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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  • An oldie but a goodie

    It was interesting to see the well known old case of Arthur Murray (Arthur Murray (NSW) Pty Ltd v FC of T (1965) 114 CLR 314) cited as authority for the Commissioner's views expressed in a recent Taxation Ruling. The ruling is TR 2014/1, dealing with the derivation of income by commercial software developers for the licensing of proprietary software and ‘hosted’ or ‘cloud’ arrangements for the use of such software.

    The Commissioner states the normal position that a taxpayer conducting a business generally derives income for income tax purposes when a recoverable debt arises. In the Arthur Murray case, that normal position was held not to apply to prepayments for a series of dance lessons, when it was the practice of the dance studio to make refunds for lessons not used and to account for income only when the lessons to which the income related, were provided. The income was held to be derived for income tax purposes only as lessons were provided, rather than on receipt at the start of the arrangement.

    In TR 2014/1, the Commissioner expresses the view that software developers in an analogous position to the dance studio in Arthur Murray will derive income progressively over the life of their contracts. That is, upfront consideration will not be wholly derived immediately if there is a contractual obligation to make a refund for non-performance, a demonstrated commercial practice to make a refund or exposure to contractual damages for breach of ongoing obligations.

    The ruling is a good reminder that the Arthur Murray principle is one of general application to the issue of income derivation and can apply in different factual situations (Taxation Ruling 2014/1).
    ... Read More

    19 Mar 2014

    Topic: Income Tax

  • Elderly nursing home resident with dementia not a share trader

    One might think it impossible that an elderly person in a nursing home and suffering from dementia could be carrying on a business of share trading. The taxpayer's argument to that effect failed in this AAT decision but the Tribunal accepted as a matter of principle that it was plainly possible, which is most certainly the case.

    The way that such a person could carry on business is through the activities undertaken by the person's agent. In a similar way, a passive partner carries on business with his or her partners through the agency of one or more of the other partners who manage the partnership business. The agent in this case was the taxpayer's nephew who, together with another, had been appointed as the taxpayer's attorneys.

    It did not assist the taxpayer in this case that her share profits for the 2007, 2008 and 2010 years were returned as capital profits (it was submitted on the taxpayer's behalf that the 2010 income tax return was incorrect), but that the losses of approximately $800,000 in the 2009 income year were submitted to be losses from the conduct of a business. But of probably more significance was the Tribunal's finding relating to the scope of the agency and consequent rights and obligations of the taxpayer's nephew – that the nephew was not authorised to conduct a share trading business. It was held that, viewed in that context, the activities of the nephew did not amount to the conduct of business (Executor for the late JE Osborne v FC of T [2014] AATA 128).
    ... Read More

    19 Mar 2014

    Topic: Income Tax

  • New penalty regime for SMSF's

    The Bill introducing the new penalty regime for SMSFs received Royal Assent yesterday. The new regime will apply from 1 July 2014 and is intended to provide alternative sanctions for breaches of the Superannuation Industry (Supervision) Act 1993 and Regulations.

    It can be expected that the Commissioner of Taxation will heartily embrace these new rules and that SMSF trustees and directors of corporate trustees are far more likely to be penalised for future breaches. After all, the purpose of the new regime is to provide the Commissioner with ‘effective, flexible and cost-effective mechanisms for imposing sanctions that reflect the nature and seriousness of the breach’. Other current sanctions will remain in place – the ability to make an SMSF non-complying, court imposed civil and criminal penalties, enforceable undertakings and trustee disqualification.

    The new regime confers powers on the Commissioner to:
    • give rectification directions to rectify SIS contraventions,
    • give education directions to require a person to undertake a specified course of education, and
    • impose administrative penalties for breaches of specified SIS provisions (examples include recordkeeping breaches, lending to members, borrowing breaches and in-house asset breaches).
    (Tax and Superannuation Laws Amendment (2014 Measures No 1) Act 2014)
    ... Read More

    19 Mar 2014

    Topic: SMSFs

  • Another payroll tax success for the NSW OSR

    NSW payroll tax has been held to apply for the years 2003 to 2009 in the case of one of the models used by Freelance, a business that provides services relating to the engagement of independent contractors. Under the relevant business model, Freelance contracted with clients for the provision of services by contractors. Freelance did that in its capacity as the trustee of a discretionary trust and the contractors became beneficiaries. Although not bound to do so, it seems in practice that Freelance invariably distributed to each contractor (less a fee) the earnings attributable to the contractor's work.

    The NSW Supreme Court held that Freelance was an ‘employment agent’ and that the distributions to its contractors were subject to payroll tax. The decision is relevant in Queensland and other States that also have ‘employment agency’ provisions in their payroll tax legislation. For this purpose, the meaning of an employment agent extends well beyond the popular meaning. One certainly need not be a traditional recruitment agency in order for these provisions to apply – they potentially apply to ‘a contract under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agent’.

    This is another decision that underscores the substantial armoury that State Revenues have to counter the potential loss of the payroll tax base (Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127).
    ... Read More

    05 Mar 2014

    Topic: State Taxes

  • Payments were deferred compensation for employee's services

    A recent case serves as a stark reminder of the significance of properly applying the income/capital dichotomy. The case involved an employee of the Glencore Group who, on termination of his employment with the group in the 2007 year of income, became entitled to receive an amount of over $100M by instalments (with interest) over 5 years.

    The facts are relatively complex but, essentially, the taxpayer had accrued rights under the group's employee profit participation plans while employed by Glencore overseas and also after having arrived in Australia and worked here for the group. He initially took the view that the rights under the plans comprised income at the time they accrued, but subsequently constituted capital rights and that he derived a capital gain in the 2007 year upon crystallisation of those rights in exchange for the $100M sum, but with an entitlement to the general 50% CGT discount.

    The court held that the instalments were ordinary income, assessable upon receipt over the 5 year payment period. The short point of principle, despite the very large sum involved, was that it was receipt of the instalments that constituted the reward for employment services – not the contractual right accrued under the plans. The court drew an analogy to the ordinary payment of salary to an employee – it is not the case that the right to be paid salary is income and receipt is then nothing more than the realisation of that right. Rather, it is receipt of the salary that constitutes the reward for services and, consequently, ordinary income (Blank v FC of T [2014] FCA 87).
    ... Read More

    05 Mar 2014

    Topic: Income Tax

  • Tax Strategies' 20th Anniversary

    April 6 will mark 20 years since Tax Strategies commenced practice. We are proud to achieve this milestone and very grateful for the substantial ongoing support that we enjoy – thank you. And it is particularly gratifying that we still advise a number of firms who have been with us right from the start or from very early days.

    We have plans to make our anniversary year a special one, starting soon ….
    ... Read More

    05 Mar 2014

    Topic: Other News