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

  • Criminal penalty for deliberate failure to disclose taxable income

    A person convicted of a money laundering offence has been successful in having the conviction quashed in the High Court. The relevant facts involved the transfer of Australian listed shares held by an Australian company controlled by the person to offshore parties, but with the true beneficial ownership being retained. Most of the shares were subsequently sold for a substantial profit and the jury in the person's trial was satisfied beyond reasonable doubt that the person intended not to declare the profit for income tax purposes.

    The point is that, while the person was successful in relation to the money laundering charge, the High Court was in no doubt that he was properly convicted of another count relating to the evasion of tax on the profit. It may generally only be the more extreme cases where taxpayers are prosecuted for deliberate tax evasion, but it is a worthwhile point to remember for a few clients with whom we occasionally come into contact – the crime in this case applies if ‘the person, by a deception, dishonestly obtains a financial advantage from [a Commonwealth entity]’. The maximum penalty for that crime under s 134.2 of the Criminal Code is imprisonment for 10 years (Milne v The Queen [2014] HCA 4).
    ... Read More




    19 Feb 2014

    Topic: Income Tax

  • Royalty withholding tax for software distributor

    Annual fees paid by the Australian distributor of software to its Canadian developer were held to be 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. The reason was that the distributor also had the right to copy the software for sale to end users and to develop its own templates for sale in conjunction with the software.

    While the case itself was relatively straightforward, it is a good reminder of how broad the concept of a royalty is for income tax purposes and the relevance of treaty provisions if the dealings are international. And although argument in the case was limited to the treaty provisions, our domestic tax laws about the meaning of royalties and how they are assessed can be very complex (Task Technology Pty Ltd v FC of T [2014] FCA 38).
    ... Read More




    19 Feb 2014

    Topic: Income Tax

  • Discretionary trust distribution to SMSF - special income

    In Allen v FC of T [2011] FCAFC 118, a capital gain was distributed as part of an avoidance arrangement from a non-fixed trust to a fixed trust whose only beneficiary at the time was an SMSF. On the basis of a number of technical arguments, the intention was that the capital gain would be taxed at the usual 15% rate in the SMSF. However, the Full Federal Court agreed with the Commissioner that the capital gain constituted ‘special income’ of the SMSF and was liable to be taxed at the highest marginal rate (47% at the time).

    Now the fortunes of an even more adventurous taxpayer have come to an end, with the High Court refusing the taxpayer special leave to appeal from another Full Federal Court decision. In this case, the taxpayer had tried to distinguish Allen’s case or argue that it was wrong. The argument was that ‘income derived’ for the purposes of the special income provisions in former s 273 of the 1936 Act did not include the SMSF’s unpaid entitlement to a substantial capital gain from a related trust (from the sale of shares in Super Cheap Auto, after its listing, by the founder). The argument failed.

    Although s 273 has now been replaced by the ‘non-arms length income’ provisions in s 295-550 of the 1997 Act, the scheme is similar. It would be a very brave taxpayer now who would distribute income or capital gains from a non-fixed trust to an SMSF in order to try to attract the15% super fund tax rate (SCCASP Holdings Pty Ltd v FC of T [2013] FCAFC 45).
    ... Read More




    19 Feb 2014

    Topic: SMSFs

  • 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

  • CGT event E1 applied to creation of Joint Venture

    The pain continues for 3 Victorian taxpayers (although 2 were controlled by the same industry super fund) in relation to transactions entered into to create a JV of development land. The facts are complex, but involved transfers of the land held by 2 of the parties to the 3rd party and a declaration of trust by that 3rd party that the separate land parcels would be held respectively for the 3 parties but subject to the JV. The pain was continuing, since the Victorian Court of Appeal had previously held that stamp duty applied to the land transfers and the High Court had refused to grant special leave to appeal from that decision.

    Now the Federal Court has held that CGT event E1 applied to the land transfer by one of the parties, with substantial resulting tax and a 25% administrative penalty (for taking a position not reasonably arguable or failing to take reasonable care). Without considering the case in detail, it seems to be a good example of where everything that could go wrong, has gone wrong. It is also a good reminder of the complexity and high risks of tripping up (on one or more of income tax, duty and GST) when one tries to alter ownership interests in property, particularly where matters of trusts law are involved.

    I was involved last year in a manner that was somewhat the reverse – the unwinding of a JV between 2 groups over land worth approximately $3.5M. Bizarrely, the settlement proposal by solicitors for the other side involved duty on at least 50% of the land value (and arguably on 100%), probable GST (unless the going concern exemption could apply, but that was doubtful) and crystallisation of a taxable (revenue) gain equal to the total value of the land. The point is that these sorts of scenarios warrant very detailed and high level consideration in order to avoid large tax risks (Taras Nominees Pty Ltd v C of T [2013] FCA 1372).
    ... Read More




    05 Feb 2014

    Topic: CGT/Trusts

  • Commissioner bound to apply the law

    The Commissioner has released a Decision Impact Statement on the decision of the Full Federal Court in Macquarie Bank Ltd v C of T last October. The tax issue involved the allocation of Macquarie's Offshore Banking Unit expenses, although that is unimportant to the main point arising from the case.

    Following an audit, the ATO advised that amended assessments would be issued for several past years. Macquarie pre-emptively made application to the court seeking to prevent the issue of those amended assessments, arguing that the ATO's position was contrary to earlier statements and conduct. Macquarie sought to have the ATO's views applied for the future only, not to past years. Macquarie failed, the Full Court upholding the primary judge's decision that the Commissioner could not be compelled to adhere to his Practice Statement (PS LA 2011/27) about when a changed ATO view of the law should only be applied prospectively.

    The case is a good reminder that the Commissioner is generally not bound by his views other than those expressed in binding rulingshe is bound to apply the law as he believes it to be at any particular time. In the vast majority of cases, the only way to dispute a tax assessment is by the objection and appeal process. It is not much help simply to say, "But the ATO said ….”
    ... Read More




    22 Jan 2014

    Topic: Income Tax

  • Trust ‘controller’ for the Small Business CGT Concessions

    An AAT case handed down on Christmas Eve reminds us that all elements relating to entitlements to the small business CGT concessions must always be checked precisely in each case. In Gutteridge v C of T, the family patriarch succeeded in arguing that he was the controller of a trust with capital gains, despite his daughter being the sole director of the trustee company. That meant that the trust's turnover did not have to be aggregated with another business controlled by the daughter – consequently, the trust was a small business entity for the purposes of the small business CGT concessions.

    The AAT accepted evidence that the patriarch controlled the relevant trust from behind-the-scenes, despite not being a director of the trustee. So it was accepted that the trustee ‘acts, or could reasonably be expected to act, in accordance with the directions or wishes’ (s328-125(3) ITAA97) of the patriarch. The point is that, in the circumstances, one would reach the wrong conclusion by looking solely at formal matters such as the daughter's directorship, without seeking additional information.
    ... Read More




    15 Jan 2014

    Topic: CGT