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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  • Beware the email trail - evidence from revealing correspondence

    In brief:    A recent ex parte application in the Federal Court for freezing orders and other interlocutory relief against several taxpayers starkly illustrates the importance that email correspondence may play in disputes. Evidence supporting the application included an affidavit from ‘a computer forensics officer employed in the Forensics and Investigations team of the ATO.’ The evidence of that ATO officer was that documents purportedly made in 2003 had actually been created in 2015, subsequent to the commencement of an ATO audit and associated notice issued to the taxpayers’ accountant to provide information under (former) s 264 ITAA36. Further evidence based on email correspondence involving personnel from the taxpayers’ accountants was alleged to support the fact that the relevant documents ‘were created in February 2015 and backdated to give the appearance that the documents came into existence in May 2003.’

    More:    This case involved fairly extreme circumstances, where total tax and penalties at issue exceeded $34M and documents had ultimately been seized from premises associated with the relevant accounting firm under search warrants executed by the Federal Police. However, the point is that email correspondence does not have the confidentiality that we intuitively attribute to it. Best practice is to approach the writing of any document or correspondence with the attitude that it may ultimately be viewed by a range of people, including regulatory authorities.

    Such incriminating evidence sometimes becomes unveiled from unrelated circumstances. For example, there have been reported cases where a taxpayer has been practically obliged to produce financial evidence, showing much greater business income than what has been reported to the ATO, to defend against an allegation of misrepresentation by a subsequent purchaser of the taxpayer's business. And the discovery process in proceedings for professional negligence against a professional advisor may also throw up incriminating evidence about an understatement of taxable income, perhaps even involving criminal acts. Whether or not the primary matter before the court involves taxation, the Judge will usually make orders for it to be passed on to the ATO. (DC of T v Advanced Holdings Pty Ltd [2018] FCA 1263)

    ... Read More

    24 Oct 2018

    Topic: Income tax/State taxes/Other news

  • More tax problems from wide trust beneficiary classes

    In brief:    A recent NSW payroll tax case shows again the potential problems of widely drawn beneficiary classes in discretionary trusts. A company owned and controlled by Michael Gerace had been issued with payroll tax assessments of nearly $2M and was put into liquidation. The Chief Commissioner of State Revenue (NSW) was successful in an appeal to group that insolvent company with a trust controlled by Michael’s brother and one established originally for their parents, despite an apparent lack of commercial connections. Grouping was achieved because Michael was a discretionary beneficiary of both those other trusts, so he was effectively taken to have a controlling interest in each of those trusts (as well as the insolvent company that he owned). And members of a payroll tax group are jointly and severally liable for the tax payable by every group member.

    More:    Having wide trust beneficiary classes is an outdated practice that potentially creates substantial tax disadvantages, yet serves no real purpose – Tax Strategies’ trusts have for several years been created on a different basis without wide beneficiary classes, substantially minimising the risk of such tax disadvantages. There was no doubt about the grouping in this case, but Michael disclaimed his interests under his brother’s and parents’ trusts in an attempt to retrospectively sever his connection with them. However, the Court held that that did not affect payroll tax liabilities that had already arisen, irrespective of its impact as between Michael and the respective trustees. It is traditional drafting practice to have wide beneficiary classes in a discretionary trust, including many family members who are not intended and will never benefit under the trust. But that can give the payroll tax Commissioners a very easy grouping mechanism. It has also caused significant problems in relation to the recently introduced duty and land tax surcharges for foreign purchasers of residential real estate in a number of States. (Chief Commissioner of State Revenue (NSW) v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184)

    ... Read More

    24 Aug 2017

    Topic: Trusts/State taxes

  • Disclaimer by a discretionary trust beneficiary retrospectively avoided payroll tax grouping

    In brief:    The New South Wales Supreme Court has held that a disclaimer of his interest as a discretionary trust object was valid to retrospectively end a person’s rights to benefit from the time those rights were created. This was sufficient to break the payroll tax grouping between several entities controlled by 2 brothers, the group determined by the Chief Commissioner having included a company in liquidation with substantial outstanding payroll tax assessments.

    More:    This case is another that confirms the enthusiasm by State payroll tax authorities for the grouping of entities. Grouping is a very useful mechanism for those authorities since each member of a group is jointly and severally liable for the payroll tax liabilities of all group members. And discretionary trust objects are typically deemed to have more than a 50% interest, readily enabling grouping through broad beneficiary classes in discretionary trusts. That is the real issue – having extraordinarily wide beneficiary classes is an outdated practice that creates problems, rather than serving any useful purpose. And that is why Tax Strategies’ trusts are created quite differently and will not facilitate payroll tax grouping through such tenuous connections. (Smeaton Grange Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2016] NSWSC 1594)

    ... Read More

    15 Dec 2016

    Topic: State Taxes/Trusts

  • A "scary" payroll tax decision

    In brief:    In this case, the individual trustees of an SMSF (a husband and wife) and the corporate trustee of related custodian trusts were included in a payroll tax group. Since each member of a group is jointly and severally liable for the payroll tax liabilities of all group members, those trustees faced substantial payroll tax debts for assessments on several operating entities in the group. In an application for judicial review, the Qld Supreme Court held that there was no legal error by the Commissioner in refusing an application to exclude the trustees from the relevant payroll tax group.

    More:    This matter illustrates the readiness of State Revenue Offices to utilise the very broad grouping provisions that apply for payroll tax purposes, although here there were dealings between the trustees and relevant operating entities that made it more difficult to establish that the trustees operated independently of the operating entities. It is somewhat counterintuitive that trustees of an SMSF and custodian trusts should be part of a payroll tax group, since they invariably do not carry on any business or engage workers. The Commissioner emphasised the definition in s 66 of the Payroll Tax Act 1971 (Qld), under which ‘business includes …. the carrying on of a trust, including a dormant trust’. And the Judge accepted that the breadth of intention of that provision would encompass a trustee merely holding assets as a bare trustee. That same definition appears in the payroll tax legislation of other States. (Scott and Bird v Commissioner of State Revenue [2016] QSC 132)

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    05 Oct 2016

    Topic: State Taxes

  • No appeal against QLD payroll tax objection, unless full tax and late payment interest paid

    In brief:    A recent application for leave to appeal to the Queensland Court of Appeal is a good reminder of the practical difficulty in contesting disputed Queensland payroll tax (and duty or land tax). Section 69(1)(b) of the Taxation Administration Act 2001 (Qld) provides a right of appeal only if the ‘taxpayer has paid the whole of the amount of the tax and late payment interest payable under the assessment to which the decision relates.’ Leave was refused in this case – an arrangement for payment of the assessed payroll tax by instalments did not mean that the tax was no longer ‘payable’ for the purposes of s69(1)(b).

    More:    The need for the disputed tax and late payment interest to have been paid in full is a substantial obstacle to any further appeals if the Commissioner of State Revenue has disallowed an objection. This may be particularly so in the case of payroll tax, where the disputed liability might arise from recurring payments to workers over a substantial time. This highlights the importance of addressing and managing payroll tax risks. (Commercial Property Management Pty Ltd v Comm of State Revenue [2015] QCA 209)

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    26 Nov 2015

    Topic: State Taxes

  • 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)

    ... Read More

    03 Sep 2015

    Topic: State Taxes

  • No aggregation of separate transfers for Qld duty

    For Qld duty purposes, s30 of the Duties Act 2001 provides that ‘transactions must be aggregated and treated as a single dutiable transaction’ if they ‘together form, evidence, give effect to or arise from what is, substantially 1 arrangement.’ And the section specifies that all relevant circumstances (including those listed in the section) must be taken into account in determining whether there is substantially 1 arrangement.

    Section 30 creates practical difficulties for taxpayers, particularly since it is difficult to be definitive in various situations as to whether or not aggregation should apply. In a recent decision in the Queensland Civil and Administrative Tribunal, it was held that the Commissioner of State Revenue was wrong to aggregate 2 separate transfers to different groups of beneficiaries under a testamentary trust.

    The decision is noteworthy because the transferor was the same for each of the transfers – namely, the trustees of the trust. And whether any parties to any relevant transactions are the same, is one of the circumstances that must be taken into account for the purposes of s30 (the 2 groups of transferees were also cousins in this case). The Tribunal nevertheless held that there were 2 separate transactions, separately negotiated, not conditional on each other in any way and not with any intention for the properties to be used by the respective transferees for any common purpose. The circumstances were also a bit easier for the taxpayers since there was no relationship between any prices for the separate transactions – the transfers were trust distributions so no negotiations in relation to price had been necessary. (Rawlings v Commissioner of State Revenue [2015] QCAT 10)

    ... Read More

    23 Feb 2015

    Topic: State Taxes

  • High Court applies additional Victorian duty for Docklands

    In a single, joint judgement, the High Court has upheld appeals by the Victorian Commissioner of State Revenue relating to the duty payable on the transfers of land to subsidiaries in the Lend Lease group pursuant to a development agreement for the Docklands area in Melbourne.

    The relevant Victorian duty provision referred to ‘the consideration …. for the dutiable transaction’. Adopting the decision of the Court's majority in Comm of State Revenue (NSW) v Dick Electronics Holdings Pty Ltd, it was held that the consideration referred to is ‘what was received by the Lenders so as to move the transfers to the purchaser as stipulated in the Agreement’. The land transfers under the Docklands development agreement represented a ‘single, integrated and indivisible’ transaction. Consequently, what moved each transfer included the amount payable by Lend Lease for each staged transfer of land, as well as the various other contributions and infrastructure works required of Lend Lease under the development agreement. (Comm of State Revenue (Vic) v Lend Lease Development Pty Ltd [2014] HCA 51)
    ... Read More

    17 Dec 2014

    Topic: State Taxes

  • Land value for WA duty purposes

    Property valuations are an important aspect of both Commonwealth and State taxes and can have a major impact on outcomes. In a recent WA duties case, an apparently aggressive stance by the State Commissioner on valuation principles failed to impress the WA Court of Appeal.

    A subdivision including 44 residential lots had been undertaken but, because of a slow market, only 12 of the lots had been sold after 2 years. The remaining 32 lots were sold under a single contract to the taxpayer, which was a company controlled by 2 individuals with interests in the development company. The price was based on a valuation provided for that purpose. It started with a gross sale price for each lot of $120,000, then deducting allowances for holding costs and marketing costs plus a discount for profit and risk.

    The Commissioner's own advice from the Valuer-General's office was that the valuation was reasonable. Further valuation advice obtained by the Commissioner indicated a higher value, but nevertheless acknowledged the valuation basis that had been used. The Commissioner nevertheless assessed duty more or less on an aggregation of the anticipated gross sale price of $120,000 for each lot, without any deductions.

    The Court readily dismissed the Commissioner's appeal, referring to his grounds as misconceived. The uncontradicted evidence was that the market was slow, the lots could not have been sold separately without incurring holding and marketing costs and no purchaser would acquire all 32 lots at the anticipated gross price of each lot. The sales of individual lots for residential purposes over time was the highest and best use of the land and the ‘sale in one line’ methodology endorsed by all the valuers involved was plainly correct. (Comm of State Revenue (WA) v Hazel Holdings Pty Ltd [2014] WASCA 203)
    ... Read More

    05 Dec 2014

    Topic: State Taxes/Income Tax

  • Estate Planning Dilemma - a Single or Separate Testamentary Trusts

    A recent duties case in Victoria highlights the broad range of implications that can arise from estate planning decisions.

    Many wills wisely create testamentary trusts to hold property of the deceased rather than, for instance, the property passing to the deceased's spouse (the assets are better held in risk-free trusts, since every person faces some degree of risk from legal action – whether privately, in relation to occupational activities, or both). There is a dilemma that arises, particularly where children are adults, about the form that testamentary trusts should take. Should there be multiple trusts created so that there is one for each child, who can consequently assume complete control of that share, or should there be a single trust with appropriate controls so that the children (together with their own respective families) share in the manner intended by their parents. Multiple trusts allow the children of the next generation to manage their own respective affairs but a single trust gives much better protection against divorce and relationship breakdowns for those children. Depending on the circumstances and dynamics in a particular family, there are also strategies to achieve the best of both worlds.

    The deceased in the Victorian case created 5 testamentary trusts under his will. The deceased's property included 3 blocks of land and, following his death, a 1/5 interest in each block was transferred to the respective trustees of each of the 5 testamentary trusts. After more than 4 years, the decision was made to formalise the partnership between the 5 sets of trustees and each transferred their interest in each of the 3 blocks to a private company that was to act as agent for the partnership. The intention was that the respective interests in the land would not change and the agent company would merely hold the land beneficially for the 5 sets of trustees.

    The Commissioner of State Revenue assessed duty on the transfers to the agent company and the Supreme Court of Victoria dismissed the agent company's appeals. The arguments were based largely on particular exemption provisions in the Duties Act 2000 (Vic), but a central conclusion in the case was the Court's decision that there had been a complete transfer of each block (rather than a mere legal transfer, with retention of equitable interests) and that the agent company's ownership was subject to a new trust for the respective trustees of the 5 testamentary trusts. With respect, the decision could hardly have been otherwise – it applied well settled trusts law in relation to those points.

    Although the reasons for the deceased and his advisers choosing to create 5 testamentary trusts under his will are not known, the duty that applied in this case would have been avoided if the decision had instead been to create a single testamentary trust. The judge in his reasons also commented on the cumbersome structure that resulted from 5 testamentary trusts holding the 3 blocks of land. (White Rock Properties Pty Ltd v Comm of State Revenue (Vic) [2014] VSC 312)
    ... Read More

    16 Jul 2014

    Topic: State Taxes/Trusts

  • 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

  • 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