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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  • Limited partnership status not achieved

    In brief:   Arrangements relying on the tax status of limited partnerships at the time have failed in 2 recent Brisbane cases in the AAT, with the same solicitors and counsel acting in both. The cases involved somewhat similar facts and both failed because of the Tribunal's finding that the arrangements in each did not constitute a partnership under the general law. That was said by the Tribunal to be fatal – a corporate limited partnership for income tax purposes (Division 5A of Part III of the 1936 Act) must constitute a partnership under the relevant State partnership Act. And a partnership can only exist if the persons involved are ‘carrying on a business in common with a view of profit’. No business was carried on in either case – income in both was derived from dividends on shares issued in an associated company.

    On the basis of the terms of the shares issued in both cases, they were also held to be debt interests under the debt/equity rules (Division 974 of the 1997 Act). Consequently, dividends on those shares were unfrankable (s202-45(d)). And in addition, in one of the cases, Division 7A was held to apply to payments and loans by the associated company involving the purported limited partnership.

    More:   Before changes in 2009, most corporate limited partnerships had the advantage that, although effectively taxed as companies, they were not treated in that way for the purposes of Division 7A. But the arrangements in each of these 2 cases failed to achieve the desired status as corporate limited partnerships. According to the AAT's decision, the reason was a failure to appropriately engage the relevant statutory provisions under State law to become limited partnerships. Achieving desired tax outcomes requires an arrangement to have achieved its intended legal consequences to start with – tax laws apply on the basis of the effect of transactions under the general law. Many tax arrangements that fail do so because the intended effect under the general law is not achieved. (D Marks Partnership v C of T [2015] AATA 651 and NR Allsop Holdings Pty Ltd v C of T [2015] AATA 654)

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    03 Sep 2015

    Topic: Income Tax

  • "Special licence fee" constituted capital expenditure

    In brief:   The Full High Court, by a 4 to 1 majority, has dismissed the taxpayer's appeal to allow deductions for special fees imposed as part of the arrangements for the taxpayer to acquire part of the Victorian Government's electricity transmission business. The fees were fixed in advance for the relevant 3 1/2 year period after the business was acquired, in order to prevent a windfall from increased tariffs applying after privatisation of the Government's electricity distribution network. Although not part of the stated purchase price, the fees were agreed to by the taxpayer as part of the overall package of transactions for its acquisition of the business. Further, the special fees were not dependent in any way on the extent of usage of the transmission network.

    The majority held in the circumstances that the special licence fees constituted part of the cost of acquiring the transmission business and consequently were outgoings of capital. It was accepted that the fact that a promise to pay the fees formed part of the total consideration to acquire the transmission business was not determinative. The critical question is, “what is the character of the advantage sought by the taxpayer?” (or, as expressed in the authority cited by Gageler J, it “depends on what the expenditure is calculated to effect from a practical and business point of view.”)

    More:   It is perhaps a little disappointing that the High Court members did not seek to more precisely identify the conceptual basis underlying the revenue/capital dichotomy. In the joint judgement of French CJ, Kiefel and Bell JJ, they lay the blame for the difficulty squarely on the high degree of generality provided by income tax law in relation to the concepts. (Ausnet Transmission Group Pty Ltd V FC of T [2015] HCA 25)

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    03 Sep 2015

    Topic: Income Tax

  • No de-grouping for NSW payroll tax

    In brief:   In this case, the NSW Court of Appeal refused the taxpayers leave to appeal against the decision that they be grouped for NSW payroll tax purposes. The grounds of the proposed appeal were directed solely to the Chief Commissioner's de-grouping discretion – it was accepted by the taxpayers that they should properly be grouped without the favourable exercise of that discretion.

    There were 3 companies involved, owned and controlled by members of the same family. One company carried on a mechanical engineering business and another carried on a civil engineering business. The third company's business solely comprised the provision of contract workers to each of the other 2 companies and it was grouped with each of the other 2 on that basis (and both groups were consequently included in a single larger group, because the third company was a member of each). However, there was evidence that the arrangements between the 3 businesses were undertaken on a commercial basis.

    More:   The proposed grounds of appeal were that the Tribunal had erred:

    • by not construing the de-grouping discretion as ‘a broad discretion to exclude persons from a group where it is just and reasonable to do so in order to alleviate otherwise harsh consequences’
    • because it was obliged to take into account the absence of artificial or contrived arrangements to avoid payroll tax, or of the splitting of existing businesses or other such strategies, and that dealings between the group members were conducted on commercial arm's-length terms
    • by failing to have proper regard to the nature and degree of ownership and control of the respective businesses.

    The Court of Appeal rejected all these grounds. The case is illustrative of the breadth of the grouping provisions in State payroll tax acts, which do not necessarily rely on elements of avoidance. (Seovic Engineering Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCA 242)

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    03 Sep 2015

    Topic: State Taxes

  • Failed CGT roll-over relief

    In brief:   CGT roll-over relief can be obtained on the transfer of a CGT asset to a wholly owned company by an individual or trustee (s122-15) or all the partners in a partnership (s122-125). But, in both cases, the relief is limited to gains from several specified CGT events. In this case, the Federal Court held that the roll-over relief was not available to a couple who created a trust over their land for the benefit of a company wholly owned by them, pursuant to a contract with the company for it to acquire the beneficial ownership of the land. The reason was that CGT event E1 applied (creation of a trust over a CGT asset by declaration or settlement – s104-55) and, even if another CGT event also potentially applied, event E1 was the event most specific to the circumstances of the taxpayers and consequently it was the relevant event to apply (s102-25(1)). And the CGT roll-over relief sought under Division 122 simply did not apply in the case of an E1 event.

    More:   So this is a further case where the desired tax outcomes failed because the intended outcome under the general law was not achieved – the case turned on matters of trust law. The critical question was whether the arrangements entered into created a trust over the taxpayers’ land by declaration or settlement, which the Court held to be the case. (Kafataris v DC of T [2015] FCA 874)

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    03 Sep 2015

    Topic: CGT/Trusts

  • No time limitation on original assessments

    In brief:   The corporate taxpayer in this case failed to convince the Full Federal Court that assessments to disallow deductions for contributions to a foreign welfare fund were out of time. The relevant years of income were the 1998 and 1999 years, for which the taxpayer lodged returns and received from the ATO a document entitled "Company/Fund Assessment for ATO use only". Those ATO notices disclosed a taxable income of $0 for each of the years. Following an audit, the Commissioner in 2012 issued notices of "amended assessment" for each of the years to disallow the welfare fund contributions and impose significant shortfall penalties.

    The Court in a single, unanimous decision dismissed the taxpayer's appeal. It held that, although each of the 2012 assessments was described as an "amended assessment", in law it was an original assessment. According to the law as it applied in relation to the 1998 and 1999 years of income, there could be no assessment without a positive amount of tax payable (see FC of T v Ryan [2000] HCA 4). Consequently, the original ATO notices were not assessments at all.

    More:   The law as it applied in relation to the relevant years involved in this case was changed with effect from the start of the 2005 year. Prior to that time, a ‘nil assessment’ meant that the limitation periods for the amendment of assessments would never apply against the Commissioner and, consequently, a taxpayer in that position faced a risk of the Commissioner raising an assessment on a different basis at any time in the future. The definition of ‘assessment’ now includes the ascertainment that there is no taxable income or no tax payable (s6(1)). (Allan J Heasman Pty Ltd v FC of T [2015] FCAFC 119)

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    03 Sep 2015

    Topic: Income Tax