the september 2010 mtun - tax matrix - 2010-09 - website copy.pdf · 2015-04-20 · 1 2010-09 ~...

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2010-09 ~ MTUN Master www.taxmatrix.com.au

The September 2010 MTUN

~ tax education for the thinking tax professional

Links to electronic resources

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MTUN Archive Full Court Appeals HCA Special Leave

Getting a “fair shake of the sauce bottle”

In recent days we have been made aware of the details of the ATO’s pursuit of Paul Hogan for alleged tax debts arising many years ago.

Newspapers and internet media have reported that Hogan “intentionally avoided paying income tax” in Australia.

The newspaper reports allege that documents lodged in the Federal Court by the ATO “claimed there was evidence Hogan's former accountant, John Gibb, told him tax structures he proposed to use were "not in accordance with Australian law"”

One newspaper article quoted Hogan’s current legal advisor as claiming the documents lodged by the ATO "omitted crucial parts of evidence" given by [his accountant] to the Tax Office and a representative of the Australian Government Solicitor's office in Sydney in July last year.

The legal advisor’s statement claimed that “A transcript of the meeting showed Hogan had relied on the advice of a leading 1980s QC and US attorneys, who found that his tax arrangements were legitimate. The statement said the lawyers had determined the tax structures to be "effective and proceeded accordingly". More recent newspaper reports have speculated on the identity of the Australian silk.

The model litigant

Article 2 of the Model Litigant policy promulgated by the Attorney General requires the ATO to act honestly and fairly in handling claims and litigation brought by or agaoinst it. Article 2 also requires the ATO to endeavour to avoid, prevent and limit the scope of legal proceedings.

There is a further requirement that the ATO not take advantage of a claimant who lacks the resources to litigate a legitimate claim.

ATO duty as model litigant

The ATO is an agency of the Commonwealth and in that capacity has a positive obligation to act as a model litigant. [The obligation also extends to matters at the AAT].

These reports, if true, are disturbing, not because Paul Hogan is in the ATO sights, but because the behaviour of the ATO in omitting, from documents lodged with the Federal Court, in support of its case, relevant evidence in its possession, is on any view, short of the behaviour expected, if not required, of a model litigant.

It is arguable that omitting evidence may limit the scope of the proceedings.

The model litigant policy

The model litigant policy is promulgated as Appendix B to the Legal Services Directions 2005 made under section 55ZF of the Judiciary Act 1903 and Prepared by the Office of Legislative Drafting and Publishing, AttorneyGeneral’s Department, Canberral.

Table of Contents 1 INCOME TAX 3 1.1 Politicians, Boards & Statutory Authorities 3 1.2 Courts & Tribunals 3 (a) Courts 3

(1) ** Was the Wentworth branch of the Bendigo Bank established for community service purposes? (Wentworth District Capital Ltd v C of T) 3

(2) ** Taxpayer entitled to a stay of judgment in order to contest assessment? (DC of T v Denlay) 8 (3) ** Did part IVA apply to scheme to obtain foreign tax credits? (Citigroup v C of T) 11

(b) Tribunals 15 (1) ** No entitlement to CGT small business concessions – 25% penalty! (Cannavo And C of T) 15

Tax Matrix Pty Ltd has no arrangements with any legal firms and receives no payments for documents or deeds it recommends.

http://www.taxmap.com.au/http://www.taxmap.com.au/acts_date.phphttp://www.taxmap.com.au/pdfs/ON-LINE%20-%2002%20%7E%20Part%207%20-%20Bills%20before%20the%20Parliament.pdfhttp://www.taxmatrix.com.au/update_notes.asphttp://www.taxmap.com.au/pdfs/ON-LINE%20-%2007%20%7E%20Part%208%20-%20Appeals.pdfhttp://www.taxmap.com.au/pdfs/ON-LINE%20-%2008%20%7E%20Part%208%20-%20Special%20Leave.pdfhttp://www.optuszoo.com.au/news/190027/hogan-knew-of-fraud-claims-government.htmlhttp://www.optuszoo.com.au/news/190027/hogan-knew-of-fraud-claims-government.html

2 The September 2010 MTUN

www.taxmatrix.com.au 2010-09 ~ MTUN Master


(2) ** Was there hardship or special reaons to justify reduction of HELP and SFSS repayments? (Dedes and C of T) 19

(3) ** Is the taxpayer carrying on a business in share trading? (Smith and C of T) 21 (4) ** Adjourning AAT review of objection decisions (MacMahon and C of T) 29

1.3 Featured ATO interpretations 30

2 GST 31 (b) Tribunals 31

(1) ** Claiming back input tax credits after BAS errors (Australian Leisure Marine and C of T) 31 2.3 Featured ATO interpretations 33

3 FBT ~ UPDATE MATERIAL IS ACCESSED ON LINE THROUGH TAXMAP™ 33

4 STATE TAXES ~ UPDATE MATERIAL IS ACCESSED ON LINE THROUGH TAXMAP™ 33

5 SUPERANNUATION, ETP’S & PENSIONS 35 5.2 Courts & Tribunals 35 (b) Tribunals 35

(1) ** The problem with excess concessional contributions (McMennemin and C of T) 35

6 OTHER IMPOSTS, OFFSETS & REBATES 53 6.2 Courts & Tribunals 53 (a) Courts 53

(1) ** Is a stretched Hummer a luxury vehicle? (Dreamtech International v Cof T) 53

7 LISTED ATO PUBLICATIONS FOR THE MONTH 59 7.1 ATO Publications that you can rely upon 59 (b) TD Series - including TD Series in draft form 59 (c) Class Rulings 59 (f) Addenda & Errata & Withdrawals of documents able to be relied upon 59 7.2 ATO Publications that you are not entitled to rely upon 59 (e) ATO ID’s New 60 (f) Addenda & Errata & Withdrawals to documents not intended to be relied upon 60

(1) Addenda 60 (2) 60 (3) Withdrawals 60

(g) Decision Impact Statements 62

8 LEGISLATION - UPDATE MATERIAL IS ACCESSED ON LINE THROUGH TAXMAP™ 62

9 APPEALS TO THE FULL COURT OF THE FEDERAL COURT - UPDATE MATERIAL IS ACCESSED ON LINE THROUGH TAXMAP™ 62

10 DECISIONS DEALING WITH PRACTICE & PROCEDURE ISSUES 62 (1) ** Taxpayer’s lack of evidence of financial circumstances fatal to stay of judgment application (D C of T v

Sakovits) 62 (2) * Taxpayer’s application dismissed for not complying with Tribunal orders (LVR (WA) and C of T) 65 (3) (DC of T v Ansett Resources & Industries) 65 (4) (Grapsas v C of T) 65 (5) (Clark v C Of T (No. 2)) 65 (6) (DC of T v Cranswick) 66

The September 2010 MTUN 3


1 INCOME TAX

1.1 Politicians, Boards & Statutory Authorities As a result of the Government calling the election and the Government being in caretaker mode over the period since calling the election there have been no press releases.

1.2 Courts & Tribunals

(a) Courts

(1) ** Was the Wentworth branch of the Bendigo Bank established for community service purposes? (Wentworth District Capital Ltd v C of T)

Source: Month 08-2010-37 ~ Part 1-2(a) - Wentworth District Capital Ltd v C of T [2010] FCA 862 (13 August 2010) Perram J

What is the issue?

Was the Wentworth branch of the Bendigo Bank an association established for community service purposes within section 50-10?

What was the outcome?

The Court concluded that the Wentworth Branch of the Bendigo Bank was an association established for community purposes.

What was the evidence?

In September 1996 the only bank in Wentworth, in New South Wales near the confluence of the Murray River and the Darling River, closed leaving the town without a bank.

In 1998 members of the Wentworth community incorporated WDCL which entered into arrangements with Bendigo Bank Ltd (“Bendigo Bank”) under which the bank provided banking services in Wentworth through premises, staff and equipment provided by WDCL.

The legal aspects of WDCL

♦ WDC was a corporation limited by guarantee and incorporated on 25 January 1999;

♦ originally had two principal objects being to take over the funds and other assets and liabilities of the steering committee and “to operate and manage the ongoing action (if any) stated at Item 3 in the 1st schedule”.

On 29 November 2006, the original objects were changed:

The ongoing action (if any) that the Company proposes to Operate and Manage are:

3.1 To do such things as may be necessary to re-establish for the Wentworth and district community a face-to-face banking service in view of the withdrawal of face-to-face banking services from the Wentworth district by all major banks;

3.2 To conclude a Management Agreement with Bendigo Bank Limited and one or more of its subsidiaries to enable the Company to manage a franchised office of Bendigo Bank Limited;

3.3 To manage such franchised outlet at Wentworth and such other places as the Company may decide;


http://www.austlii.edu.au/au/cases/cth/federal_ct/2010/862.html

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3.4 If and when possible, to conduct Commercial Banking within New South Wales and Victoria under franchise from Bendigo Bank Limited or from such other Banking Corporation as the Company may from time to time decide;

3.5 To distribute such portion of any profit derived by carrying on the Management of (or conducting the business of) Banking Franchise for such community service purposes within the areas in which such management or franchise is conducted as the Board may from time to time decide;

3.6 For the avoidance of doubt, the Company’s main and or dominant purpose and or object is the promoting, providing, or carrying out activities, facilities or projects including but not limited to community banking services for the benefit or welfare of the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances. Any other ongoing action or object otherwise stated or inferred is secondary and subservient to the extent of any inconsistency to the Company’s main or dominant purpose and or objective as expressed in this item 3.

Bendigo Bank granted an exclusive licence to its wholly owned subsidiary, Bendigo Franchising Pty Ltd (“Bendigo Franchising”), to conduct the Wentworth franchising operation under which that entity granted franchises to third parties to conduct retail shopfronts for the Bendigo Bank.

On 17 February 1999 Bendigo Franchising granted the franchise to conduct a Bendigo Bank branch to another wholly owned subsidiary of Bendigo Bank, BBL Wentworth Franchising Pty Ltd (“BBL Wentworth”).

BBL Wentworth entered into a management agreement with WDCL in effect passing along to WDCL all of BBL Wentworth’s obligations to Bendigo Franchising under the franchise deed.

What was the decision?

13. The community bank opened in March 1999 … For present purposes it suffices to observe that a company limited by guarantee was incorporated – WDCL – and that that company provided the premises, staff and equipment to an entity owned by Bendigo Bank for the conduct of its banking business. …

14. The business was rapidly successful. …By September 1999 WDCL experienced its first break-even month, having 809 customers, $22 million in business and $17,367 in gross income. The annual report for 30 June 2009 showed that after 10 years the branch had nearly $100 million in business with an annual income before tax of about $200,000.

15. The unexpected success of WDCL quickly gave rise to an issue about what to do with the excess of funds generated. At first this was resolved by repaying all of the money which originally had been pledged with interest. Subsequently, after the pledges had been repaid a grants scheme was put in place in 2002 under which community groups could apply for, and receive, grants from WDCL. Recipients included football clubs, schools, bowling clubs, the Rotary Club and so on. Recipients were not required to bank with the branch. As at the date of the hearing WDCL had given away in excess of $1 million to such recipients.

16. … the Wentworth branch improved economic circumstances in the town. Despite the drought, business picked up and traffic returned to the main street to the extent that parking was sometimes an issue. …

23 WDCL’s important obligations under the management agreement were as follows:

(a) To use its very best endeavours in the management and conduct of the franchise and to use the same endeavours actively and diligently to promote the franchise and the interests of Bendigo Bank, Bendigo Franchising and BBL Wentworth.

(b) To pay all of the fees payable by BBL Wentworth to Bendigo Franchising and also to receive all of the fees to which that company was entitled under the franchise deed.

(c) To provide staff, including a manager, for the operation of the branch.

(d) To ensure that the staff wore Bendigo Bank uniforms.

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(e) To lease premises for the conduct of the branch.

(f) To fit out those premises to the satisfaction of Bendigo Franchising.

24 …The fee arrangements involved BBL Wentworth in paying WDCL 50% of the amount earned by it through the borrowing and lending transacted through the branch. ….

IV - The tax question

26 …, not all “assessable income” is liable to tax. Section 6-20(1) provides that:

An amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law.

27 Section 50-1 erects a series of such exemptions. It provides:

The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

28 In ss 50-5 to 50-45 there are then set out nine tables of different classes of exemptions. One such a table in s 50-10 deals with “community service” and is in the following terms:

Community Service

Item Exempt entity Special conditions

2.1 society, association or club established for community service purposes (except political or lobbying purposes)

see section 50-70

29 The table picks up, by reference, the special conditions set out in s 50-70. ….

30 The question which arises is, … whether WDCL is a “society, association or club established for community service purposes” in terms of the expressions appearing in the table. WDCL took the view that it was established for “community service purposes”. The Commissioner took the opposite view. 36 …

V - The construction of the expression

“established for community service purposes”

31 One should start, I think, with the obvious and that is that this expression is inherently vague. It is not clear whether “established” means presently established or originally established and the expression “community service” has such a wide and sweeping range of meanings that it is difficult to be sure what is connoted at all. No less obscure is the relationship between the word “purposes” and the balance of the phrase – questions at once prompted include whether the purposes involved are the subjective purposes of particular individuals or whether, instead, they refer to a more concrete and objective assessment of aptness or suitability.

40 So far as the present interpretative task is concerned I would take from the explanatory memorandum the following matters:

(a) the provisions were intended by the Treasurer to extend tax exemption status beyond charitable institutions to embrace, at least, community service clubs such as Apex;

(b) the expression was intended by the Treasurer to have a wide meaning;

(c) the concept of services was intended by the Treasurer to extend to “activities, facilities or projects”, which were to be promoted, provided by or carried on by the organisation;

(d) those undertakings had to be for the benefit of the community or for the members of the community

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who had particular need for those undertakings;

(e) the need in question could include those arising from social or economic circumstances and that, in turn, could include the circumstances of living in a remote area.

41 I approach these points as part of the interpretative material available to construe the words of the statute. They are not, however, the sole materials and they cannot dictate the meaning of s 50-10 to this Court. Like Jessup J, who considered the same explanatory memorandum in Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1 at 33 [82], I would not regard “myself under an executive injunction, not carried into the legislation, to give the words a wide interpretation”. It may be, in that regard, that the author of the explanatory memorandum proceeded on an assumption as to its definitive effect which is not warranted.

45 Neither the reasons of Jessup J in Navy Health nor those of French J in Victorian Women Lawyers form part of the ratio decidendi of either decision. This is so in Navy Health because Jessup J concluded that the applicant was not an association to which the provision could apply (163 FCR at 32 [76] and [80]). The Commissioner argued that paragraph [85] of his Honour’s reasons showed that he had decided the case on this basis. There his Honour said:

For the reasons explained above, I am not satisfied that, in the three years ending 31 March 2001, 2002 and 2003, or in any of those years, the applicant was a “non-profit association, … established for community services” within the meaning of s 65J(1)(j) of the FBTA Act.

However, that has to be read in light of paragraph [81] which says:

Although not strictly necessary, for the sake of completeness I shall deal also with the question whether the applicant was “established for community service purposes”.

(emphasis added)

This is a plain indication that what followed was not the basis for his Honour’s decision.

46 Be that as it may, however, on this aspect – namely the need for the service to involve a tangible or practical benefit for the community or part of the community – the decision seems, with respect, plainly to be correct.

47 Granted then that a community service involves a concrete benefit to the community there remains the question of what community service purposes might be. As a matter of first principles it would seem likely that “purposes” would be likely to cover a broad range of aims. One obvious purpose would be the purpose of providing a community service. However, there is no reason to think that other purposes are not included. They could include, for example, purposes such as funding, promoting or organising community services. It is likely that so long as the proposed purpose can be seen as having a reasonable connexion to the delivery of a community service it will be within the class of contemplated purposes.

48 That view is supported by the explanatory memorandum which made clear, at least the Treasurer’s view, that the expression not only had a broad meaning but that it “would extend to promoting, providing or carrying out” community service activities. There the matter might rest save for the second passage I have quoted from above in Navy Health at paragraph [43]. In that passage however Jessup J not only said that the benefit had to be identifiable (with which I agree) but also that it should be “bestowed or provided directly by the putative benefactor”. If his Honour meant by this that the exemption would not apply unless the association in question in fact itself provided a tangible benefit to the community then I must respectfully differ. Such a reading would remove from the exemption all entities whose purposes were other than the direct supply of community services. It would, for example, remove from the exemption organisations pursuing tangible community service by means of fundraising activities or those who would provide voluntary labour to service providers. …

50 The Commissioner submitted that to constitute a community service the nominated benefit had to be directly conferred on the community by the entity. Particular reliance was placed on the passage just referred to. However, for reasons just given I do not think that that is what his Honour meant. …

51 There are three further matters which should be mentioned. The first is the requirement that the body in question be “established” for community services purposes. It was settled by the Full Court in Cronulla

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Sutherland Leagues Club Ltd v Commissioner of Taxation (1990) 23 FCR 82 at 89-90 (“Cronulla”) that this issue was to be addressed in each income year so that, perhaps contrary to ordinary parlance, an entity might be “established” for the requisite purpose in one year but not another.

52 There is no reason for that principle not to apply to s 50-10 and, indeed, clause six of the original explanatory memorandum contained the statement that bodies “are established for exempt purposes according to their actual objects and activities from time to time”.

53 The second matter concerns the characterisation of bodies established for multiple purposes. The requirement of s 50-10 is that the body be established for the specified purpose. In order to meet that requirement the entity must have the purpose as its main or predominant purpose: Cronulla 23 FCR at 93-95. The answer to that question is to be ascertained by examining the “true character and nature of” the body in question: Cronulla 23 FCR at 95. That other purposes exist does not necessarily affect that analysis unless those purposes can be said to supplant the identified purpose’s role as the main or dominant purpose. The issue at hand is, I think, a commonsense question whose answer should not be obscured by an overzealous attendance to the taxonomy of purposes.

54 The third matter concerns the provision of a benefit in return for a reward. In Navy Health Jessup J was of the view that it could not be a community service to provide insurance products at normal market rates (163 FCR at 33 [83]). This was because such an arrangement was not properly to be described as a benefit or advantage. His Honour did not need to, and did not, address the position of subsidised services. Since this case does not involve that question it is not necessary to pass upon it either.

55 From the above the following principles may be distilled:

(a) the kind of community service referred to in s 50-10 is a practical or tangible help, benefit or advantage conferred on the community or an identifiable section thereof;

(b) a service provided for reward is not a community service at least where there is no element of subsidisation;

(c) community service purposes include the purpose of providing a community service but the purposes contemplated are not limited solely to the act of provision. The expression is broad and may extend to encompass any activity whose purpose has a reasonable connexion to the delivery of a community service. Facilitation and promotion are, therefore, purposes which are squarely within s 50-10;

(d) the entity claiming the exemption must be “established” for those purposes. This requires an analysis of what the entity is doing in the relevant income year both as a matter of its constitutive documents such as its constitution and also by reference to its actual activities;

(e) the purpose must be the entity’s main or dominant purpose which is a practical question. The existence of other purposes will not lead to a different conclusion so long as a matter of true characterisation the main or dominant purpose is still reasonably connected to the delivery of a community service

VI - Application to the facts of the present case

56. It is necessary in light of the above to identify the purposes for which WDCL was “established” in the years 2006 and 2007. This in turn requires attendance to the constitutive documents of WDCL in those years as well as its actual activities. Further, although the issues arise in the 2006 and 2007 years, it would be to take a blinkered approach to ignore the context in which WDCL originally came into existence. The question at hand, in light of these matters, is the isolation and identification of WDCL’s main or dominant purpose.

57 The history of WDCL dictates a connexion between a serious and precisely definable problem and the company’s incorporation. That problem was the absence of face-to-face banking services in the town of Wentworth. The solution to that problem was the incorporation of an entity to manage a franchised branch of Bendigo Bank. As would be natural in any franchise relationship (including those conducted through a management arrangement like the present one) WDCL was bound to further the interests of the franchisor as the commercial documentation required by Bendigo Bank made clear. But it would be quite unrealistic to suggest that WDCL’s principal purpose when originally established was to help the Bendigo Bank in its

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commercial endeavours. No doubt WDCL had that purpose but it did so, so it seems to me, only to further its basic purpose of restoring banking services to Wentworth.

58 As the Commissioner correctly submitted the purpose of WDCL was not to provide banking services in Wentworth and it did not do so. The only entity conducting the business of banking in the town was Bendigo Bank (or its wholly owned subsidiary, BBL Wentworth). But WDCL’s purpose was to facilitate the provision of banking services in the town by making it commercially viable for a bank to return to Wentworth. This was the purpose for which WDCL was originally established and that remained its purpose in the 2006 and 2007 years. In those years there was no other bank in the town except Bendigo Bank and the conduct by WDCL of the shopfront operations of that bank on a not-for-profit basis continued its purpose of facilitating the provision of banking services in the town. Further, by 2006 its formal objects in its constitution included the promotion of community banking services which confirmed what its activities otherwise demonstrated.

59 There were, no doubt, other purposes of WDCL. I would accept that it aimed to distribute any generated profits through the community grants programme but I do not think that that was its raison d’être. The origins of that programme lay in the unexpectedly rapid accumulation of excess money in WDCL with the attendant need to dispose of that surplus. The surplus was, in that sense, a collateral benefit of WDCL’s principal operation. I am unable to accept that such a collateral benefit was the principal purpose for which WDCL existed in the relevant years. So too, whilst it is true that WDCL was able to provide additional services to the elderly in the form of a weekly visit by a staff member to the aged care facility, this is again to be seen not as a central purpose of the company but rather as an incidental benefit of its operation. Largely for the same reasons, no different characterisation should apply to the provision by WDCL of banking visits to schools.

61 The Commissioner submitted that WDCL’s real purpose in the relevant years was to conduct and manage a franchise branch of the Bendigo Bank. It would be unrealistic to deny that WDCL had that as one of its purposes. However, its management of the branch was a means rather than an end. The end was to the facilitation of face-to-face banking in Wentworth. The accomplishment of that end was achieved through the means of the management contract. …

62 For those reasons the main or dominant purpose of WDCL in the 2006 and 2007 years was the facilitation of previously absent face-to-face banking services in Wentworth and, in the requisite sense, WDCL is to be seen as established in those years for that purpose. The question then is whether that purpose is a community service purpose. I accept the Commissioner’s submission that the provision of banking services to customers of Bendigo Bank could not be the provision of a community service. Such a service would be the provision of an ordinary retail service, for reward, to customers. For the reasons given by Jessup J in Navy Health it is impossible to characterise such an arrangement as having about it the requisite element of community service. This observation, although correct, is not material, for the provision of banking services was not the service provided by WDCL. The service it provided was the creation of the circumstances which would make it possible for a bank to operate in the town.

63 Was it a service to the Wentworth community to bring about circumstances apt to lead to the re-introduction of banking in the town? It is not to be thought that the facilitation of the commercial supply of services which would otherwise not be provided is always a community service. Had WDCL been incorporated to facilitate the provision of a toy shop in Wentworth it might be doubted that the community was much thereby served. The question in each case is whether the facilitation of the service in question provides a real or tangible benefit to the community. If it does, then a community service is established.

64. In (sic) a town with no face-to-face banking services the facilitation of such services provided a substantial benefit to the community. That benefit was both real and tangible. It consisted of the fact that local banking then became available, increasing in a concrete way the amenity of the town. It follows that in 2006 and 2007 WDCL was established for community services purposes. The income of WDCL was, therefore, exempt under s 50-1 of the 1997 Act.

(2) ** Taxpayer entitled to a stay of judgment in order to contest assessment? (DC of T v Denlay)

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Source: Month 08-2010-44 ~ Part 1-2(a) – DC of T v Denlay [2010] QCA 217 (20 August 2010) McMurdo P & Chesterman JJA

What is the issue?

Did the primary judge, who ordered a stay of the Commissioner’s right to recover tax debts from the taxpayer, give sufficient weight to the Commissioner’s right to recover judgment debts for unpaid tax by making a finding that it would be highly likely the taxpayer would be adjudged bankrupt?

In simple terms that legal question could be put this way – Did the primary judge get it wrong by allowing the taxpayer an opportunity to contest the underlying tax debt?


The Court of Appeal:

♦ dismissed the Commissioner’s appeal against the stay of judgment;

♦ noted that the purpose of the stay was self evident – to allow the taxpayers’ appeals against the underlying assessments to be heard;

♦ were dismissive of the Commissioner’s arguments that the taxpayers’ loss of their property to the judgment and the consequent inability to prosecute their appeals does not constitute extreme personal hardship.

“It is preposterous to contend that the loss of the taxpayers’ entire estate, and with it any chance of demonstrating that the basis for the assessments was wrong so that they should not have lost their property, could not be a hardship rightly called extreme. It is not easy to imagine a greater hardship in this context”.

The Court distinguished situations where bankruptcy deprived a taxpayer of the right to challenge an assessment from those where the taxpayer had never sought to exercise the right to challenge an assessment and was later subjected to bankruptcy proceedings


The Commissioner had obtained summary judgment against two taxpayers, husband and wife in the amounts of $1.04m and $2.02m respectively in respect of tax liabilities and penalties and interest for the years 2002 to 2007.

The judge who gave the summary judgment ordered that the judgments be stayed for six months or until another date fixed by further order. Later the orders staying the judgment were extended for a further six months.

The Commissioner brought an appeal challenging the correctness of the decision to stay the judgment.

The taxpayers have appealed against the assessments to the Federal Court and the hearing of their appeals is set for four days, 13 to 16 September next.


16. Before dealing with the arguments in detail I should notice the statutory provisions which establish the “legislative scheme”, and rehearse the principles relevant to a stay of execution of judgment debt for assessed income tax, as they emerge from the cases.

20. A convenient starting point in the consideration of authority is Snow, in which French J considered the authorities at some length and concluded (at 139):

“... the power of State courts to stay recovery proceedings ... is well established and ... courts exercising it have regard to the following propositions:

1. The policy of the (ITA Act) ... gives priority to recovery of the revenue against the determination of the taxpayer’s appeal against his assessment.

2. The power to grant a stay is therefore exercised sparingly and the onus is on the taxpayer to justify it.

http://www.austlii.edu.au/au/cases/qld/QCA/2010/217.html

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3. The merits of the taxpayer’s appeal constitute a factor to be taken into account in the exercise of the discretion (although some judges have expressed different views on this point).

4. Irrespective of the ... merits of the appeal a stay will not usually be granted where the taxpayer is party to a contrivance to avoid his liability to payment of the tax.

5. A stay may be granted in a case of abuse of office by the Commissioner or extreme personal hardship to the taxpayer called on to pay.

6. The mere imposition of the obligation to pay does not constitute hardship.

7. The existence of a request for reference of an objection for review where appeal is a factor relevant to the exercise of the discretion.”

22. The relevance of “extreme personal hardship” to the exercise of the discretion is well established. In Deputy Commissioner of Taxation (NSW) v Mackey (1982) 13 ATR 547 Hutley JA expressed the opinion that the power to stay should be exercised with great caution and only in special circumstances. …

[His Honour’s thoughts were] quoted with apparent approval by Kaye J (with whom King and Gobbo JJ agreed) in Cywinski v Deputy Commissioner of Taxation [1990] VR 193 at 197.

The section [His Honour] referred to, s 201 of the ITA Act, was to the same effect as s 14ZZR of the TA Act, which replaced it.

38. It is time now to return to the [Commissioner]’s arguments. …

39. The first part of the argument, as I mentioned, is the submission that the primary judge failed to afford sufficient weight to the policy of the ITA Act and TA Act that, in Nathan J’s neat aphorism, the taxpayer should “pay now and argue later.” The judgment is not amenable to that criticism. The primary judge clearly had regard to the principle. Her Honour expressly referred to it and noted that, as a consequence, stays of execution were to be given “sparingly”.

40. The [Commissioner]’s complaint that the principle is given insufficient weight comes down to an assertion that the principle overwhelms all other considerations, or that, in the circumstances of this case, to grant the stay was an exercise of discretion so unreasonable as to indicate error.

41. The first proposition cannot be accepted. There will be no occasion for the grant of a stay if the only consideration is the Commissioner’s right to recover judgment debts for unpaid tax. Yet the authorities make it abundantly clear that there is a power, in appropriate circumstances, to stay the execution of a judgment notwithstanding the terms of s 14ZZR. …

43. The second complaint was that the primary judge wrongly concluded that bankruptcy was “highly likely” to follow the judgments, if no stay were granted. I have outlined earlier the basis for the criticism, which fails because the [Commissioner] misreads the judgment. Her Honour did not ignore the possibility that a federal judicial officer might refuse to sequestrate the [taxpayers]’ estates because of the prospect that the appeals against the assessments might succeed. Her Honour expressly mentioned that possibility.

45. It was, I think, common ground that the mere possibility of bankruptcy following a judgment would not amount to extreme personal hardship. Unless, therefore, there was evidence to support a finding that bankruptcy was highly likely, or probable, in the absence of a stay, it could not be said that the judgments would result in the requisite degree of hardship.

46. In my opinion the evidence justified the finding. The [Commissioner] moved for judgment at a time when the [taxpayers]’ appeals were progressing through the Federal Court. The [Commissioner] declined to offer any undertaking that he would not proceed to bankruptcy pending the hearing of those appeals. The inference that the [Commissioner] will commence bankruptcy proceedings is more than fairly raised.

47. Next the [Commissioner] contends that the likelihood of bankruptcy was not sufficient to justify the stay. The submission was that the outcome of any bankruptcy proceedings would be determined by a federal court which might not order sequestration because of the pendency of the appeals. …

48. I would reject the submission. It seeks to deprive the Supreme Court altogether of its power to stay execution in appropriate cases. …While the power should be exercised “sparingly” or “with great caution” it is a power that can be exercised in appropriate circumstances. It is not to be surrendered.

http://www.austlii.edu.au/cgi-bin/LawCite?cit=%281982%29%2013%20ATR%20547http://www.austlii.edu.au/cgi-bin/LawCite?cit=%5b1990%5d%20VR%20193

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49. It should not be overlooked that bankruptcy is not the only avenue open to the [Commissioner] to obtain satisfaction of the judgments. Absent the stays the [Commissioner] can enforce the judgments by any of the means of execution provided for by the UCPR. He has already exercised powers given him by the ITA Act and TA Act to recover money from the [taxpayers]. He has issued garnishee orders. There is no reason to suppose that the [Commissioner] is not aware of his rights, or is not prepared to exercise them. Although the primary judge’s reasons referred only to the likelihood of bankruptcy, it is, I consider, equally likely that the [Commissioner] might move to satisfy the judgments by execution, in the absence of the stays.

50 This leads to the [Commissioner]’s third point, that the loss of their property and consequent inability to prosecute their appeals does not constitute extreme personal hardship. The point may be answered shortly. It is preposterous to contend that the loss of the [taxpayers]’ entire estate, and with it any chance of demonstrating that the basis for the assessments was wrong so that they should not have lost their property, could not be a hardship rightly called extreme. It is not easy to imagine a greater hardship in this context. Certainly the primary judge cannot be criticised for so regarding it.

51. The [Commissioner]’s individual complaints are without substance. It has not demonstrated that the primary judge mistook the law or the facts. That leaves for consideration the contention that the exercise of discretion to grant the stays was so unreasonable as to indicate error, in particular failing to accord sufficient weight to the legislative scheme.

(3) ** Did part IVA apply to scheme to obtain foreign tax credits? (Citigroup v C of T)

Source: Month 08-2010-35 ~ Part 1-2(a) – Citigroup v C of T [2010] FCA 826 (9 August 2010) Edmonds J

What is the issue?

Did the taxpayer enter into or carry out schemes for the dominant purpose of obtaining a tax benefit in the form of foreign tax credits?

Was the Commissioner entitled to cancel a foreign tax credit to which CPL is otherwise entitled for the year ended 31 December 2003 and for the year ended 31 December 2004 in consequence of its participation in two Hong Kong bond transactions, the first on 31 December 2003 (‘HKBT 2003’) and the second on 2 November 2004 (‘HKBT 2004’)?


The Court concluded that:

♦ the schemes were entered into with the dominant purpose of obtaining a tax benefit.

♦ that the taxpayer was not liable pursuant to s 204(3) or otherwise, to pay GIC:

What were the contentions

CPL contended that:

♦ the HKBTs exhibited none of the elements identified in the Treasury Press Release issued on 13 August 1998 as being the target of the relevant amendments made to Part IVA nor any of the elements identified in the EM circulated by authority of the Treasurer at the time the amending bill was introduced into the House of Representatives (see [12] above);

♦ it should not be concluded that its dominant purpose in entering into each of the schemes constituted by the HKBTs was to obtain a tax benefit; rather, it should be concluded that its dominant purpose was to obtain fee income, premium and the return on the bonds.

The Commissioner’s case was that:

♦ it should be concluded that CPL’s purpose in entering into each of the schemes constituted by the HKBTs was to obtain a tax benefit in the form of a foreign tax credit;

http://www.austlii.edu.au/au/cases/cth/FCA/2010/826.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s204.html

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♦ that CPL’s contention about exhibiting none of the elements sought to read the EM in substitution for the plain words of the Act, which do not contain the restriction on the operation of the section for which CPL contended.


On 13 August 1998 the Treasurer of the day announced that the provisions of Pt IVA of the 1936 Act would be amended with immediate effect in relation to schemes entered into after that time which are designed to acquire or generate foreign tax credits that can be used to shelter low-taxed foreign source income from Australian tax.

The Treasurer went on to say:

‘These transactions generally are structured to yield little or no economic profit relative to the expected Australian tax benefits. Typically they involve the acquisition of an asset that generates an income stream subject to foreign withholding tax. An illustrative example of one such arrangement is attached.

Step 1: Foreign Resident Company (ForCo2) owes royalty payment to Foreign Resident (ForCo1) for the use of intellectual property.

Step 2: ForCo1 & AustCo enter into assignment agreement under which the right to receive the income stream in respect of the intellectual property is assigned to AusCo.

Step 3: AusCo makes payment to ForCo1 for the right to receive the income stream.

Step 4: The assigned income is paid to AusCo by ForCo2. Country B withholds 10% tax on the royalty.

AusCo includes the income stream in its assessable income. After “grossing up” to reflect the foreign tax, and claiming a deduction in respect of the cost of acquiring the income stream, only a small amount of net income is included in AusCo’s taxable income. AusCo claims a foreign tax credit for the full amount withheld by Country B. This amount is greater than the amount needed to offset the tax in respect of the net foreign income. The excess credit is used to reduce the Australian tax payable on other foreign income of the same class.’

Paragraphs (bb) and (f) were added to s 177C(1) to implement the announcement.

Dictionary

BPP BPP (Hong Kong) Partnership, the partners in which were CPL and OIPL

BPQ BPQ (Hong Kong) Partnership, the partners in which were CPL and OIPL

Guidelines Guidelines issued by the HKIRD on bond transactions of the kind exemplified by the HKBTs



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Healthcote Healthcote Limited, a company incorporated in Hong Kong whose ultimate parent company is Citigroup Inc

HKIRD Hong Kong Inland Revenue Department


2 There is no issue in this case that, absent the application of Part IVA, CPL is entitled to foreign tax credits arising out of HKBT 2003 and HKBT 2004.

3 If the Court finds that the Commissioner is entitled to cancel the foreign tax credits in reliance on Part IVA, a consequential issue arises as to whether CPL is liable to pay the general interest charge (‘GIC’) pursuant to s 204(3) of the 1936 Act or otherwise: …

15 The real issue between the parties is the conclusion that should be drawn, having regard to the eight matters or considerations in s 177D(b), as to the dominant purpose of CPL in entering into each of the schemes constituted by the HKBTs.

16 The Commissioner’s case against persons, other than CPL, who entered into or carried out each of the schemes or part of them, as to the conclusion that should be drawn as to their dominant purpose in doing so, appears to be no different from that alleged against CPL itself. Consequently, if it was not concluded that CPL had the requisite purpose under s 177D(b) of entering into or carrying out each of the schemes, it would follow, according to CPL, that no other relevant person had such a purpose. Again, I think this must be right; nor did the Commissioner press that if the Court should conclude that CPL did not have the requisite purpose, it was nevertheless open to the Court to find that another relevant person did have such a purpose.

The Opening Salvos

17 In opening, CPL contended that a reasonable person could not conclude that the dominant purpose of a person making an actual payment of foreign tax was the acquisition of foreign tax credits in the same amount. That is evident, so CPL contended, because no rational taxpayer would pay a dollar of foreign tax simply to avoid an obligation to pay an equal amount of tax in Australia: why, one might ask, would the rational taxpayer be anything other than indifferent as to where it paid that tax?

18 So much may be conceded where the foreign tax on the relevant income is equal to or less than the Australian tax on that income; it may also be conceded where the foreign tax on the relevant income is greater than the Australian tax on that income by reason only of a greater foreign tax rate. But where, as here, the foreign tax rate (17.5%) is less than the Australian tax rate (30%) but the foreign income base, in the years in which the relevant transactions are entered into, is considerably greater than the Australian income base by reason of the different computation of those bases, resulting in greater foreign tax payable than the Australian tax that would otherwise be payable, giving rise to excess foreign tax credits, the door of inquiry under s 177D(b) as to the dominant purpose of a person entering into a scheme giving rise to a tax benefit in the form of those foreign tax credits, is not foreclosed by recourse to arguments based on the rationality of a taxpayer. It has to be determined by reference to the relevant matters or considerations set out in s 177D(b) …

The Section 177D(b) Matters

131 As indicated in [25] above, some of the matters or considerations referred to in s 177D(b) will not be relevant in a particular case, while others will be relevant but neutral in the sense of not pointing in one direction or the other in the conclusion drawing process as to whether a person entered into or carried out a scheme for the requisite dominant purpose. My assessment of the facts of the present case leads me to the view that matters numbered (vi), (vii) and (viii) are not relevant to the task the Court has in the present case, but if they are, they are neutral in the sense which I have described and would not alter the conclusion to be drawn by a reasonable person having regard to the five matters which I now propose to analyse in detail.

The manner in which the schemes were entered into or carried out

132 There is no doubt that the structure of the schemes was dictated by the Guidelines designed, as they were, to allow BOC, as the principal partner in the CPP, a deduction, for Hong Kong Profits Tax purposes, for the purchase price of the interest coupons but at the same time requiring the BPP/BPQ to bring to account that price as assessable profits, for Hong Kong Profits Tax purposes. The matching required by the Guidelines

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was designed to avoid any leakage of revenue, not only quantitatively, but temporally by requiring the deduction on the one hand and the profit on the other to be brought to account in the same year. Additionally, it required that the BPP/BPQ not carry on any trade or business in Hong Kong which might give rise to losses which could be offset against the coupon profit.

133 But the identity of the participants in the structure, at least on the BPP/BPQ side, were not dictated by the Guidelines; they were dictated by the need for the participants, in particular the principal partner in the BPP/BPQ, to be entitled to some form of relief in a jurisdiction outside Hong Kong to offset the post-tax loss in Hong Kong. That relief might take a number of forms, but one form it could take was by giving a credit in the jurisdiction of the principal partner’s residence for the tax suffered in Hong Kong which might be applied against the tax liability of the principal partner in its jurisdiction of residence against other foreign source income which had not borne foreign tax at a rate equal to the jurisdiction of residence rate. In the relevant years of income, Div 18 of Pt III of the 1936 Act provided such relief.

134 In my view, the choice of CPL as the principal partner in the BPP/BPQ is explicable solely on the basis of the foreign tax credit regime in Australia embodied, in the relevant years, in Div 18 of Pt III of the 1936 Act. On the other hand, this does not determine the conclusion to be drawn in terms of s 177D(b); the fact that CPL’s participation in the HKBTs is facilitated by Australia’s foreign tax credit regime and that, but for that regime, CPL would not have participated as such, does not answer the conclusion to be drawn by s 177D(b); it remains to consider the other relevant matters or considerations before drawing any such conclusion.

The form and substance of the schemes

135 The form of the schemes was undoubtedly complex, largely because of the requirement of the Guidelines. Indeed, the whole form of the HKBTs had an air of artificial complexity which was no doubt a function of the Hong Kong fiscal objectives: a deduction for the CPP (BOC principal partner) and equivalent assessable profits for the BPP/BPQ (CPL principal partner). The existence of the Hong Kong partnerships on the CPL side no doubt provided a territorial nexus for an entity otherwise composed of two non-Hong Kong partners, but the partnerships were terminated the day after the transactions were consummated.

136 … In short, each scheme involved the subscription for an interest-bearing bond and the immediate sale of the interest coupons attached to the bond for a lump sum payment. That all occurred on day one and thereafter the stripped securities were continued to be held, although not necessarily by the day one parties, for the life of the bond. The financial and tax consequences for CPL over the life of the bond flowed from what occurred on day one, including the collateral arrangements involving, in the case of HKBT 2003 for example, the swap of the fixed leg of AUD60,495,296 on 31 December 2008 for the three monthly AUD BBSW floating leg on AUD169,504,704.

The result in relation to the operation of this Act that, but for this Part, would be achieved by the schemes

138 It is common ground that the result obtained under the 1936 Act but for the application of Pt IVA was a reduction of CPL’s Australian tax. In the year ended 31 December 2003 the reduction amounted to AUD9,613,285 being the balance of the Hong Kong profits tax on HKBT 2003 (AUD11,561,339) available to be used as a credit against other foreign source income after application of AUD1,948,054 of such tax credit to the HKBT 2003 income in that year. In the year ended 31 December 2004 the reduction amounted to AUD9,653,163 being the balance of the Hong Kong profits tax on HKBT 2004 (AUD11,520,171) available to be used as a credit against other foreign source income after application of AUD1,867,008 of such tax credit to the HKBT 2004 income in that year.

142. Put shortly, while HKBT 2003 was pre-tax positive, it was post-tax negative prior to taking into account the foreign tax credits arising from the payment of Hong Kong Profits Tax on the transaction; this was so, irrespective of whether or not the pre-tax profit was inclusive of a ‘margin’ over cost of funds utilised in the transaction.

143 Moreover, CPL’s other foreign source income facilitated the immediate utilisation of the foreign tax credits.

144 In my view, these are matters which point strongly in the direction that the conclusion to be drawn by the Court under s 177D, having regard to the matters set out in subparas (i) to (v) inclusive of para (b) thereof, is that CPL entered into HKBT 2003, and it follows HKBT 2004, with the dominant purpose of obtaining a tax benefit in the form of those foreign tax credits.

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Edmonds J continued on to examine whether the taxpayer was liable for GIC.

(b) Tribunals

(1) ** No entitlement to CGT small business concessions – 25% penalty! (Cannavo And C of T)

Source: Month 08-2010-38 ~ Part 1-2(c) - Cannavo and C of T [2010] AATA 591 (10 August 2010) Mr Julian Block, Deputy President

What is the issue?

Was the taxpayer entitled to the CGT small business concessions?

Which liabilities could be taken into account in determining the net asset value for the purposes of the CGT small business concessions?


The Tribunal concluded that the taxpayer’s net asset value far exceeded the then applicable $5m test.

What is the impact of the decision for your firm’s practices?

The calculation of the capital gain was incorrect – how good are your working papers in relation to the calculation of the capital gain?

Could you have made the same errors as the tax agent made?

A 25% penalty imposed on an understated capital gain will soak up the fees from tax returns. Does your firm minimise the possibility of miscalculating a capital gain? How foolproof is your firm’s software or spreadsheets?


The taxpayer sold a building and claimed the CGT small business concessions in order to reduce his tax liability.

The taxpayer was audited for the 2006 income year and on 6 April 2009 the [Taxpayer] was notified the Commissioner had determined that the taxpayer was not eligible to access the small business 50% reduction as he did not satisfy:

♦ the maximum net asset value test; and

♦ active asset tests.

The only evidence that was before the Tribunal in relation to the relevant property was from the T statements which stated:

2. The [Taxpayer] obtained ownership of [672-676 Pacific Highway, (“the property”)]. a period of time, as follows:

♦ 40% of 676 Pacific Highway, Chatswood on 8 August 1985 for $169,148;

♦ the remaining 60% of 676 Pacific Highway, Chatswood on 18 November 1986 for $993,230;

♦ 40% of 672 Pacific Highway, Chatswood on 7 March 1986 for $96,794; and

♦ the remaining 60% of 672 Pacific Highway, Chatswood on 18 November 1986 for $240,000

(each acquisition amount stated is inclusive of stamp duty and other legal costs incurred upon acquisition).

3. The property was renovated in February 1997 for a total cost of $2,440,400. By the date of sale, 11 July 2005, the depreciated value of the improvements was $581,679 thus reducing the value of the building costs, for the purpose of inclusion in the cost base of the property, to $1,858,721

http://www.austlii.edu.au/au/cases/cth/aat/2010/591.htmlhttp://www.austlii.edu.au/au/cases/cth/aat/2010/591.html

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5. On 11 July 2005, the [Taxpayer] entered into a contract for the sale of the property for a sale price of $9,900,000 [T15-144]. Settlement of the sale of the property took place on 22 August 2005. As a consequence of entering into the contract for sale the [Taxpayer] became liable to pay vendor’s duty equal to 2.25% of the dutiable value of the property (being an amount equal to the GST exclusive sales price)1 upon settlement.

6. …The [Taxpayer] drew upon [a bill facility]y at various times to fund his business activities. Just prior to the sale of the property, the [Taxpayer] had drawn upon $4,813,667 from the bill facility. This comprised of $2,000,000…, $1,900,000 … and $913,667 ….

7. At, or about 11 July 2005, the [Taxpayer] had loans owing from related entities totaling $3,856,950. This comprised of:

♦ $3,803,231 loaned to Icon Property Investments ATF Icon Property Unit Trust [T10-87]; and

♦ $53,719 loaned to Phonetalk Pty Ltd [T10-76].

10. On 16 May 2007, the [Taxpayer] lodged his income tax return for the 2006 income year declaring a net capital gain of $1,179,357 [T3-14]. According to the Capital Gains Tax Schedule attached to the return [T3-24 to T3-28], this was calculated as follows:

Capital gain from active assets $5,375,632

Total year capital gains $5,375,632

Less capital losses -$658,2052

Total capital gain from active assets $4,717,427

Less general 50% discount -$2,358,714

Less 50% discount for small business concession -$1,179,357

Net capital gain $1,179,356

Paragraph 17 disclosed how the taxpayer had calculated its tax liability.

17. The [Taxpayer]’s liability for capital gains tax (“CGT”) was calculated as follows:

As part of the property was obtained prior to the introduction of CGT a portion of the capital gain was disregarded. This portion was calculated as follows:

Capital proceeds ($9,900,000 x 29.92%3) $2,962,080

Less value of capital improvements ($1,858,721 x 29.92%) $ 556,1294

$2,405,951

Less cost base –

Acquisition cost $169,148

Vendors tax ($222,750 x 29.92%) $ 66,647 $ 235,795

Capital gain to be disregarded $2,170,156 The remaining capital gain was calculated a follows:

Total capital gain $6,319,357

Less capital gain to be disregarded $2,170,156

$4,419,201

Less- Current year capital loss $ 109,226

1 s. 146 and 150 of the Duties Act (NSW) 1997. 2 $109,226 (Current year capital losses) + $548,979 (Prior year losses) 3 This was calculated as the percentage of the total area of the property that related to the pre-CGT asset. This percentage is not in dispute. 4 A capital improvement to a CGT asset acquired before 29 September 1985 is a separate CGT asset under subsection 108-70(2) of the ITAA 1997.

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Prior year capital loss $ 548,979

CGT discount $1,745,498 $2,403,703

Net capital gain $1,745,498

Although there was no evidence before the Tribunal at one stage the Tribunal was informed that one part of the property was originally used as a car park and the other part as a service station and that after 20 September 1985 a building was constructed to house the taxpayer’s mobile phone and car radio business.

The reasons for the decision make reference to the contents of an amended Statement of Facts and Contentions dated 27 July 2010 (“RASFC”).

What were the reasons for the decision?

8. Mr Hauer in respect of the RASFC agreed with much, but not all of its content; in particular he agreed that:

…

(f) that in respect of the small business concession claimed by the [Taxpayer] and in relation to the relevant year and although there are references in the documents before the Tribunal to a number of provisions of the Income Tax Assessment Act 1997 (the “Tax Act”) the [Taxpayer] could succeed if, and only if the net value of his CGT assets was less that $5 million (sometimes referred to in these reasons as “the threshold”) and thus satisfying the maximum net asset value test set out in section 152-15 of the Tax Act (in its form in respect of the relevant year); if that test was not satisfied the [Taxpayer] could not seek the small business concessions under any other sections, and in particular sections 152-105, 152-205 or 152-300 of the Tax Act.

10. Mr Hauer contended that the Glowbuoy Unit Trust (referred to in clause 8 of the RASFC) did not have a positive net asset value and that by contrast its net asset value was negative; he said more particularly that the [Commissioner] had incorrectly added back an amount of employee benefits and consisting of leave entitlements and PAYG. The Tribunal was informed that the PAYG component was at a late stage allowed, but that the Commissioner should have also allowed the leave entitlement amounts, in that the amounts in question were in fact paid at a time which was in the circumstances relevant. Mr Hauer contended also that, in any event the value, if there was a positive net asset value, should have been taken into account at one half and not the whole value. The Tribunal does not consider it necessary to deal with these contentions having regard to the fact that the amount involved is small and may properly be considered as de minimis, and having regard to the fact that the threshold in respect of the small business concession was far exceeded; accordingly the value of this particular trust is for all practical purposes irrelevant.

11. Mr Hauer contended, at considerable length, that the debts (referred to in clause 7 of the RASFC) were not CGT assets and should not have been taken into account for the purpose of considering whether the threshold had been achieved. … Debts are unquestionably assets as is clear having regard to section 108-5 of the Tax Act. If moreover a debt being a capital asset is not recovered in full the shortfall can be netted against capital gains and where relevant carried forward.

15. The vendor tax which at the relevant time was in force in New South Wales deserves some brief comment. The tax (now repealed) was imposed as a percentage of the sale proceeds of real property. In broad terms the tax arose and became payable in consequence of a sale of real property and was payable on completion of that sale. It is relevant to note that the tax was exacted on the whole sale proceeds and not simply (as is the case with land tax) on the unencumbered value of the land. ,,,. The tax could not in my view be described as a liability which was contingent in any relevant sense; the [Taxpayer] referred at some length to a decision of this Tribunal in Re The Taxpayer and Commissioner of Taxation [2010] AATA 455; clause 38 of the decision (which was referred to during the hearing although in my view it is of limited if any relevance) reads as follows:

I have difficulty in seeing how it could possibly be said that the amount of $23,450 was not a liability of the [Taxpayer] “just before” the execution of the contracts of sale. All of the accountants’ work had been performed; all that remained to be done was for an invoice to be prepared and sent for the fees payable. The obligation to pay had been incurred prior to 24 October 2003 even if the date for payment had not yet arrived. A balance sheet of the [Taxpayer] prepared as at 23 October 2003 would not be a true and fair financial statement [Footnote: See s 286(1), Corporations Act (Cth)] if it did not show the accountants’ fees as a liability that had been accrued by the [Taxpayer].

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16. The decision referred to in the preceding paragraph has been appealed and it is neither appropriate nor necessary to comment on it. …However, it is clear that the vendor tax constitutes an incidental expense forming part of the cost base of the property (and also the improvements) within section 110-35 of the Tax Act.

Part C. Clause 17 of the RASFC

22. Clause 17 of the RASFC was the subject of considerable discussion and debate. In effect the [Taxpayer] contests some aspects of the calculation of the assessment.

25. Each of the tests contained in section 108-70(2) is satisfied. For the purposes of paragraph (a) the relevant amount ascertained from the tables is, so Mr Geale advised, $109,447 which is much less than the cost base of the improvements; for the purpose of paragraph (b) the 5% calculation produces a result which is much less than the cost base of the improvements and regardless of whether it is applied to the whole proceeds of sale or the proceeds in respect of the improvements; it is clear then that the improvements constituted a separate asset and Mr Hauer (correctly) did not contend otherwise.

Part D. Miscellaneous

28. …Section 152-20(2)(a) of the Tax Act makes it clear (and I refer here to the words in brackets in the first line) that debt is taken into account for the purpose of the relevant calculation; it reads as follows:

(2) In working out the net value of the CGT assets of an entity:

(a) disregard *shares, units or other interests (except debt) in another entity that is *connected with the first-mentioned entity or with a *small business CGT affiliate of the first-mentioned entity;

29. There was no dispute as to the fact that the debtor entities were connected in accordance with section 152-20 of the Tax Act.

Part E. Penalty

30. The [Taxpayer]’s tax return in respect of the relevant year demonstrates in the clearest possible terms that the [Taxpayer] did not calculate his capital gain correctly and that there were important aspects of it which were omitted. It is here necessary to note that the return was prepared by the [Taxpayer]’s then tax agent; however the provisions of the Taxation Administration Act 1953 (“TAA”) make it clear that it is necessary to focus on the actions of both the taxpayer and his agent. (There were indications that the [Taxpayer] blames his previous tax agent for the fact that proper disclosure was not made; it is unnecessary for the Tribunal to express a view as to the extent to which the [Taxpayer] might or might not have a claim against his former tax agent.)

31. Penalty was originally imposed at 50% of the tax shortfall on the basis that the [Taxpayer] was reckless. However, the Commissioner conceded in the RASFC that penalty should be reduced to 25% on the basis that the [Taxpayer]’s conduct should more appropriately be characterised as false and misleading within section 284-90 of Schedule 1 to TAA.

33. The Commissioner cited authority to the effect that tax agents are presumed to be aware of the law and that for this reason a higher standard is expected of them. See in this context Hart v Federal Commissioner of Taxation (2002) 51 ATR 471 at 479.

Part F. Conclusion

34. The [Taxpayer]’s net CGT assets were far in excess of the threshold and so that he is not entitled to any small business concession in respect of his capital gain.

38. As regards penalty the Tribunal does not consider that any further reduction above the reduction conceded by the Commissioner in the RASFC is warranted and, subject to that reduction conceded to the [Taxpayer] by the [Commissioner], affirms the objection decision in respect of the penalty.

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Editor:

The taxpayer’s representative in the matter was Mr Hauer, an accountant who had not been the taxpayer’s tax agent at the time the offending tax return was completed.

Over many years the Tribunal has been willing to highlight the conduct of taxpayer representatives before the Tribunal – usually by observation, sometimes cryptically, sometimes pointedly. The Tribunal made several observations about the taxpayer’s representative in this matter:

Mr Hauer in reply raised matters which had not been raised previously and which led to further submissions by both parties, and so that and to some extent the hearing took on some of the form of a debate.

Mr Hauer contended, at considerable length, that the debts (referred to in clause 7 of the RASFC) were not CGT assets and should not have been taken into account for the purpose of considering whether the threshold had been achieved. He contended that this was so because they were debts pure and simple which could not yield anything more than (at most) an interest return and that the most which could be obtained in respect of the capital amount of the debts was their face value; accordingly, so he argued, they could not be CGT assets. He reinforced his argument in this context by contending that if the debts were not recovered in full a capital gains tax deduction would not be allowed.

Mr Hauer contended that the value of the property which was relevant for the purpose of the threshold calculation was that set out in a valuation obtained prior to the sale and pursuant to which the value was set at $8,740,000.

At a later stage Mr Hauer claimed that the debts if they were to be taken into account should be taken into account by reducing them to the extent that payment would not be received if the debtors were placed in liquidation.

Also at a later stage Mr Hauer claimed that the debts were personal use assets although he could not point to any evidence to this effect and again did not offer any.

Mr Hauer again at a late stage contended that the debts were not used in connection with a business and should not for this reason be taken into account.

During his submissions in reply Mr Hauer contended that debt should not be taken into account by virtue of a statutory provision to this effect although he could not remember which provision it was.

Towards the end of the hearing contentions were made by Mr Hauer and which had not been made previously and in support of which evidence had not been and was not then produced.

In respect of the improvements Mr Hauer did not at any time seek to deny that the improvement constituted a separate asset in accordance with section 108-70 of the Tax Act.

(2) ** Was there hardship or special reaons to justify reduction of HELP and SFSS repayments? (Dedes and C of T)

Source: Month 08-2010-30 ~ 1-1(b) - Dedes and C of T [2010] AATA 567 (30 June 2010) Senior Member R W Dunne

What is the issue? Should the Tribunal exercise the discretion:

♦ in s 154-50 of Higher Education Support Act 2003 (“HESA”) to amend the [Taxpayer]’s assessment for the year ended 30 June 2009 to excise the HELP and SFSS repayment amounts included in the assessment?

♦ in s 154-45 of the HESA to defer the making of the [Taxpayer]’s assessment for the year ended 30 June 2010 to include HELP and SFSS repayment amounts in the assessment?

http://www.austlii.edu.au/au/cases/cth/AATA/2010/567.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/aata1975323/s50.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/aata1975323/s45.html

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What was the decision? Should the [Taxpayer]’s assessment for the year ended 30 June 2009 be amended to excise the HELP and SFSS repayment amounts included in the assessment?

10. Sections 154-45 and 154-50 of the HESA allow the Commissioner (and the Tribunal, upon review) the exercise of the discretion to defer HELP and SFSS repayment amounts, or amend an assessment if HELP and SFSS repayment amounts have already been raised, if the Commissioner (or the Tribunal) is of the opinion that payment of the relevant amounts would cause serious hardship or there are other special reasons that make it fair and reasonable to defer making the assessment or to make the amendment. …

14. Mr Dedes’ notice of assessment for the year ended 30 June 2009 issued on 28 July 2009. Included in the assessment was a HELP repayment amount of $2,624.45 and a SFSS repayment amount of $1,574.67, totalling $4,199.12. Mr Dedes is seeking amendment to the 2008/2009 assessment to reduce the HELP and SFSS repayment amounts to nil by reason of serious hardship or special reasons. As Mr S Webb, Member, did in Re The Taxpayer (supra), it is necessary to consider Mr Dedes’ factual circumstances to determine whether, as a matter of probability to the reasonable satisfaction standard, there are grounds to amend his 2008/2009 assessment under the terms of s 154-50 of the HESA, so that no amount of tax is payable.

SERIOUS HARDSHIP

15. Plainly, hardship is to be assessed in relation to the HELP and the SFSS assessed amounts, whether in fact payment has been made or has yet to be made. When does payment of the assessed amounts occur? Clearly, payment is effected when a PAYG credit is applied against a HELP and SFSS assessment debt or repayment amount of a person, even though a taxation deficit in equivalent amount may result. It follows that the time at which hardship is to be assessed in Mr Dedes’ 2008/2009 assessment is the time of effective payment from PAYG credit of the HELP and SFSS repayment amounts (see Re Szekely and Commissioner of Taxation [2001] AATA 704 at paragraph 4). In Mr Dedes’ case, that time is the date on which his assessment for the year ended 30 June 2009 issued, namely 28 July 2009.

25. On the evidence presented, I am not satisfied that the [Taxpayer] is destitute or experiencing hardship to the extent shown by the authorities to be “serious hardship”. Although his financial position may be straitened, there is no evidence that he will be left without reasonable acquisitions of food and clothing, medical supplies or other basic requirements. He has medical and dental requirements that may need to be provided for. However, he received the retention pay prior to the termination of his employment and, in reading the termination letter from the AVO dated 17 June 2010 which he forwarded to the Tribunal on 2 July 2010, it appears that he would have also received payment in lieu of 5 weeks notice of termination, together with severance benefit and payments in lieu of leave.

26. He also owns his residence at Myers Lane which, on his evidence, would now have a market value of approximately $600,000. He said he believed he had the right to live in his residence with a small mortgage and that the re-alignment of his financial affairs should not involve a sale of the residence. In my view, there is the capacity for him to re-align his financial arrangements by disposing of his present residence and downsizing to a cheaper residence that would be adequate for his personal and present needs. The excess funds could then be used to provide him with the medical and dental equipment that he requires. In doing so, and having regard to the moneys he received from the AVO in June 2010, I am satisfied that Mr Dedes will not suffer unduly burdensome consequences depriving him of the necessities of life. In the circumstances, I find that he has not established “serious hardship” under the HESA, particularly s 154-50.

SPECIAL REASONS

27. The term “special reasons” has been seen as similar in meaning to the term “special circumstances” used in Social Security legislation: see Re Comptom and Commissioner of Taxation [1999] AATA 351. Cases which demonstrate “special circumstances” must show something which is “unusual, uncommon or exceptional” (see Re Beadle and Director-General of Social Security (1984) 6 ALD 1 at 4). …

28. To prove “special reasons”, Mr Dedes’ position must be different from the ordinary run of cases, but does not have to be unique. In his case, the evidence clearly shows that he is not destitute.

SUMMARY

http://www.austlii.edu.au/au/cases/cth/AATA/2001/704.htmlhttp://www.austlii.edu.au/au/cases/cth/AATA/1999/351.htmlhttp://www.austlii.edu.au/cgi-bin/LawCite?cit=%281984%29%206%20ALD%201

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32. Mr Dedes has not relevantly established “serious hardship” or proved “special reasons” under either s 154-45 or s 154-50 of the HESA in relation to the HELP and SFSS repayment amounts in (or that might be included in) the 2008/2009 and the 2009/2010 assessments.

DECISION

33. The Tribunal affirms the decision under review.

Editor

The gratuitous comment from the Tribunal that the taxpayer could downsize his house ignores the reality of the stamp duty expense such a move would cause. It also ignores the reality that a person who lost their job may be able to service their current housing loan but not qualify for a new loan.

The comment about what the taxpayer could do didn’t need to be made and shouldn’t have been made.

(3) ** Is the taxpayer carrying on a business in share trading? (Smith and C of T)

Source: Month 08-2010-33 ~ Part 1-2(b) - Smith and C of T [2010] AATA 576 (5 August 2010) Ms G Ettinger, Senior Member

What is the issue?

Was the taxpayer:

♦ carrying on a business in the 2007 and 2008 income years?

♦ in the business of being a share trader in the 2007 and 2008 income years?

In the alternative, were the shares to be treated as trading stock on revenue account?


The Tribunal was satisfied that the taxpayer in the 2007 and 2008 years:

♦ invested reasonably large amounts of money and conducted various buying and selling transactions;

♦ did not meet the tests in order to have been held to have been conducting a business;

♦ was not a share trader in those years.


Mr Smith, who had completed a thesis on “share market over-reaction” and also a graduate diploma in finance, claimed to be in engaged in the business of share trading during the 2007 and 2008 income years.

Mr Smith transferred to Australia in 1996, worked for ABN Amro for five years and later was one of five directors employed by Babcock & Brown to develop an infrastructure team primarily focused on public/private partnerships.

Mr Smith was represented at the AAT by his accountant, Mr Hollestelle.

What is the impact of the decision on your firm’s practices?

This decision is one of real importance for many practitioners with clients who claim to be share traders. After reading this decision you might come to the conclusion that none of them could be a share trader, but that should not be your conclusion.

A more appropriate response would be to seek to understand how the Tribunal viewed the evidence before it and to understand the deficiencies in the evidence that the Tribunal identified. The different sets of figures were not helpful.

Having undertaken an evaluation of the evidence exercise you will be in a better position to understand the evidence

http://www.austlii.edu.au/au/cases/cth/aat/2010/576.html

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you will need to demand from a client before you could lodge a tax return in which a person claims to be a share trader.

In paragraph 4 of the decision the Tribunal made this observation:

“Mr HollestelIe, Mr Smith’s accountant who represented him at the Tribunal, filed numerous documents and various versions of his share accounts as well as four sets of Statements of Facts and Contentions over the period of preparation of this matter, including amended figures during the hearing.”

The observation is perhaps central to understanding what the Tribunal saw as the vibe of the case and of particular importance in understanding the Tribunal’s observation that “The evidence before me indicates that Mr Smith did not represent himself as a share trader until after he had lodged his income tax returns for 2007 and 2008.” For an understanding of how the Tribunal came to its decision it is important to understand the role of impression – or the vibe: see paragraphs 15, 17, 22, 27, 53, 69, 77, 84 and 86.

Having read the decision you might decide that some tax returns lodged in relation to losses sustained in the GFC might need revision.

What were the relevant legislative provisions?

The relevant legislation is the Income Tax Assessment Act 1997 (the Act), in particular:

6-5 Income according to ordinary concepts (ordinary income)

(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

(2) If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

….

8-1 General deductions

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

…..

70-10 Meaning of trading stock

Trading stock includes:

(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a *business; and

…

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70-30 Starting to hold as trading stock an item you already own

(1) If you start holding as *trading stock an item you already own, but do not hold as trading stock, you are treated as if:.

(a) just before it became trading stock, you had sold the item to someone else (at arm’s length) for whichever of these amounts you elect:

• its cost (as worked out under subsection (3) or (4));

• its *market value just before it became trading stock; and

(b) you had immediately bought it back for the same amount.

Example: ….

Note: Depending on how you elect under paragraph (1)(a), the sale may or may not give rise to a capital gain or a capital loss for the purposes of Parts 3-1 and 3-3 (about CGT). It does not if you elect to be treated as having sold the item for what would have been its cost: see subsection 118-25(2). However, it can if you elect market value.

When you must make the election

(2) You must make the election by the time you lodge your *income tax return for the income year in which you start holding the item as *trading stock. (If you do not make the election by then because you do not realise until later that you started to hold the item as trading stock, you must make the election as soon as is reasonable after realising that.)

However, the Commissioner can allow you to make it later (in either case).

How to work out the item’s cost

(3) The item’s cost is what would have been its cost for the purposes of section 70-45 (about valuing trading stock at the end of the income year) if it had been your *trading stock ever since you last acquired it. In working that out, disregard section 70-55 (about acquiring live stock by natural increase).

…..

70-35 You include the value of your trading stock in worki

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