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A person convicted of a money laundering offence has been successful in having the conviction quashed in the High Court. The relevant facts involved the transfer of Australian listed shares held by an Australian company controlled by the person to offshore parties, but with the true beneficial ownership being retained. Most of the shares were subsequently sold for a substantial profit and the jury in the person's trial was satisfied beyond reasonable doubt that the person intended not to declare the profit for income tax purposes.
The point is that, while the person was successful in relation to the money laundering charge, the High Court was in no doubt that he was properly convicted of another count relating to the evasion of tax on the profit. It may generally only be the more extreme cases where taxpayers are prosecuted for deliberate tax evasion, but it is a worthwhile point to remember for a few clients with whom we occasionally come into contact – the crime in this case applies if ‘the person, by a deception, dishonestly obtains a financial advantage from [a Commonwealth entity]’. The maximum penalty for that crime under s 134.2 of the Criminal Code is imprisonment for 10 years (Milne v The Queen [2014] HCA 4).
Annual fees paid by the Australian distributor of software to its Canadian developer were held to be royalties for the purposes of Article 12(3)(a) of Australia's double tax agreement with Canada and liable for withholding tax accordingly. In particular, an exclusion under the treatyfor payments for source code in computer software, where ‘the right to use the source code is limited to such use as is necessary to enable effective operation of the program by the user’ (Article 12(7)),did not apply. The reason was that the distributor also had the right to copy the software for sale to end users and to develop its own templates for sale in conjunction with the software.
While the case itself was relatively straightforward, it is a good reminder of how broad the concept of a royalty is for income tax purposes and the relevance of treaty provisions if the dealings are international. And although argument in the case was limited to the treaty provisions, our domestic tax laws about the meaning of royalties and how they are assessed can be very complex (Task Technology Pty Ltd v FC of T [2014] FCA 38).
In Allen v FC of T [2011] FCAFC 118, a capital gain was distributed as part of an avoidance arrangement from a non-fixed trust to a fixed trust whose only beneficiary at the time was an SMSF. On the basis of a number of technical arguments, the intention was that the capital gain would be taxed at the usual 15% rate in the SMSF. However, the Full Federal Court agreed with the Commissioner that the capital gain constituted ‘special income’ of the SMSF and was liable to be taxed at the highest marginal rate (47% at the time).
Now the fortunes of an even more adventurous taxpayer have come to an end, with the High Court refusing the taxpayer special leave to appeal from another Full Federal Court decision. In this case, the taxpayer had tried to distinguish Allen’s case or argue that it was wrong. The argument was that ‘income derived’ for the purposes of the special income provisions in former s 273 of the 1936 Act did not include the SMSF’s unpaid entitlement to a substantial capital gain from a related trust (from the sale of shares in Super Cheap Auto, after its listing, by the founder). The argument failed.
Although s 273 has now been replaced by the ‘non-arms length income’ provisions in s 295-550 of the 1997 Act, the scheme is similar. It would be a very brave taxpayer now who would distribute income or capital gains from a non-fixed trust to an SMSF in order to try to attract the15% super fund tax rate (SCCASP Holdings Pty Ltd v FC of T [2013] FCAFC 45).
In a case handed down just before Christmas, the NSW Court of Appeal ruled against the assessment of payroll tax under the contractor provisions of the Payroll Tax Act 2007 (NSW). The decision is relevant in Queensland because our contractor provisions are very similar, having been adopted with effect from 1 July 2008 as part of the harmonisation of payroll tax laws with other States.
The relevant contracts in this case involved independent contractors engaged to service the vending machines of Smith's Snackfoods. The contractors’ obligations were to restock the machines, collect cash and carry out minor maintenance. In particular, contractors were acquired to supply their own vehicle to undertake the services.
The Court of Appeal held that the contracts were not ‘relevant contracts’, because of the exclusion in s 32(2)(d)(i) (s 13B(2)(d)(i) in the Qld Act). That exclusion applies where a person is supplied with “services ancillary to the conveyance of goods by means of a vehicle provided by the person conveying them ….’ That was held to be the case – a contract is either a relevant contract or not (contrary to the primary judge’s view that it could be dissected for this purpose) and, in the circumstances, the other services provided by the contractors were ancillary to the conveyance of Smith's products.
Note that it was a specific (and relatively narrow) exclusion that was upheld in this case. The contractor provisions still have a very broad application and there is a lot of non-compliance by taxpayers in this respect (Smith's Snackfood Company Ltd v Chief Commissioner of State Revenue (NSW) [2013] NSWCA 470).
The pain continues for 3 Victorian taxpayers (although 2 were controlled by the same industry super fund) in relation to transactions entered into to create a JV of development land. The facts are complex, but involved transfers of the land held by 2 of the parties to the 3rd party and a declaration of trust by that 3rd party that the separate land parcels would be held respectively for the 3 parties but subject to the JV. The pain was continuing, since the Victorian Court of Appeal had previously held that stamp duty applied to the land transfersand the High Court had refused to grant special leave to appeal from that decision.
Now the Federal Court has held that CGT event E1 applied to the land transfer by one of the parties, with substantial resulting tax and a 25% administrative penalty (for taking a position not reasonably arguable or failing to take reasonable care). Without considering the case in detail, it seems to be a good example of where everything that could go wrong, has gone wrong. It is also a good reminder of the complexity and high risks of tripping up (on one or more of income tax, duty and GST) when one tries to alter ownership interests in property, particularly where matters of trusts law are involved.
I was involved last year in a manner that was somewhat the reverse – the unwinding of a JV between 2 groups over land worth approximately $3.5M. Bizarrely, the settlement proposal by solicitors for the other side involved duty on at least 50% of the land value (and arguably on 100%), probable GST (unless the going concern exemption could apply, but that was doubtful) and crystallisation of a taxable (revenue) gain equal to the total value of the land. The point is that these sorts of scenarios warrant very detailed and high level consideration in order to avoid large tax risks (Taras Nominees Pty Ltd v C of T [2013] FCA 1372).
Tax planning arrangements can fail for a number of reasons. One of those reasons has little to do with technical tax rules. With a real-life example, this episode of Tax Solutions illustrates how tax planning can go wrong because of a fatal legal flaw in the underlying transactions or circumstances on which the tax plan is based. With the result that the practitioner involved is highly exposed.
The small business CGT concessions provide very substantial benefits in situations where they apply. And given the policy intent to direct the concessions to business assets, one of the central conditions that must normally be satisfied is the ‘active asset test’.
This episode of Tax Solutions emphasises a class of CGT assets that achieve a special status for the purposes of the small business CGT concessions. Those assets continue as active assets indefinitely – retaining that status even long after they have ceased being used in any business controlled by the owners!
Widely drafted beneficiary classes in discretionary trusts can create headaches in dealing with various State taxes. A recent example is Victoria’s new 3% additional duty on foreign buyers of residential property – where a trustee is the buyer and a family beneficiary lives overseas. A starker example that applies in all States and Territories is payroll tax grouping of businesses controlled by family relatives, where at least one of the businesses is operated by a discretionary trust.
Having extraordinarily wide beneficiary classes is an outdated practice that creates problems, rather than serving any useful purpose. There is really no point in including a whole range of relatives who are never intended to benefit. A narrow class of beneficiaries is required, with a simple and practical mechanism to add others to whom it is desired to distribute.
Frustrations with ATO views about UPEs of corporate beneficiaries have led to companies more frequently being used to acquire and operate small and medium sized businesses. But the problem is not discretionary trusts owning businesses, it is Division 7A. And there will usually be ways to deal with Division 7A anyway.
Some advisers believe that a business owner can still access the small business CGT concessions on a future business sale, by selling shares in the company that owns the business. But how realistic is it to hope that that is the way things will turn out. This edition of Tax Solutions emphasises 2 reasons why clients with a business owned by a company may not actually benefit from the CGT concessions.
One of the best things you will ever do for some of your small business clients is to deliberately trigger a CGT event and capture the small business CGT concessions. In the right client circumstances, this strategy can produce several very substantial benefits. That will particularly be so if 100% CGT exemptions can be achieved without duty applying to the transaction.
A restructure for this purpose should always be kept in mind, particularly for clients who may grow to the point where they can no longer satisfy either the $2M turnover test or $6M net asset value test. But it warrants greater consideration at the moment, given the apparent increased political risk of changes to CGT concessions.
