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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  • Payments for Olympic broadcasting rights not royalties

    The Federal Court has upheld the submissions of the Seven Television Network in a case concerning payments of nearly $98M to the International Olympic Committee in Switzerland. The Commissioner's view was that Seven was liable to deduct withholding tax, failing which Seven was liable for penalties and not entitled to income tax deductions for the payments. The Seven Network succeeded because the payments were held not to be royalties for the purposes of Article 12(3) of the double tax agreement between Australian and Switzerland – that is, not ‘consideration for the use of, or the right to use, any copyright …. or other like property or right ….’

    Much of the evidence and judgement was necessarily devoted to technical matters about the transmission of signals and copyright law. Under its agreement with the IOC, the Seven Network became the copyright owner in Australia of all recordings and broadcasts that it produced from the signal supplied to it under the arrangement with the IOC during the period of each Olympic Games. But the Commissioner's case was that the IOC effectively also had copyright or some similar property in the transmission signal initially provided to Seven. The Court disagreed. The transmission signal itself did not comprise images or things or something in which images or things were embodied, although images and sounds could be produced after conversion of the signal in some receiving device. Further, the transmission signal itself could not be stored – it merely represented the flow of data originating from cameras and microphones, to receiving equipment capable of converting the data into pictures and sound. (Seven Network Ltd v C of T [2014] FCA 1411)
    ... Read More




    22 Jan 2015

    Topic: Income Tax

  • 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

  • Interest free loans to SMSFs

    In 2 recent Interpretive Decisions, the Commissioner has concluded that the income derived by SMSFs under limited recourse borrowing arrangements would be non-arm's length income and consequently subject to income tax at the maximum personal rate of 47% (rather than 15%).

    The examples adopted related to the acquisition of both listed shares and real property. In each case, the limited recourse loans were from related parties and were long term (15 years payable by regular instalments and 20 years payable at the end of the loan term). But no interest was payable by the SMSFs to the related party lenders and the LVRs were 80% and 100% respectively.

    Comments from ATO representatives in 2012 (that low or no interest loans from a related party under a limited recourse loan arrangement would not be regarded as resulting in contributions to the relevant SMSF) have fuelled an increase in arrangements with non-arm’s length interest rates. But it is now plain that the ATO will tax the income from such arrangements at 47%. Unless a particular SMSF wants to take issue with the Commissioner on the point, loan terms from related parties (particularly, the interest rate) should be adjusted to the terms that would apply from an unrelated lender and it would be wise for evidence of that to be obtained. (ATO Interpretive Decisions 2014/39 and 2014/40)
    ... Read More




    17 Dec 2014

    Topic: SMSFs

  • Tax Bill No 7 introduced

    The Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014 has been introduced into Parliament. The amendments of most interest are those to enact a less severe regime for excess non-concessional super contributions, to clarify and broaden CGT exemptions relating to personal wrongs, injury, illness and death, and to introduce the exploration development incentive to encourage investments in small exploration companies.

    The super fund amendments will give members the option to withdraw excess non-concessional contributions made from 1 July 2013, together with 85% of associated earnings. No tax will apply to the withdrawn excess contributions, but the associated earnings are to be included in the member's assessable income and taxed at his or her marginal tax rate, with a 15% non-refundable tax offset.

    The exploration development incentive will enable eligible exploration companies to effectively use their tax losses to create exploration credits for investors, giving investors a refundable tax offset (or franking credits in the case of a corporate investor).
    ... Read More




    17 Dec 2014

    Topic: SMSFs/Income Tax

  • No FBT relief for Qantas employee car parking

    The Full Federal Court has held that Qantas was liable to pay FBT in relation to car parking that it provided for employees on its premises at airports. Qantas’ arguments against liability hinged on the definition of a ‘car parking fringe benefit’, an element of which is that there must be a ‘commercial parking station’ within a kilometre of the premises at which the parking spaces are provided. And to be a commercial parking station, car parking spaces must be available in the ordinary course of business to members of the public.

    There was no argument that there are commercially operated parking stations within a kilometre of Qantas’ premises where it provides employee parking at airports. Qantas sought to confine the concept of ‘public’ in this context by reference to the plain rationale of the legislation that car parking fringe benefits are intended to apply in relation to vehicles used by persons commuting between their homes and ordinary places of work, rather than a broader concept of anyone using airport parking stations. However, this argument was rejected – the Court held that ‘there is no rationale for imputing into the definition [of public] a requirement that the commercial parking station be one that employees of the employer commuting to work by car would or could in fact use.’ (C of T v Qantas Airways Ltd [2014] FCAFC 168)
    ... Read More




    17 Dec 2014

    Topic: Other News

  • No deduction for fly-in fly-out employee costs

    In another FBT case, an employer argued that employees would have been entitled to an income tax deduction for their costs of flying to and from remote worksites, had the employees paid such costs. Consequently, so the argument went, the taxable value of the flights that it provided to its employees was nil pursuant to s52 of the Fringe Benefits Tax Assessment Act 1986.

    The taxpayer had a formidable task to distinguish the long-standing authority of Lunney v FC of T [1958] HCA 5, that expenses in travelling from home to work or business and back are not deductible. The judge in this case remarked that she found ‘much in the applicants’ submissions persuasive’, but was bound by authority otherwise. This was despite an important difference in this case – that employees were paid for the time spent travelling to and from the work site.

    It is unlikely that the taxpayer in this case commenced its litigation expecting that the matter would be over after the initial hearing – and this is borne out by the eminent Counsel engaged by both sides. There will be a further instalment! (John Holland Group Pty Ltd v C of T [2014] FCA 1332)
    ... Read More




    17 Dec 2014

    Topic: Income Tax

  • Taxation Ruling on transfer pricing reconstruction power

    The Commissioner has issued Taxation Ruling TR 2014/6 to express his views about the application of s815-130 in the new, overhauled transfer pricing rules that commenced last year. Coincidentally (???), the ruling was issued just before the Brisbane G20 – Australia and other members of that forum have been very vocal about international profit shifting by multinationals.

    Section 815-130 relates to the identification of ‘appropriate’ arm's length conditions by which to determine whether a tax advantage has been obtained. The provision effectively allows the Commissioner to reconstruct transactions to the basis of how independent parties would have dealt with each other and where the form of the actual commercial or financial relations between the parties is inconsistent with the substance. Although the impact of the transfer pricing rules is greatest on larger corporate groups, one sometimes sees potential implications for those SMEs that have inbound funding from an associated entity offshore.
    ... Read More




    05 Dec 2014

    Topic: Income Tax

  • Tax Bill No 6 introduced

    The Tax and Superannuation Laws Amendment (2014 Measures No 6) Bill 2014 has been passed by both Houses.

    The most significant aspect of the Bill is the proposed consolidation of the CGT rollovers in Subdivisions 124-G and 124-H into a new Division 615. Subdivision 124-G applies where shareholders exchange their shares in a company for shares in an interposed company (e.g. a new holding company) and Subdivision 124-H applies where unit holders in a unit trust effectively exchange their units for shares in a company. Significantly, rollovers will also be permitted where the relevant shares or trust units are revenue assets or trading stock.

    The Bill also includes other proposed changes (including the extension of the managed investment trust withholding regime to foreign pension funds) and, because they reflect announcements going back to the 2011-12 Budget and proposed start times in those announcements, will have proposed application dates going back as far as 1 November 2008.
    ... Read More




    05 Dec 2014

    Topic: CGT/Income Tax

  • 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

  • ATO's Div 7A discretion - corrective action

    The ATO in a recent update on its website indicated its views about taxpayers’ corrective action to be taken into account in exercising the discretion to disregard the operation of Division 7A under s109RB, where a deemed dividend results from honest mistake or inadvertent omission. The Commissioner says that corrective action usually involves entering into a complying loan agreement and making catch up payments of interest (with missed payments compounded) and principal, so as to achieve the same position that would have resulted had there been a complying loan agreement and requisite payments from the outset.

    How quickly corrective action has been taken is also a consideration. However, the update also refers to the prospect of the Commissioner's discretion being exercised subject to a condition that relevant corrective action is taken within a specified future time. Refer also to taxation ruling TR 2010/8.
    ... Read More




    05 Dec 2014

    Topic: Income Tax

  • MBI Properties case - Commissioner wins in the High Court

    In a single, joint judgement, the High Court on Wednesday allowed the Commissioner's appeal in this case. This is a very significant GST decision for the property industry and, at least in an overall and pragmatic sense, restores structure to the relevant provisions of the GST regime.

    The critical point for determination in the case was whether the purchaser of the reversionary estate in land – relevantly, the purchaser of 3 residential apartments subject to a lease to the operator of the serviced apartment business in the relevant building – makes any supplies to the lessee following the purchase. The Full Federal Court had decided in favour of the taxpayer, holding that the supply constituted by the grant of a lease of property did not continue beyond the grant. The High Court disagreed, remarking that ‘[i]n observing and continuing to observe the express or implied covenant of quiet enjoyment under the lease, the lessor is appropriately characterised, for the purposes of the GST Act, as engaging in an "activity" done "on a regular or continuous basis, in the form of a lease".’

    The outcome was that, although each of the sales of the 3 apartments to the purchaser had been held in previous proceedings to be a GST-free supply of a going concern, s135-5 applied and an increasing adjustment resulted, effectively negating the GST-free supply. There was an increasing adjustment because the continuing observance by the purchaser of the apartments, of its obligations under the leases, constituted input-taxed supplies of residential premises. (C of T v MBI Properties Pty Ltd [2014] HCA 49)
    ... Read More




    05 Dec 2014

    Topic: GST

  • Assessable income from sales of mining tenements

    A recent AAT case serves as a useful reminder of several very basic, but also very important, propositions relevant to tax law and practice. The taxpayer, together with 2 other individuals, had acquired 6 mining tenements between 2004 and 2006. They purported to transfer the tenements to a company associated with 2 of them, although there was no change in the formal ownership of the tenements and a subsequent sale of some of them to an unrelated company described the individuals (rather than that associated company) as the owners of the tenements. The other tenements were also subsequently sold to unrelated companies.

    The taxpayer argued that he did not receive any sales proceeds – they were received by the associated company and one of the co-owners of the tenements. The Tribunal nevertheless held that the taxpayer was properly assessed on the profits from all sales and the Commissioner's amended assessments, including substantial penalties, were upheld. The several important propositions that are reinforced by this case are:

    • Tax applies on the basis established by the legal position according to the application of the general law. The purported sale of mining tenements to the associated company in this case was ineffective under basic contract law – there was no consideration. So the taxpayer and his partners retained ownership of the tenements until the sale to unrelated parties.
    • The profits on sale of the mining tenements were of a revenue nature and liable to be taxed as ordinary income. The tenements were also no doubt CGT assets and subject to the CGT regime, but that is of no help if the profits constitute ordinary income in any case (typically, any capital gains will be reduced to the extent of any amount included in assessable income).
    • Ordinary income will still be assessable to the taxpayer, despite non-receipt, if non-receipt is because the income ‘is applied or dealt with in any way on [the taxpayer's] behalf or as [the taxpayer] direct[s]’ (s6-5(4)).
    • Unless there is specific provision otherwise, an agreement cannot have retrospective effect for taxation purposes (even though having retrospective effect under the general law in some cases) – an agreement in this case between the taxpayer and his partners with the associated company, made after the commencement of ATO audit activity, was described by the Tribunal as ‘an attempt to rewrite history.’(Kirkby v C of T [2014] AATA 759)
    ... Read More




    30 Oct 2014

    Topic: Income Tax

  • Substantial penalties for SMSF breaches

    The Federal Court has recently sanctioned an agreement between the ATO and the directors (husband and wife) of a corporate trustee of an SMSF, for substantial penalties and costs – $40,000 and $10,000 respectively, in aggregate. The Commissioner had already disqualified each of the directors from acting as a trustee, investment manager or custodian of a superannuation entity under s126A(2) of SIS.

    The trustee bought a residence in which the directors’ son lived without paying rent, spend money on a number of things from which no income was produced (a caravan, cattle, 2 cars that were garaged with the directors’ 2 sons, etc) and some expenditure could not be explained. Apart from the cost of the residence, the costs paid (including further costs after the SMSF auditor had filed a Contravention Report) were debited to loan accounts in the names of the directors, amounting to over $250,000.

    Despite the penalties, the directors got off lightly – the amounts were paid back to the SMSF by the directors from other funds and the Commissioner did not make the fund non-complying. The other thing of note is that the penalties in this case were under the civil penalty rules. Under the new administrative penalty regime that started on 1 July 2014, the Commissioner can apply penalties for breaches without seeking any order of the Court. (DC of T v Graham Family Superannuation Pty Ltd [2014] FCA 1101)
    ... Read More




    30 Oct 2014

    Topic: SMSFs

  • Tax relief from Queensland Supreme Court - trust vesting extended

    Practitioners commonly look to the trust deed of a trust as the source of its terms and powers of the trustee. The trust deed is a very important source, but it is complemented by a vast body of Judge-made law and the Trusts Act 1973 (Qld) (and its counterparts in other States) and other legislation.

    In this case, the trustees of 2 separate discretionary trusts (though both relating to the same family) successfully applied to the Court under s94 of the Trusts Act 1973 for the vesting dates to be extended to a maximum of 80 years. The Judge held, largely by reference to cases decided on the equivalent NSW provision, that he was authorised to grant the orders and that indeed he should.

    Apart from support for the applications from the family members who could benefit from the trusts, the main evidence relied upon and upon which the Court granted the applications, was the substantial capital gains tax and duty liabilities that would result upon vesting of the trusts. Under the trust deeds, vesting was to occur no later than 16 February 2017.

    In this context, I note that (subject to the drafting of the trust deed) the rule against perpetuities only requires that interests in the trust property be fully vested within the requisite time, not that the trust be wound up. And vesting without winding up can be done without triggering a CGT event or incurring duty (Qld duty, at least) – but that's another story. (Re Arthur Brady Family Trust; Re Trekmore Trading Trust [2014] QSC 244)
    ... Read More




    30 Oct 2014

    Topic: Trusts/CGT

  • Postscipt - Compliance assessment by the ATO for professional firms

    I referred in our Tax Facts of 24 September to the release by the Commissioner of draft guidelines on how the ATO will assess the risk of Part IVA potentially applying to the allocation of profits from a professional firm carried on through a partnership, trusts or companies. In correspondence to Chartered Accountants Australia New Zealand, the ATO has sought to clarify the third alternative criterion that will reduce the risk of ATO audit – that the principal and their associated entities have an effective tax rate of at least 30% on the income from the firm.

    The ATO says that its intention is that each principal of the firm, and also each associated entity that receives practice income, has an effective tax rate of at least 30%. Further, that measure is to be applied to taxable income, after deductions such as super contributions and prior year losses. Although it is still not clear, the 30% threshold seems to imply an average tax rate of at least 30% – coincidentally, a taxable income of $180,000 will result in an average tax rate (apart from Medicare) of just over 30%.
    ... Read More




    30 Oct 2014

    Topic: Income Tax

  • ATO's access to court files

    The Commissioner has released a Decision Impact Statement regarding the decision of the Full Family Court in C of T v Darling [2014] FamCAFC 59. In that case, the Commissioner was successful in obtaining access to parts of the court file for the purposes of a tax audit, although not a party to the case.

    The Court in that decision made specific reference to its practice to refer matters to the relevant authorities where it becomes apparent in the course of a case that there has been tax evasion. My understanding is that the Federal Court has a similar practice, although it is less common in State Supreme Courts.

    Indeed, in a recent Federal Court matter where I was engaged as an expert witness relating to tax issues, there was an expectation that one of the reasons that the other side may want to settle was that those parties would come to the realisation that the Court would be likely to refer the matter to the ATO if it proceeded to hearing. It seemed very likely that those parties had wrongly claimed the small business CGT concessions in respect of substantial capital gains on the business sale to which the Court action related.

    It was also very interesting in that matter to see how much incriminating evidence relating to the doubtful tax claims, in e-mail correspondence between various parties both before and after the time of the sale, had been uncovered through the court discovery process.
    ... Read More




    09 Oct 2014

    Topic: Income Tax

  • ATO consultation to resume about UPEs and small business concessions

    The ATO intends to resume its consultation process in October in order to finalise its view on whether unpaid trust entitlements may be deducted for the purposes of the $6M net asset value test. Consultation had been suspended pending the outcome of the AAT decision in Pope v FC of T (referred to in our Tax Fax of 27 August). In that case, the Commissioner successfully argued that no bad debt deduction was allowable to a trust beneficiary under s25-35 in relation to a UPE that the trustee could not pay, although the basis of that decision rested on the terms of the particular trust deed involved.

    Of course, whether a UPE may be deducted for the $6M net asset value test may be academic if the beneficiary is the relevant taxpayer or one that is an affiliate of or connected to the relevant taxpayer, and the UPE must be counted as a CGT asset in any case.
    ... Read More




    09 Oct 2014

    Topic: CGT

  • Commissioner wins again on small business CGT concessions

    We should have no doubts about the Commissioner's interest in whether claims for the small business CGT concessions are legitimate, both as to compliance with all relevant requirements and matters of valuation relating to the $6M net asset value test. In an AAT case handed down last week, it was held that a husband and wife did not satisfy the (at the time) $5M net asset value test and additional assessments by the ATO on capital gains of approximately $2.15M and $1.6M were upheld by the AAT. The capital gains related to the sale by the taxpayers of their shares in a family company that conducted a successful business.

    Many of the taxpayers’ problems related to termination payments of $1.925M and $0.825M that the husband, as sole director of the company, resolved should be paid to them on termination as a result of the sale. That resolution was made on advice from their accountants – before execution of a formal contract, but after acceptance by the taxpayers of a written offer from the purchaser. The taxpayers argued that their acceptance of the offer was not the time of the CGT event and that, by the time when the CGT event did occur, the company had liabilities for the termination payments to be paid to the taxpayers. This argument was rejected on a number of different bases, the AAT concluding that the termination payments of $1.925M and $0.825M were not to be deducted in computing the $5M net asset value test and that, consequently, the taxpayers failed that test and were not entitled to access any of the small business CGT concessions.

    The AAT decided that there was no liability at all for the termination payments – in terms of contract and corporations’ law, the company director's resolution to pay the termination payments was unenforceable. Even if the Tribunal was wrong about that, it held in any case that the obligation arose after the CGT event when the purchaser's offer was accepted. And, for good measure, the Tribunal also held that, even if it was also wrong about that, the termination payments were not assets being used for the personal use and enjoyment of the taxpayers (contrary to what they had argued), so had to be counted for the purposes of the $5M net asset value test as their CGT assets anyway.

    Note the first point decided by the Tribunal, that the termination payments were unenforceable. That same logic applies to a company's decision to pay a bonus or some other additional remuneration to a director or employee, which is then claimed as a deduction by the company although not paid until the following year of income. If you have ever asked me about that point, you will recall that I have warned that there is usually no legal basis for the company's deduction (subject, of course, to any specific agreements in a particular case), even though the ATO as a matter of practice seems to regard ‘a properly authorised resolution’ (refer to IT 2534) as sufficiently committing the company to payment. (Scanlon v C of T [2014] AATA 725)
    ... Read More




    09 Oct 2014

    Topic: CGT/Income Tax

  • Royalty withholding tax for software distributor upheld on appeal

    The full Federal Court dismissed the taxpayer's appeal in this case. It held that annual fees paid by the Australian distributor of software to its Canadian developer were 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. (Task Technology Pty Ltd v FC of T [2014] FCAFC 113).
    ... Read More




    24 Sep 2014

    Topic: Income Tax

  • Settlement of action constituted a CGT event

    In a recent AAT case, an amount of $350,000 received by the taxpayer in settlement of a claim by she and her husband was held to constitute the capital proceeds from CGT event C2. Further, the taxpayer was held not to have satisfied the onus on her to show that legal costs incurred in prosecuting the claim should be included in the cost base of the relevant CGT asset, the cause of action against the defendant. And to make matters worse, the Tribunal upheld a 50% penalty for recklessness.

    The CGT principles involved in this case may be uncontroversial, but it is a good reminder. The income tax, CGT and GST implications of settlements can be notoriously difficult. Further, the course of negotiations and settlement documentation usually has a substantial bearing on tax outcomes, so it is often made even more difficult if taxes are not addressed at a very early stage. (Coshott v FC of T [2014] AATA 622)
    ... Read More




    24 Sep 2014

    Topic: CGT