Tax Facts

Tax Facts contains news and alerts relating to tax practice, for the benefit of accountants and other professionals in public practice. Please click on the links below for recent issues. You may also like to peruse Tax Facts by topic category - topics are listed below to the right.

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  • Criminal penalty for deliberate failure to disclose taxable income

    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).
    ... Read More

    19 Feb 2014

    Topic: Income Tax

  • Royalty withholding tax for software distributor

    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 treaty for 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).
    ... Read More

    19 Feb 2014

    Topic: Income Tax

  • Discretionary trust distribution to SMSF - special income

    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).
    ... Read More

    19 Feb 2014

    Topic: SMSFs

  • No payroll tax under the contractor provisions

    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).
    ... Read More

    05 Feb 2014

    Topic: State Taxes

  • CGT event E1 applied to creation of Joint Venture

    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 transfers and 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).
    ... Read More

    05 Feb 2014

    Topic: CGT/Trusts