Talking Tax- Issue 32

Case law

Tax debts set off against a refund owing to a company in liquidation

In a test case decision in FCT v 4 Doonan Street Collinsville Pty Ltd (in liq) [2016] NSWCA 69, the NSW Court of Appeal allowed the Commissioner of Taxation’s appeal. The Court held that the debits made by the Commissioner were authorised by the Running Balance Accounts (RBAs) regime under the Tax Administration Act 1953 (TAA), and that the relevant provisions applied despite the taxpayer company’s insolvency. RBAs are the accounts maintained by the ATO to track a taxpayer's tax liabilities.

4 Doonan Street Collinsville Pty Ltd (taxpayer) was a trustee of a trading trust which went into liquidation on 27 August 2010. On 16 November 2012, the administrators, on behalf of the taxpayer, lodged a request for an amended tax assessment, claiming it was not liable for CGT and was therefore entitled to a tax refund. The Commissioner, on 14 May 2013, issued an amended assessment in accordance with the request, but reduced the amount of the refund by reason of five separate sums due by the company. These reductions were recorded as debits to the Commissioner’s RBAs and therefore reduced the existing credit payable to the taxpayer. The taxpayer had sought a declaration that these five sums were void.

The trial judge held that four of these five debits were unauthorised under the RBA regime. However, on appeal, the Court held that the Commissioner’s set off in this manner was not contrary to either the TAA or the Corporations Act 2001 (Cth), and therefore each of the five debits was authorised.

Importantly, the case highlights the fact that the Commissioner has the power to make adjustments to the RBA of a company in liquidation in respect of transactions that took place before the company was placed into liquidation.

Court Orders that contract be rectified to show GST-exclusive price of property

The NSW Supreme Court in SAMM Property Holdings Pty Ltd v Shaye Properties Pty Ltd [2016] NSWSC 362 has ordered that a contract for the sale of property be rectified, to reflect the common intention of parties. The contract provided for consideration of $3.325m inclusive of GST. The vendor claimed this was a mistake and it should have been $3.325m plus GST.

The Court considered the auctioneer’s affidavit, which stated that he was informed in writing that the property’s reserve price was ‘$3,500,000 + GST’. It also placed significant weight on an email by the auctioneer in days following the auction, which was seen by the Court as an accurate record of the auctioneer’s recollection of events and what was said. The Court accepted the auctioneer’s evidence and found that the clear and common intention of the parties was that the sale price be $3.325m plus GST. It ordered that the contract be rectified to reflect this finding.

Appeal dismissed for lack of competency

The Federal Court, in Crown Estates (Sales) Pty Ltd & Anor v FCT [2016] FCA 335, dismissed the taxpayer’s appeal on the basis that it did not raise a question of law and therefore lacked competency.

The taxpayer conducted a property management business on behalf of property owners. As part of this business, the taxpayer provided goods and services on behalf of property owners, and claimed input tax credits (ITCs) on those dealings. The Commissioner disallowed the ITCs on the basis that, for the purposes of section 11-5 of the GST Act, the taxpayer was not the entity making the creditable acquisitions. This decision was confirmed by the AAT, on the basis that an agency relationship existed as between the Taxpayer and the property owners.

The Federal Court confirmed that the correct classification of the arrangement was that the taxpayer acted as the agent of the property owners, and therefore it was the property owners that made the creditable acquisitions and were entitled to the ITCs. However, given that the taxpayer failed to raise a question of law as to whether this was the correct classification, the Federal Court held that the appeal lacked competency and dismissed it accordingly.

ATO updates

ATO shares Panama Papers data with AUSTRAC

As discussed in Talking Tax - Issue 30, a significant amount of taxpayer data was recently released to the ATO by the Panama law firm Mossack Fonseca.

Most recently, AUSTRAC has made public that the ATO has shared this data with it, as part of the collaborative approach of the Serious Financial Crime Taskforce (SFCT). AUSTRAC is analysing this data and will share its findings with the other SFCT partners, which include the ATO, AFP, Australian Crime Commission, Attorney-General’s Department, ASIC, the Commonwealth DPP and Australian Border Force. The objective of the SFCT is to identify undisclosed and incorrectly reported offshore financial activities, and to address threats to Australia’s financial system more broadly.

Legislation and government policy

Regulations amended to reflect GST extension and CGT and earnout rights

Regulations have been made which amend the A New Tax System (Goods and Services Tax) Regulations 1999 and the Superannuation Industry (Supervision) Regulations 1994, to take account of the changes to the tax law relating to the extension of GST to digital products and other imported services and to CGT and earnout rights.

GST extension

The Tax and Superannuation Laws Amendment (2016 Measures No 1) Bill 2016 seeks to extend the application of GST to the supply of digital products and other imported services by a foreign entity. This was discussed in our earlier publication Talking Tax Issue 24.

In line with this the definition of ‘financial supply’ under the regulations has been broadened so that it includes the supply of bank accounts and superannuation interests by foreign financial institutions, where an equivalent supply by an Australian entity would also be deemed an input-taxed financial supply. These amendments will apply to tax periods commencing on or after 1 July 2017.

CGT and earnout rights

The Tax and Superannuation Laws Amendment (2015 Measures No 6) Act 2016 (Act No 10 of 2016) provided that future payments linked to business performance or business assets following the sale of the business, are to be treated as part of the original transaction for the purposes of CGT. This was implemented to ensure that Taxpayers are not discouraged from attaching such rights to contracts of sale, as they are a useful way of facilitating transactions where parties have differing expectations of future performance. These amendments were discussed in detail in our earlier publication Earnout Arrangements.

The new regulation creates an exception to the contribution restrictions. Where a business to which the small business retirement concession applies is sold, funds are now allowed to accept a contribution of an amount of the proceeds of the sale. For this exception to apply the sale must have involved an earnout right and provided the contribution would not have been affected by the contribution restrictions if it were made during the financial year of sale.