Tax Facts

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In brief:    The Federal Government in its formal response to the Financial System Inquiry (chaired by David Murray) says that it ‘does not agree with the Inquiry's recommendation to prohibit limited recourse borrowing arrangements by superannuation funds.’ However, it will commission the Council of Financial Regulators and the ATO ‘to monitor leverage and risk in the superannuation system and report back to Government after 3 years.'

More:    So no changes at all are currently proposed to the limited recourse borrowing rules for SMSFs. Coincidentally, in the same week as the Government's response to the Financial System Inquiry, it was reported that ASIC successfully obtained orders in the Supreme Court of New South Wales against a national real estate company held to be wrongly providing financial services. Those services related to recommendations and services about SMSFs provided as part of the company's business of marketing real estate.

In brief:    Despite its sympathy for the taxpayer, the Administrative Appeals Tribunal has held that she was properly assessed on trust income to which she was shown as presently entitled in the relevant tax return of the trust. The entitlement was said to relate to funds accessed by the taxpayer from a trust bank account as part of the normal living arrangements between her and her then partner who was the trustee. The taxpayer had not been aware that those funds constituted assessable income and attempted to disclaim the benefit following her separation from her partner. That disclaimer was held by the Tribunal to be ineffective, since she had already had the benefit of the trust distributions.

More:   A discretionary trust distribution amounts to a gift and no one can be forced to accept a gift. Disclaimer is possible to avoid such a trust distribution but it is legally effective until disclaimer, even if the beneficiary is unaware of it. To be effective, the disclaimer by the beneficiary of a distribution must occur before the beneficiary has received the benefit of it and, in any case, within a reasonable time of the beneficiary becoming aware of the distribution. The Tribunal in this case was critical of the way that the trustee had effectively subjected the taxpayer to a significant tax liability and 75% administrative penalty after cessation of his relationship with the taxpayer. But the Tribunal nevertheless held itself bound to uphold the tax assessed to the taxpayer. (Alderton v C of T [2015] AATA 807)

In brief:    The Commissioner in a recent Taxation Determination changed his view about the assessment of retiring partners. Contrary to a number of private rulings in the past, any entitlement of a retiring partner in the net income of the partnership will be regarded as assessable under s 92 ITAA36. This is said to be the case regardless of how the payment is labelled, whether the partner retires before the end of the year of income and the timing of any payment. In the Commissioner's view, the question is one of characterisation of the payment received by the retiring partner. An amount representing an interest in the partnership net income may also represent the capital proceeds from a CGT event, but any capital gain will typically be reduced to the extent that the amount is assessable under other provisions.

More:    The Commissioner had accepted in a number of past private rulings that s 92 would not apply and that the CGT regime would instead. Given the example included in the Determination, these rulings may have typically applied in relation to larger partnerships. (Taxation Determination TD 2015/19)

In brief:    In a complex case, the trustee of a discretionary trust failed in its attempt to allocate franking credits on a basis quite independent of the proportions in which the franked dividends of the trust were allocated (as part of the distributable trust income). The Federal Court confirmed that a taxpayer's entitlement to a tax offset for franking credits is a function solely of the statutory mechanism. In the case of franked dividends included in the assessable income of a trust, the trust beneficiary's entitlement to franking credits arises according to the beneficiary's share of the franked dividend (s 207-57 ITAA97).

The trustee had previously sought directions from the Queensland Supreme Court in relation to the disputed construction of the trustee's relevant resolutions relating to the distribution of trust income and franking credits. Nevertheless, the Federal Court held that it was obliged to form its own conclusions about the proper construction of the trust deed and the resolutions. And that the orders of the Supreme Court did not bind the Commissioner as to the proper application of the tax law in the circumstances.

More:    This decision illustrates the need to get things right in relation to trust distributions and, in more difficult scenarios, to get expert assistance. The beneficiary in this case had claimed franking credits of over $9M over the several relevant income years at issue, despite being entitled each year to only a minor share of the trust income. Interestingly, although it did not arise on the particular facts involved in this case, the Court expressed the view that franking credits might be properly regarded as a ‘category of income’ capable of being separately recorded in the trust books, if the trust deed was appropriately drafted. (Thomas v FC of T [2015] FCA 968)

In brief:    Legislation has been enacted to formally adopt look-through treatment in relation to SMSF assets held subject to limited recourse borrowing arrangements. This is achieved by effectively ignoring the custodian trust under which such assets are held, treating the SMSF as the owner and the acts of the custodian trustee as those of the SMSF trustee. So income derived from the assets will be taken to be derived by the SMSF and any CGT event will give rise to a capital gain or loss for the SMSF.

More:    This change is welcome, although it really only formalises existing practice. It is a pity that the amending Act did not also formalise the practice for GST purposes, although SMSFs will presumably be reasonably comfortable to continue relying on GST Ruling GSTR 2008/3. Under that Ruling, the Commissioner pragmatically accepts that GST supplies and credits effectively occur for the SMSF rather than the custodian trustee. (Tax and Superannuation Laws Amendment (2015 Measures No 2) Act 2015)

In brief:    A taxpayer has failed in his bid to deduct course fees for an MBA from a prestigious institution in Paris, after having been made redundant from his role in the private equity investments team of a major trading bank. The Commissioner accepted that there was sufficient nexus of the course with his former employment with the bank and had allowed deductions for an initial non-refundable deposit and airfares to Paris, both incurred before the taxpayer's redundancy. But the Tribunal held that there was insufficient evidence to satisfy the taxpayer's obligation to show that the balance of the €48,000 course fees was incurred before the redundancy, which severed the nexus of the MBA course to the derivation of assessable income (the taxpayer did not derive any further employment income for the balance of the income year or the next).

More:    The case was argued by the taxpayer's father, a registered tax agent who had guaranteed payment of his son's MBA fees. The Tribunal held that the evidence was insufficient to satisfy it that the balance of the course fees, unlike the initial non-refundable deposit, was payable irrespective of whether or not the taxpayer proceeded with the course. Nevertheless, although the view formed by the taxpayer's father as to deductibility was incorrect, a 25% administrative penalty for failure to take reasonable care was held to be incorrectly imposed – the taxpayer's father had notes substantiating that he had considered the relevant issues and cases relating to the matter. (Thomas v FC of T [2015] AATA 687)

In brief:    In this case, a husband and wife were the trustees and only members of their SMSF. A civil penalty of $20,000 was imposed on each of them for various breaches of the SIS laws, together with payment of the Commissioner's costs. The breaches included contravention of the sole purpose rule, lending money to members of the Fund, exceeding in-house assets limits and entering into transactions with related parties on more favourable terms and conditions than would be expected if dealing with those parties at arm's length.

Subsequent to the sale of an unsuccessful business, they had started to withdraw funds from their SMSF for ordinary living expenses and to meet repayment commitments relating to debt on their former business. Over a 3 year period, they withdrew virtually all the funds from their SMSF, leaving it with only about $6,000 remaining. The trustees were disqualified from being trustees of a super fund and were subsequently also prosecuted for breaches of the relevant SIS laws.

More:    The penalties in this case were imposed in the context of admission by the trustees of their breaches and their full cooperation with the Commissioner. Nevertheless, there had been prior SIS contraventions, the trustees’ actions were deliberate and they understood that they were contravening the SIS rules. Further, the breaches were serious, with virtually all the assets of the Fund withdrawn. But, having regard to the financial position of the trustees, the Federal Court held that the civil penalties be paid monthly over a 3 year period. (DFC of T v Ryan [2015] FCA 1037) 

In brief:    A university student has failed in an attempt to appeal against summary judgement for PAYG withholding of approximately $3.4M in respect of directors’ penalty notices issued to him by the Commissioner. The attempt failed because the West Australian Court of Appeal refused an extension of time for the taxpayer to file his appeal (which was out of time). Nevertheless, the Court went on to give reasons why it would dismiss the appeal in any case.

The Court agreed with the decision of the Master below who had commented that the lack of detail in the taxpayer’s evidence ‘presumably reflected the appellant's lack of involvement in the day-to-day operations of the company’. The father of the taxpayer was heavily involved in the management of the company and the taxpayer's evidence was that he had had regular discussions with his father about the company's affairs and periodic meetings with the company's financial controller. However, it was held that such evidence fell well short of the taxpayer's obligation to take all reasonable steps to ensure that the company paid its PAYG withholding or to cause the appointment of an administrator or commencement of winding up.

More:    This decision emphasises the dangers in a person accepting appointment as a director when he or she is not actively involved with the company. The judgment in the case does not indicate whether the taxpayer's father was also a director or, in any case, why the taxpayer had been appointed a director. But, whatever the circumstances, the taxpayer paid a very heavy price (including, presumably, the prospect of bankruptcy) for agreeing to act as a director. (Roche v DFC of T [2015] WASCA 196)