefit of the same family group. The roll-over will be available from

1 July 2016.

1.10.5.1 Draft LCG 2016/D2: roll-over consequences

Draft Law Companion Guideline LCG 2016/D2 explains the consequences and adjustments that occur

when the transferor and transferee choose to apply the small business restructure roll-over. This is

done via six examples, which cover:

A company to discretionary trust restructure;

Finally, the Court dismissed the FCT's claim that it would be an anomalous result for the taxpayer

to have a "freshened-up" market value cost base for the pre-CGT assets in determining the

allocable cost amount and that the consequences for the purposes of the consolidation provisions

would be that taxpayers would obtain the double benefit of a market value step-up in the cost

base of the membership interests of an entity joining a consolidated group. Instead, the Full Court

said that the need to determine cost base for the purposes of the consolidation provisions arises

in a separate and different context and that "the cost base is used to work out the allocable cost

amount that is used in resetting the cost base for the assets of a joining entity". Furthermore, it

said that the object of the process is "to recognise the head company's cost of becoming the

holder of the joining entity's assets as an amount reflecting the group's cost of acquiring the

entity".


30

A partnership to company restructure;

A capital loss on shares attributable to the transfer of business premises to a trust. Draft LCG 2016/D2

provides that if the shares are subsequently disposed of for a loss, the loss must be disregarded

unless the shareholder can demonstrate that the loss was not attributable to the restructure;

The transfer of a sole trader's assets to a trust, including assets that form a small business pool;

A foreign currency loan taken out prior to a restructure. If the transferee assumes the transferor's

liability through a novation, Draft LCG 2016/D2 says that any resulting forex realisation gain will be

recognised for income tax purposes because the roll-over only applies in relation to assets; and

A company to discretionary trust restructure, where an asset is transferred for consideration but the

trustee enters into a Div 7A compliant loan. Draft LCG 2016/D2 states that the subsequent application

of Div 7A of the ITAA 1936 (the deemed dividend rules) "is not turned off" by s 328-450 (which

provides that small business transfers do not affect income tax positions). Accordingly, it is the FCT's

preliminary view that a deemed dividend may arise if the company subsequently forgives the loan or

the trustee fails to make the minimum yearly repayments.

Example

Family Co Pty Ltd transfers a factory to Family Trust for $260,000. The whole amount is via a

Division 7A loan for $260,000. This is a valid Div 7A loan. Failure by Family Trust to make Div

7A loan repayments will trigger deemed dividends.


31

1.10.5.2 Draft LCG 2016/D3: genuine restructure of ongoing business

Draft Law Companion Guideline LCG 2016/D3 explains the meaning of "genuine restructure of an

ongoing business" as the expression is used in Subdiv 328-G and includes eight examples to illustrate

the FCT's preliminary views. The Draft also discusses the safe harbour rule, which is satisfied if no

significant assets, apart from trading stock, are disposed of, or used for private purposes, by the small

business owners for three years after the transfer. The ATO says that if the safe harbour is satisfied, it is

not necessary to consider whether the arrangement would qualify as a genuine restructure.

Draft LCG 2016/D3 states that it is a question of fact whether a restructure is "genuine", to be determined

having regard to all of the circumstances surrounding the restructure. The FCT's preliminary view is that

a genuine restructure is one that "could be reasonably expected to deliver benefits to small business

owners in respect of their efficient conduct of the business going forward". Accordingly, the roll-over will

not be available to small business owners who are restructuring in the course of winding down or realising

their ownership interests.

Draft LCG 2016/D3 lists a number of features that indicate, in the ATO's view, that a restructure is

genuine. These features include bona fide commercial arrangements, "authentically" restructuring how

the business is conducted, continuity of employment of key personnel, continuity of production, supplies

or services, and a resulting structure that is "likely to have been adopted had the small business owners

obtained appropriate professional advice when setting up the business".

The FCT accepts that tax considerations are factors that can be taken into account under a genuine

small business restructure (e.g. a sole trader subject to the highest marginal rate moving to a corporate

structure), but says this is not without limits.

The ATO's attention may be attracted if the restructure is contrived or unduly tax-driven in the sense that

it achieves a tax outcome that does not reflect the economic reality, or creates an outcome that would,

but for the roll-over, ordinarily attract other tax integrity measures.

Example

Dad owns Fish&Chips Pty Ltd. Under SBR roll-over, transfers “Chip” business to Chips Pty Ltd.

Now, Dad owns 2 companies. 12 months later, transfers shares in Chips Pty Ltd to son.

Not “genuine restructure of an ongoing business.” It was a form of succession planning.

Fish&Chips Pty Ltd retrospectively fails SBR rollover.

Fish&Chips Pty Ltd now pays tax on asset transfer.


32

1.11 Tax Offsets

1.11.1 R&D tax incentive

The ATO has released a new checklist for R&D tax incentive claimants. The ATO said the checklist will

help taxpayers self-assess eligibility, source advice on record-keeping requirements, correct mistakes

and challenge decisions, and recognise "red flags" when dealing with promoters of aggressive R&D

arrangements.

In relation to "red flags", the ATO said it is important for taxpayers and regulators of the R&D tax incentive

to work together to ensure the incentive is benefiting the right people. The ATO suggests that taxpayers

(claimants) who have not sought/received independent advice about their R&D claim, to ask their existing

tax agent to check:

Their claim against AusIndustry's eligibility guidelines;

The quantum of the claim by reference to the expenditure the taxpayer had actually incurred on their

registered R&D activities; and

That adequate records had been kept

The ATO also warns taxpayers to be wary if they are approached by a new tax agent or R&D consultant

proposing a potential R&D claim that is "too good to be true" (e.g. claims that they know how to get

ordinary business expenses into an R&D claim).


33

1.11.2 Trial to test drug’s safety was R&D activity

Re JLSP v Innovation Australia [2016] AATA 23


• Taxpayer an Australian-based company in global drug research group

• Ran clinical trial of client's drug in Australia

• AAT found taxpayer conducted core R&D activity:

– Experimental

– Substantial purpose of trial to generate new knowledge

• AAT disagreed with Innovation Australia that purpose must be dominant


The AAT has found that the taxpayer conducted a core R&D activity when it ran a clinical trial to

determine the safety of a client's drug: Re JLSP and Innovation Australia [2016] AATA 23 (AAT,

File No 2014/5955, Frost DP, 22 January 2016).

Background

The taxpayer was an Australian-based company in an international research group that provided

biopharmaceutical development services to clients. Between 2011 and 2013, various entities in

the group carried out a global clinical trial to test the safety and efficacy of a client's drug. The

taxpayer participated in four studies, including a "phase III" trial to demonstrate the safety and

efficacy of the drug in specific trial conditions. The taxpayer applied to Innovation Australia for an

advance finding that the trial was a core R&D activity and that certain "recruitment" and "site close

out" activities were supporting R&D activities.

Innovation Australia found that the activities were not core and supporting R&D activities because

the only significant purpose of the trial was to perform specific services for a client. After

Innovation Australia dismissed the taxpayer's internal review application, the taxpayer applied to

the AAT for a review of this decision.


34

Decision

The AAT found that the clinical trial satisfied the definition of "core R&D activity" in s 355-25(1) of

the ITAA 1997 because it was an experimental activity and one of its substantial purposes was

to generate new knowledge. The Tribunal rejected Innovation Australia's submission that the

purpose of generating new knowledge must be the dominant or prevailing purpose. In the

Tribunal's view, the relevant purpose "must be more than an insubstantial purpose; it must be

substantial enough to enable the activity to be accurately characterised as conducted for that

purpose".

The Tribunal also rejected Innovation Australia's submission that there was little practical point in

making an advance finding because the taxpayer could not satisfy the operative provisions of

Div 355 of the ITAA 1997. The fact that the taxpayer would not be entitled to the R&D tax offset

(because its activities did not meet the conditions set out in s 355-20) was irrelevant in

determining whether the definition of "core R&D activity" was satisfied, the AAT said.

In relation to the supporting activities, the parties subsequently agreed that, on the basis that the

clinical trial was a core R&D activity, the supporting activities qualified as supporting R&D

activities.


35

1.12 Fringe benefits tax (FBT) rates and

thresholds for 2017

The FCT's annual Taxation Determinations of FBT rates, thresholds and other amounts were released

on 30 March 2016. Each Determination applies to the 2016-17 FBT year (i.e. 1 April 2016 to

31 March 2017).

1.12.1 TD 2016/1: Indexation factors for valuing

non-remote housing

The indexation factors for valuing non-remote housing for the 2016-17 FBT year are:

New South Wales - 1.025;

Victoria - 1.022;

Queensland - 1.013;

South Australia - 1.016;

Western Australia - 0.988;

Tasmania - 1.010;

Northern Territory - 0.997; and

ACT - 0.978

1.12.2 TD 2016/2: FBT record-keeping exemption

threshold

The FBT record-keeping exemption threshold for the 2016-17 FBT year is $8,286 (up from $8,164 for

the 2015-16 FBT year).


36

1.12.3 TD 2016/3: Cents per kilometre rate –

vehicles other than cars

The cents-per-kilometre rates for calculating the taxable value of a fringe benefit arising in the 2016-17

FBT year from the private use of a motor vehicle other than a car are:

Vehicles with an engine capacity of up to 2,500cc - 52 cents/km;

Vehicles with an engine capacity of over 2,500cc - 63 cents/km; and

Motorcycles - 16 cents/km

1.12.4 TD 2016/4: LAFHA – reasonable amounts

for food and drink expenses

Taxation Determination TD 2016/4 sets out the weekly amounts the FCT considers reasonable for food

and drink expenses incurred by employees receiving a Living-Away-From-Home allowance (LAFHA)

fringe benefit for the 2016-17 FBT year. Separate reasonable amounts apply for locations within Australia

and for locations overseas. The weekly amounts for locations within Australia for the 2016-17 FBT year

are:

1 adult - $242;

2 adults - $363;

3 adults - $484;

1 adult and 1 child - $303;

2 adults and 1 child - $424;

2 adults and 2 children - $485;

2 adults and 3 children - $546;

3 adults and 1 child - $545;

3 adults and 2 children - $606; and

4 adults - $605.


37

An "adult" for this purpose is a person aged 12 years or more at 31 March 2016.

For larger family groupings, add $121 for each additional adult and $61 for each additional child.

1.12.5 TD 2016/5: Benchmark interest rate

The benchmark interest rate for the 2016-17 FBT year is 5.65% pa (unchanged from the 2015-16 FBT

year). The benchmark interest rate is used in calculating the taxable value of car fringe benefits (if the

employer uses the operating cost method) and loan fringe benefits.

1.12.6 Taxation Determination TD 2016/7

The ATO has released Taxation Determination TD 2016/7. It specifies that, for the purposes of s 39A of

the FBTAA, the car parking threshold for the FBT year that commenced on 1 April 2016 is $8.48 (up from

$8.37 that applied in the previous year).

1.13 Indirect taxes

1.13.1 GST adjustments windfall gains


38

Draft GST Determination GSTD 2016/D1, issued on 23 March 2016, considers whether Div 142 of the

GST Act (about GST refund restrictions) can apply to prevent refunds of increasing adjustments for

supplies. Under Div 142, a supplier is generally not entitled to a refund of overpaid GST until the recipient

has reimbursed the supplier for any GST passed on to the recipient. This ensures that the supplier does

not get a windfall gain where the recipient has borne the cost of the GST.

The FCT's preliminary view is that an increasing adjustment for a supply (under s 19-50 of the GST Act)

can give rise to an amount of excess GST for Div 142 purposes. Accordingly, if the supplier's assessed

net amount incorrectly takes into account the increasing adjustment, the FCT considers that Div 142 will

apply to prevent a refund of the excess GST if the excess has been passed on to the recipient and the

supplier has not reimbursed the recipient.

The FCT took the same view in a technical discussion paper, GST adjustments and windfall gains,

released in May 2015. The paper also provided that Div 142 does not apply to decreasing adjustments

for supplies (unless the supply was cancelled), and to increasing or decreasing adjustments for

acquisitions.

When the final Determination is issued, it is proposed to apply before and after date of issue.

1.13.2 Dispute over contract for sale of land

SAMM Property Holdings Pty Ltd v Shaye Properties Pty Ltd [2016] NSWSC 362


• Was contract GST inclusive or GST exclusive?

• NSW Supreme Court ordered a contract for sale of property be rectified to reflect common

intention of parties that purchase price was exclusive of GST


The NSW Supreme Court has ordered that a contract for the sale of a property be rectified to

reflect what it said was the common intention of the parties that the purchase price was to be

exclusive of GST.

The property in question was an industrial property at Wetherill Park in Sydney. The Court said

the effect of the contract, as executed, was to provide for a purchase price of $3.325 million

inclusive of GST. However, the Vendor alleged that, despite the form of the contract as executed,

the "clear and common intention" of the parties was that the contract price be $3.325 million plus


39

1.13.3 GST treatment of digital currency

1.13.3.1 Discussion paper

In the 2016-17 Budget papers, the Treasurer announced in a Budget night press release that the

government had released a discussion paper seeking public submissions on options to address the

double taxation of digital currencies (e.g. bitcoin) under the current GST rules.

On Budget night 3 May 2016, the government released a Discussion Paper entitled "GST treatment of

digital currency". The Paper provides background and questions for consultation on the potential

approaches available to identify digital currencies in the GST law and change their GST treatment to

remove "double GST/taxation". The release of the Paper was foreshadowed by the Treasurer in the

2016-17 Federal Budget.

For digital currency, the current treatment under the GST means that consumers are "double taxed"

when using digital currency to purchase anything already subject to GST. The government said it

recognises that this treatment may be preventing the use of digital currencies and hindering their further

development.

the Auctioneer said that before the auction, he saw a letter signed by the principal of the Vendor

stating that the reserve price of the property was "$3,500,000 + GST". The Court called this letter

the "Reserve Price Letter".

The Court ultimately found that the decisive evidence was the Auctioneer's email a few days after

the auction which the Court said constituted "an almost contemporaneous note by the Auctioneer

of what he said at the auction". In the result, the Court said it accepted the Auctioneer's evidence

that the email reflected his actual recollection of what occurred at the auction and, in particular,

his actual recollection that at the auction "it was clearly stated that GST was payable above and

beyond the sale price". The Court accepted the Auctioneer's evidence and found the common

intention of the parties was that the sale price would be $3.325 million + GST and that the contract

should be rectified accordingly.


40

1.13.3.2 Government response to Senate report

On 5 May 2016, the government released its response to the Senate Economics References

Committee's report on the Inquiry into Digital Currency. In announcing the release of the government's

response, the Assistant Treasurer said the government was "committed to fostering innovation in the

financial sector and the financial technology (FinTech) industry is integral to this goal". The Assistant

Treasurer noted a key recommendation of the Committee dealing with the GST treatment of digital

currencies. In this regard, Ms O'Dwyer noted the government's discussion paper on 3 May 2016 (see

above) seeking the best options to address the current "double taxation" of digital currencies under the

GST law. The government is of the view that "consumers should not be subject to the GST twice when

using digital currency to purchase goods or services."


41

1.13.4 Accommodation in commercial premises

Castan Investments Unit Trust and FCT [2016] AATA 298


• AAT has affirmed an objection decision of FCT re GST on supply of accommodation

• AAT said only issue it was required to determine was whether supply of accommodation

was correctly described

• It held taxpayer failed to discharge the onus of proof


The AAT has affirmed an objection decision of the FCT concerning GST on the supply of

accommodation in commercial residential premises: Re Paul J Castan & Son Pty Ltd ATF Castan

Investments Unit Trust and FCT [2016] AATA 298 (AAT, Ref No: 2015/4856, Fice SM,

11 May 2016).

Background

The taxpayer was a hotel owner and it had a management agreement with another entity ("the

operator"). Under the agreement, the operator was to have such control and discretion in the

operation, direction, management and supervision of the hotel as was required to give effect of

the terms of the agreement. In addition, under the agreement, the operator was to "act solely as

the agent" for the taxpayer.

The taxpayer claimed that it had incorrectly accounted for GST and sought refunds totalling

$476,610 for the periods between 1 July 2010 and 31 December 2013. Information provided to

the ATO by the taxpayer's accountant was treated as an application for a Private Binding Ruling

(PBR).

The ATO handed down its PBR in a letter dated 8 December 2014. It ruled that the taxpayer was

making a taxable supply of accommodation in commercial residential premises for the purposes

of the GST Act. The taxpayer objected, the FCT disallowed the objection and the taxpayer then

sought review of the FCT's objection decision.


42

The AAT said the only issue it was required to determine was whether the supply of

accommodation in the hotel by the taxpayer from May 2014 (apparent date of the management

agreement) was correctly described as a supply of accommodation in commercial residential

premises provided to an individual by the entity that owns or controls the commercial residential

premises. If it was so, then the taxpayer could not claim that the supply was input taxed for the

purposes of s 40-35(1)(a). The result would be that GST was payable on the supply of the

accommodation.

Decision

The AAT said: "Perhaps the most significant aspect of this case is the fact that the owner of [the

hotel] has appointed the operator to act solely as its agent. The owner does not supply the

accommodation to an independent intermediary under a discrete agreement. It is, in my opinion,

inescapable that the relationship which arises out of that agreement results in a contract entered

into for accommodation by the operator with an individual guest legally binding the owner

principal. The common law principle of agency must apply in those circumstances."

The AAT concluded the supply in this case was made by the owner of the hotel (the taxpayer)

through its agent, the operator. The AAT held the taxpayer had failed to discharge the onus of

proving that, on the balance of probabilities, the tax decision concerned should not have been

made or should have been made differently. Accordingly, it affirmed the FCT's objection decision.


43

1.13.5 Pharmacies claiming large GST refunds

The ATO has released information to help pharmacies avoid delays in processing unusually large GST

refunds that may result from recent changes to the Pharmaceutical Benefits Scheme (PBS). The ATO

says certain Hepatitis C medicines have recently been listed on the PBS. It says it has worked with the

Pharmacy Guild and understands pharmacies may claim unusually large GST refunds if you purchase

these medicines.

To help reduce the likelihood of undue delays in processing such GST refunds, the ATO says it is

important that:

The pharmacy's contact details (including tax agent details) with the ATO are up to date;

The pharmacy lodges any BAS that may be outstanding or overdue;

The pharmacy has provided the ATO with a valid Australian financial institution account;

The pharmacy's business industry code describing its main business activity is "Chemists or

Pharmacy Operation (42711)". The ATO says that reporting the correct code will help it to prioritise

GST refund claims for pharmacies affected by this issue.

The ATO says it normally processes GST refund claims within 14 calendar days of lodgement of a BAS.

Sometimes, it will contact a business to discuss its refund claim. To assist with the prompt processing

and payment of refunds, the ATO recommends a business have easily accessible tax invoices supporting

the GST purchases reported on the BAS – in particular, any large or unusual expenses that may have

impacted on the claim (e.g. purchase of Hepatitis C medicines).


44

1.14 Tax administration

1.14.1 Agents need to get ready to switch from ELS

The ATO says it is working with agents and their software providers to deliver an SBR-enabled

practitioner lodgement service for all returns and statements. From July 2016 this service will become

the ATO's main lodgement channel replacing the Electronic Lodgement Service (ELS). For practices that

are already using SBR-enabled software to lodge activity statements, the ATO says these changes will

add more obligations, including income tax, allowing these practices to use the same software for all

lodgements.

The ATO says it will maintain ELS as a safety net until 31 March 2017. According to the ATO, this will

allow time for agents to transition their practice's software to lodge all returns and statements through

SBR-enabled software. The ATO says software providers will contact agents to let them know what they

need to do to make the transition. This may include updates to AUSkey.

1.14.2 Trustee had power to apply trust capital

Fischer v Nemeske Pty Ltd [2016] HCA 11

Brief summary of the facts

• High Court dismissed an appeal in a matter involving trustee powers

• Held trustee validly exercised a power to apply trust capital or income by creating a debt

reflecting value of shares held


45


The High Court has, by a 3:2 majority (Kiefel and Gordon JJ dissenting), dismissed an appeal

from a decision of the NSW Court of Appeal in a matter involving trustee powers. The High Court

held that a trustee had validly exercised a power to "advance" and "apply" trust capital or income

by creating a debt reflecting the value of shares held by the trustee at the time the advance was

made. French CJ and Bell J delivered a joint judgment, while Kiefel J, Gageler J and Gordon J

each delivered separate judgments. The case was an appeal from the decision in Fischer v

Nemeske Pty Ltd [2015] NSWCA 6 (11 February 2015).

Although not a tax case, the decision is of interest given the importance of trustee powers in the

application of trust assets and income and the tax consequences that can follow.

The High Court observed that the appeal primarily concerned the power of the trustee of a

discretionary trust to advance and apply to two designated beneficiaries, by resolution and entry

in the trust accounts, an amount of money representing the value of unrealised trust assets

comprising shares in a company. Also in issue was the effect of a deed reciting the alleged

indebtedness of the trustee to the designated beneficiaries in that amount and purporting to

charge the shares in their favour.

The appellants are beneficiaries of the Nemes Family Trust ("the Trust"), of which the first

respondent, Nemeske Pty Ltd, is trustee ("the Trustee"). The Trust's principal assets are shares

in a second company, Aladdin Ltd. In July 1994, the value of those shares, $3,904,300, was

recorded in an "asset revaluation reserve". In September 1994, the Trustee passed a resolution

which distributed the whole of the asset revaluation reserve to two other beneficiaries of the Trust,

Mr Emery Nemes and Mrs Madeleine Nemes. In August 1995, the Trustee executed a deed

purportedly charging the shares in Aladdin in Mr and Mrs Nemes' favour ("the Deed of Charge").

In the Deed of Charge, the Trustee recited that it was indebted to Mr and Mrs Nemes in the sum

of $3,904,300, and covenanted that it would pay the amount of that debt upon their demand. Mr

and Mrs Nemes both died before any demand was made. Mr Nemes bequeathed all the shares

in the Trustee and in Aladdin to the appellants. The residuary estate was left to other persons.


46

The appellants commenced proceedings against the Trustee, the executors of Mr Nemes' estate

and other beneficiaries of the Trust, seeking declarations including that the distribution made from

the Trust was of no effect or void. The executors cross-claimed, seeking payment of the amount

allegedly owing to Mr Nemes' estate.

The primary judge in the NSW Supreme Court held that the resolution was a valid exercise of the

Trustee's power to advance and apply trust capital or income under the terms of the trust deed.

That conclusion was upheld by the Court of Appeal, which also held that although there was no

power to charge the shares, the covenant in the Deed of Charge confirmed that the debt owing

to Mr and Mrs Nemes was payable on demand.

The majority of the High Court dismissed the appeal, holding that the resolution was an effective

exercise of the Trustee's power to advance and apply trust capital or income, notwithstanding

there was no change in the beneficial ownership of the shares. In particular, French CJ and Bell J

said the Court of Appeal was correct to conclude that the Trustee had advanced and applied

capital of the Trust Funds to Mr and Mrs Nemes by creating a debt reflecting the value of the

shares comprising that capital at the time that the advance was made.

Gageler J said the Court of Appeal did not disturb the primary judge's interpretation of the

resolution of 23 September 1994 as a resolution by the Trustee "to distribute to Mr and Mrs

Nemes an amount of money equal to the value of the asset revaluation reserve, namely

$3,904,300".

His Honour noted that the Court of Appeal acknowledged that the resolution in question "did not

result in any cash payment or change in ownership of specific property".

However, according to His Honour: "the Court of Appeal nevertheless held the resolution so

interpreted to have been a proper exercise of the power conferred by cl 4(b) of the Deed to

'advance' and 'apply' 'any part or parts of the whole of the capital or income of the Trust Funds'

and, as such, to have given rise to an immediate unconditional equitable obligation on the part of

the Trustee to account to Mr and Mrs Nemes in the sum of $3,904,300 out of the Trust".


47

1.14.3 House committee recommends ATO work

to align definitions of employee and

contractor

The House of Representatives Standing Committee on Education and Employment has released its

report on matters that inhibit or discourage job-creation and employment by private sector small

businesses and/or provide disincentives to individuals from working for such businesses.

Among the Committee's 14 recommendations were:

That the ATO and the Fair Work Ombudsman set up a working group to align the definitions of

employee and contractor across government agencies and to develop a single decision tool to help

small businesses correctly identify when a worker is an employee or a contractor. This working group

should also identify legislative changes if needed.

That the ATO and the Fair Work Ombudsman working group set up to align the definitions of

employee and contractor, and also to look into the Master Builders Australia proposals including for

a register of building contractors.

That the Australia government work with states and territories to boost employment and business

productivity by reducing state and territory governments' reliance on payroll tax as a form of revenue.

Gageler J did not accept the appellant's challenge to the Court of Appeal's finding that the

Trustee's implementation of the resolution, by recording a liability to Mr and Mrs Nemes in the

sum of $3,904,300 in the Trust's balance sheet, was sufficient to have given Mr and Mrs Nemes

a cause of action against the Trustee to recover that sum at common law.

In the result, the majority held that the resolution created a creditor/debtor relationship,

enforceable at law, between Mr and Mrs Nemes and the Trustee. Further, the covenant in the

Deed of Charge supported the advance and application made by the Trustee's resolution, the

Court said.


48

That the Productivity Commission investigates the impact on small business of lowering the GST

threshold on the importation of physical goods and undertakes regular cost effectiveness research of

GST threshold reduction.

That the Australian government reassess the policy case for taxing the redundancy payouts of

persons over 65 years of age to encourage people to stay in the workforce.

1.14.4 Data matching

The ATO has gazetted notices announcing details of various data matching programs. Most of the notices

are announcements of extensions to existing data matching programs. These records will be

electronically matched with ATO data holdings to identify non-compliance with registration, lodgement,

reporting and payment obligations under taxation laws.

1.14.4.1 Commonwealth electoral roll details

The ATO will acquire details of registered voters on the Commonwealth electoral roll from the Australian

Electoral Commissioner. This data will be collected on an ongoing basis and will be refreshed every three

months.

Details to be collected include the name, residential address, date of birth, and occupation of the

registered voter. It is estimated that records for 15m individuals will be obtained each quarter.

The ATO said the program aims to:

Identify taxpayers that are not registered with the ATO when they are required to be;

Locate taxpayers that may have outstanding taxation and superannuation lodgment, correct reporting

or payment obligations; and

Identify potential instances of taxation or superannuation fraud; and

Assist with the administration of Australia's Foreign Investment Framework.


49

1.14.4.2 Contractor payments 2016-19

The ATO will acquire data from businesses that it visits as part of its employer obligations compliance

program during the 2016-17, 2017-18 and 2018-19 financial years.

Data to be collected include: ABN of the payer business; ABN of the payee business (contractor); name,

address and contact details of the contractor; dates of payment to the contractor; and amounts paid to

the contractors (including details of whether the payment included GST). It is estimated that records for

25,000 of entities will be obtained, including the records of 12,500 individuals.

The program aims to:

Assess the integrity of the information held on the Australian Business Register to assist the Registrar

develop educational and compliance strategies;

Obtain intelligence to identify risks and trends about contractors that may not be complying with their

taxation obligations;

Ensure compliance with registration, lodgement, correct reporting and payment of taxation and

superannuation obligations;

Promote voluntary compliance and better tailor educational products and services.

The ATO noted that the program has been ongoing since the 2008-09 financial year and has resulted in

improved compliance with obligations and additional income tax, GST and PAYGW liabilities being

raised.

1.14.4.3 Merchants – specialised payment systems

2014-17

The ATO will acquire data relating to electronic payments made to merchants through specialised

payment systems for the 2014-15, 2015-16 and 2016-17 financial years. The ATO said this program is

designed to obtain data on electronic payments received by businesses that complement data obtained

from the ongoing credit and debit card data matching program (see below). It said transactions processed


50

through the specialised payment systems in this program cover those transactions either not included,

or not visible at the "end merchant" level in the ATO's merchant credit and debit card data collection.

The ATO said data will be initially obtained from the following specialised payment system facilitators:

Debitsuccess Pty Ltd

Ezidebit Pty Ltd

Ezypay Pty Ltd

FFA Paysmart Pty Ltd

Integrapay Pty Ltd

Flexi Online Pty Ltd (T/A Paymate)

PayPal Australia Pty Ltd

Southern Payment Systems Pty Ltd (T/A Pin Payments)

Stripe Payments Australia Pty Ltd

The data items that will be obtained are personal details of: (i) merchants using the services of a

specialised payment system to take electronic payments; and (ii) the amount and quantity of the

transactions processed. It is estimated that records for 300,000 entities will be obtained, including around

50,000 for individuals.

The ATO said this program will be the second collection of specialised payment systems data. It said the

first collection revealed discrepancies between electronic payments received and information declared

in businesses' tax returns and that these discrepancies are being investigated.

The ATO said the data will be used to:

Detect unreported income through discrepancy matching;

Identify those operating a business but failing to meet their registration, lodgment or payment

obligations;

Identify liquidated or de-registered businesses that are continuing to trade (phoenix operators);

Identify "cash only" businesses, by exception; and

Support analytical models to detect high risk activity and cases for administrative action.


51

The ATO also noted that from 1 July 2017, providers of specialised payment systems will be required to

report details to the ATO as part of the government's legislated compliance measure on improving

compliance through third party reporting that was announced in the 2013-14 Budget.

1.14.4.4 Credit and debit cards 2014-15

In August 2015, the ATO announced it will request and collect data relating to credit and debit card

payments to merchants for the periods from 1 July 2014 to 30 June 2015 from 11 specified financial

institutions. The ATO has now also advised that it will collect data from Suncorp-Metway Ltd as part of

that data matching program.

The purpose of the data matching program is to ensure that merchants are correctly meeting their

taxation obligations in relation to their business income. These obligations include registration,

lodgement, reporting and payment responsibilities.

1.14.5 Transfer pricing

1.14.5.1 Simplifying transfer pricing record-keeping

The ATO has updated on its website FAQs about simplifying transfer pricing record keeping

[unfortunately, the ATO has not flagged what is new]. The ATO notes that the FAQs should be read in

conjunction with its Simplifying transfer pricing record keeping publication.

The following are some of the questions featured in the FAQ publication:

What happens when you apply a simplified transfer pricing record-keeping option?

What is meant by "have assessed your compliance with the transfer pricing rules"?

Can small business taxpayers or distributors be eligible for other simplification options?

How is the term "Australian economic group" applied in determining the turnover eligibility criterion?

How is the total international related party dealings determined for the operation of the materiality,

management and administration services, and technical services options?


52

How do trusts and partnerships determine if they satisfy the "sustained losses" criterion?

How is the weighted average calculated with respect to the profit before tax ratio criterion?

Does the exclusion of financial transactions mean you cannot have any such dealings to apply the

small taxpayers, distributors or intra-group services options?

The updates also feature branch, trust and partnership application of simplification options.

1.14.5.2 Practice Statement PS LA 2016/1

The ATO released PS LA 2016/1 on 14 April 2016.

It applies from that date and provides guidance to ATO staff when they are proposing transfer pricing

adjustments under Subdiv 815B of the ITAA 1997 involving imported purchases with potential customs

implications. The adjustments may have been made in an audit, a settlement, where the entity has

objected to an amended assessment or as part of an Advance Pricing Arrangement (APA) or Mutual

Agreement Procedure (MAP).

The Practice Statement says that where an entity gets a transfer pricing benefit and the ATO adjusts the

entity's amount of taxable income, or loss of a particular sort, but does not attribute it to the individual

components of the purchases relating to the value of the imported goods, the entity can experience

difficulties in obtaining refunds of customs duty or determining additional duty liabilities. In order to satisfy

its responsibilities under the Customs Act 1901, an entity may request assistance from the ATO to the

extent the adjustments relate to imported goods.

ATO staff are required to populate an adjustment table in an audit position paper or in a revised

adjustment table which is consistent with the agreed terms of a settlement, objection decision, APA or

MAP outcome.

To the extent possible and for each income year that is the subject of an adjustment, the ATO says its

staff should include the following amounts in the adjustment table:

The cross-border purchases as returned;

The cross-border purchases as amended (or after adjustment at objection stage);


53

The cross-border purchases as amended upon which customs duty has been levied.

This additional information will normally attribute the adjustment to the appropriate cross-border dealings,

the ATO said.

If an ATO officer has attributed the amount of the transfer pricing benefit across all of the cross-border

dealings, for example, by using a general economic allocation key, the Practice Statement directs them

to prepare a note to accompany the adjustment table. They should indicate in the note that the table is:

Prepared solely to assist the entity in informing the Australian Border Force (ABF) as to the arm's

length value of the goods, and

Not an aid to determine any liability under Subdiv 815 B

The ATO says that such a note would be appropriate in instances where, for example, a profit method

has been applied in making an adjustment to taxable income.

1.14.6 Public benevolent institutions

The Australian Charities and Not-for-profits Commission (ACNC) has released for comment a draft

Commissioner's Interpretation Statement on the meaning and scope of the charity subtype of "public

benevolent institutions" for ACNC purposes. The ATO administers the taxation implications of being a

registered charity and the PBI subtype of charity for Commonwealth purposes.

The draft Statement sets out the ACNC's views on what "public", "benevolent" and "institution" mean for

the purposes of being a PBI.

According to the ACNC, examples of organisations that may be PBIs are organisations that provide crisis

accommodation to the homeless, disability services organisations and international development

organisations.

The ACNC notes that the Draft CIS covers issues such as:

The degree of "need" beneficiaries must be in;

Whether organisations can collaborate to provide relief;

http://www.acnc.gov.au/ACNC/Comms/LN/LN_20160421.aspx


54

Whether PBIs can operate overseas; and

The distinguishing features of an institution.

1.14.7 ATO warns about iTunes and Visa card

scammers

The ATO is reminding the public to be alert to scammers impersonating the ATO demanding iTunes gift

cards as a form of tax debt payment.

ATO Assistant Commissioner Janine Clark said that based on recent reports made to the ATO, iTunes

gift cards were part of new tactic being used by fraudsters. "In the last month, of the 8,692 phone scam

reports we received in April 2016 were in relation to the fake ATO tax debt scam; 58 reports mentioned

the scammer demanding payment by iTunes and 26 people unfortunately paid $174,830 to fraudsters,"

Ms Clark said.

In many cases, scammers request payments that are either non-existent or unexpected, she said. "By

the time these scams are reported to us, the cards have already been on-sold or redeemed by the

scammers. The scammers don't need the actual physical card. They just need the gift card number,

which they get victims to read over the phone."

Ms Clark said the ATO has recently received reports of not only iTunes cards, but also pre-paid Visa gift

cards purchased from supermarkets and department stores. She said the ATO will never request the

payment of a tax debt via gift or pre-paid cards such as iTunes and Visa cards. Nor would it ask for direct

credit to be paid to a personal bank account.

People who think they have been scammed or would like to confirm the legitimacy of an ATO call or

letter, can phone the ATO on 1800 008 540.


55

1.14.8 Property developers and trusts

The ATO is continuing its focus on trusts developing and selling properties as part of their normal

business.

The ATO said some trusts are incorrectly claiming the 50% CGT discount when developed properties

are sold.

As part of the Trusts Taskforce, the ATO said it has escalated 75% of the cases reviewed for audit and

have received voluntary disclosures. The ATO added that it will continue to target arrangements that

display the following characteristics:

Taxpayers have experience in either developing or selling property (or experience in the industry)

and establish a new trust to acquire property for development and sale;

Circumstances surrounding the arrangement are inconsistent with the stated purpose of developing

the property as a long term investment;

The development is advertised as available to purchase before completion or is sold soon after

completion; and

The trustee claims the 50% CGT discount on the sale of the property.


56

1.14.9 Property transfers and pre-filling

From 1 July 2016, all state and territory revenue collection agencies will need to collect and report

information to the ATO about all transfers of freehold or leasehold interests in real property located in

their state or territory. Agencies must lodge a Real Property Transfers Report (RPTR) to the ATO no later

than 31 days after the end of each quarter.

Information to be reported includes:

Property details, including land title information, property address and other descriptors;

Transactional information, including transfer price, contract date and settlement date; and

Identity data of the purchaser/transferee and vendor/transferor, including: (i) name, address and date

of birth for individuals; (ii) name, address and ABN for non-individuals; and/or (iii) some foreign identity

details.

The ATO said it uses the information obtained from the RPTR to:

Expand its data matching with third-party reporter information;

Support voluntary compliance by providing taxpayers with information related to CGT events that

have occurred during the income year;

Improve compliance through administration of CGT, GST and other taxable events;

Administer the Agricultural Land Register;

Support compliance under the foreign resident CGT regime; and

Make this information available through pre-filling for self-preparers and tax agents from 1 July 2017.

1.14.10 Non-profit foundations and evasion

The ATO has released Taxpayer Alert TA 2016/5 - Purported tax-exempt non-profit "foundations" used

to evade or avoid taxation obligations. The ATO says it is currently reviewing arrangements by taxpayers

in northern NSW and southern Qld who may be incorrectly claiming to be a not-for-profit organisation in

order to avoid paying tax.


57

The ATO says the arrangements are where taxpayers are purporting to stream their untaxed

employment, contractor or business income through an unincorporated "foundation" that they treat as

not being subject to income tax. The foundations and the persons who control them also frequently do

not comply with their other tax obligations, such as those relating to superannuation and GST.

The Taxpayer Alert outlines what it calls a typical arrangement. The ATO considers these types of

foundation structures are artificial and contrived, and the purpose of their design is simply to evade or

avoid tax. It is concerned that participants and volunteers who are using these arrangements are not

properly reporting their assessable income by representing that their income has not been derived by

them and that it belongs instead to an entity that is not taxable.

The ATO considers the amounts received by the foundation under the arrangement may comprise

ordinary income that has been derived by the participants and which is assessable to the participants

under s 6-5 of the ITAA 1997. The purported diversion of income to the foundation may be income

derived by the participants under s 6-5(4), the ATO says. Where an intermediary receives monies that it

then remits to a foundation, the Alert says the personal services income regime in Pt 2-42 of the ITAA

1997 may apply. Part IVA may also apply, and there may also be possible serious offences committed

by the promoters or participants under either the taxation law or the Criminal Code.

ATO Assistant Commissioner Scott Parkinson said that the ATO is currently engaging with a number of

taxpayers who it believes are operating under similar structures to get a better understanding of the

arrangements in place. "The ATO will take compliance action where we identify taxpayers that have

entered into this type of arrangement", he said.

If people have entered into, or are contemplating entering into, an arrangement of this type, the ATO

encourages them to:

Phone or email the ATO;

Ask the ATO for its view through a private ruling;

Seek independent professional advice; or

Make a voluntary disclosure to reduce penalties that may apply.


58

1.14.11 PSI diverted to SMSF

The ATO has issued Taxpayer Alert TA 2016/6 warning individuals about arrangements purporting to

divert Personal Services Income (PSI) to a Self-Managed Superannuation Fund (SMSF) to avoid paying

tax at personal marginal rates.

1.14.11.1 Arrangement

The ATO said it is reviewing arrangements whereby individuals (typically SMSF members at or

approaching retirement age) perform services for a client but do not directly receive any (or adequate)

consideration for the services. Rather, the client remits the consideration for the services to a company,

trust or other non-individual entity (including an unrelated third party). That entity then distributes the

income to the individual's SMSF, purportedly as a return on an investment in the entity. The SMSF treats

the income as subject to concessional tax (15%) or as exempt current pension income.

Other variations of the arrangement include the income being remitted by the entity to the SMSF via a

written or oral agreement between the entity and SMSF, instead of as a return on an investment. The

SMSF may also record the income from multiple entities or through a chain of entities. Alternatively, the

entity may distribute the income to more than one SMSF of which the individual or associates are

members.


59

1.14.11.2 ATO view

The FCT considers that such arrangements may be ineffective at alienating income such that it remains

the assessable income of the individual under s 6-5 of the ITAA 1997 or as personal services income.

The ATO also warns that Pt IVA may apply.

The amounts received by the SMSF may also constitute non-arm's length income of the SMSF under

s 295-550 of the ITAA 1997 (taxable at 47%). Other compliance issues include:

The amounts received by the SMSF may be a contribution and generate excess contributions tax

consequences for the individual; and

Superannuation regulatory issues - the arrangement may breach the sole purpose test under s 62 of

the SIS Act. Such breaches of the SIS Act may lead to the SMSF being made non-complying or the

disqualification of an individual as a trustee.

1.14.11.3 ATO action

The ATO said it is reviewing a number of cases and will be engaging with those taxpayers over the

coming months. Taxpayers who have entered into, or are contemplating, such arrangements are

encourage by the ATO to:

Seek independent professional advice;

Phone or email the ATO;

Apply for a private ruling; or

Make a voluntary disclosure to reduce penalties that may apply.


60

1.14.12 Decision impact statements

1.14.12.1 Orica Ltd v FCT [2015] FCA 1399

Orica Ltd v FCT [2015] FCA 1399


• ATO won pre-2013 Part IVA case

• Federal Court held dominant purpose of intra-group refinancing arrangement with US

subsidiary was to obtain deductions

• Claim that Head Co could have used group losses dismissed

• ATO says case shows Part IVA can apply to artificial arrangements that shift taxable profits

from Australian tax base


In Orica Ltd v FCT [2015] FCA 1399, the Federal Court held Pt IVA applied to a scheme whereby

deductions of $112m were claimed for interest on inter-corporate loans made by an Australian

subsidiary of a US corporate group. In doing so, the Court dismissed the taxpayer's claim that the

dominant purpose was not to obtain a "tax benefit" but to generate income for the US companies (in

the form of interest earned on the loans made to them via the Australian subsidiary) so that the US

companies could absorb "unbooked" US tax losses of some A$52.9m that could not be otherwise

used.

The ATO said it considers the decision to be consistent with the established case law on Pt IVA and

the penalty provisions. The ATO also made the following points:

The case shows that the anti-avoidance legislation is capable of defeating artificial or contrived

arrangements that shift taxable profits out of the Australian tax base.

It will give close attention to schemes that exhibit similar features; namely schemes in which, in

effect, entities inject capital into foreign subsidiaries and then borrow the funds back again at

interest, where the interest is said to be deductible under s 25-90 of the ITAA 1997. Typically in

these schemes the corresponding income from the interest flows is for some reason not taxed

anywhere at a comparable rate. The ATO said it informally refers to these schemes as "loan-

ups".


61

1.14.12.2 Norman Superannuation Fund and FCT [2015] AATA 914

Norman Superannuation Fund and FCT [2015] AATA 914


• Related trusts sold, re-acquired publicly listed shares on same day

• Under scheme, trustees received 2 dividends & double imputation benefits to negate tax

liability

• S.177EA of Part IVA held to applied to deny additional imputation benefits

• ATO says new dividend washing rules in S.207-157 now remove need to make S.177EA

determination


In A Norman Superannuation Fund and FCT [2015] AATA 914, the AAT confirmed that the

imputation scheme benefit provisions in s 177EA of the ITAA 1936 applied to an arrangement

whereby two related trusts disposed of and reacquired publicly listed shares in an "integrated"

transaction carried out on the same day which had the effect that the trustees received two

dividends for the shares they held in the companies while only holding one parcel of shares, but

also received the additional imputation benefits to negate the related tax liability.

The ATO said it considers that the Tribunal's reasoning is consistent with the FCT's view on the

application of the law to "dividend washing" transactions as articulated in TD 2014/10. It added the

commencement of s 207-157 of the ITAA 1997 (enacted on 30 June 2014 with effect from

1 July 2013) is expected to remove the need for the FCT to make determinations under s 177EA

to deny imputation benefits arising under dividend washing transactions where the relevant

distributions are made on or after 1 July 2013.

As well as Pt IVA, the ATO said some loan-up schemes currently under examination raise

questions as to whether the conditions for deductibility in s 25-90 are met. In particular, the

ATO said it may question whether the requisite income-generating purpose is genuinely

present, especially if the scheme seems incapable of generating a positive net return for the

borrower. The ATO said this issue was not raised in Orica but it might be in future cases.

s17 latest key tax developments paper sme restructure rollover now law the tax laws amendment (small...

Documents