Talking Tax – Issue 54

Legislation and Government policy

Research and Development (R&D) tax incentive review

The Government has released its report of the R&D Tax Incentive review that concluded in April 2016.

The report, which was co-chaired by Chair of Innovation Australia Bill Ferris, Australia’s Chief Scientist Alan Finkel and Secretary to the Treasury John Fraser, highlights the finding that more could be done to encourage additional research and research spill-overs into other relevant sectors.

Six recommendations were made aimed at improving the performance of the programme and enabling long-term continuation.

Three of the recommendations aim to encourage research that would otherwise not take place, such as including extra incentives for businesses to hire PhD graduations or collaborate with research institutions.

The other three recommendations focus on strengthening the effectiveness and integrity of the programme, such as through the reduction of compliance costs for companies.

The Government has continued to focus on incentives to encourage innovation in Australia, including the introduction of tax concessions for investment in innovation companies. Reviews such as these are designed to assess the effectiveness of the measures being introduced.

The R&D Tax Incentive currently counts for around one-third of the Government’s monetary support for innovation. However, as part of the recent Budget Savings (Omnibus) Act 2016, the rates available under the incentive were reduced to 43.5% for the first $100million of eligible expenditure.

Submissions can be made until 28 October 2016.

Updates to Additional Foreign Acquirer Duty (AFAD) application (Queensland)

In Issue 52 of Talking Tax we discussed the introduction of the Additional Foreign Acquirer Duty (AFAD) surcharge regime in Queensland, which commenced on 1 October 2016.  Under the AFAD regime, an additional amount of duty applies to direct AND indirect transactions involving land that are liable to transfer duty, landholder duty and corporate trustee duty where the land is ‘AFAD residential land’ and the acquirer is a foreign person.

There is uncertainty with the interpretation of certain concepts within the AFAD regime. As such, the Queensland Office of State Revenue has released two further rulings offering guidance on the application of the AFAD surcharge.

DA00014.1 Foreign corporations and foreign trusts - interests of foreign persons and related persons

This ruling clarifies how to work out what a ‘foreign corporation’ and a ‘foreign trust’ are.

A corporation is a ‘foreign corporation’ if a foreign person controls 50% of the voting power or 50% of the issued shares in a corporation:

A trust is a ‘foreign trust’ if at least 50% of the interests in the trust are held by:

• a foreign individual
• a foreign corporation
• a foreign trustee
• a related person of any of these.

DA232.1.1 AFAD residential land

This ruling clarifies the Commissioner’s interpretation of the terms ‘solely or primarily used for residential purposes’ and ‘designed or approved by a local government for human habitation by a single family unit’.

Factors relevant to whether the ‘primary or sole’ use is residential are:

• the overall nature and use of the land, or intended use
• how much of the total area of the land will be used for residential purposes
• how much of the total construction costs will be used for the residential purposes.

This is to be considered on a per lot basis, so that each piece of land in a transaction will be tested separately. This aims to prevent people from including residential purposes land within a commercial land package to avoid AFAD.

These AFAD rulings accompany DA000.15.1 regarding ‘ex gratia relief’ for significant development, also discussed in Issue 52 of Talking Tax. The rulings are welcomed guidance from the Queensland Office of State Revenue on the application of the AFAD surcharge regime but parties to a transaction need to be cautious that they do not inadvertently trigger the surcharge.

Comparable surcharge regimes apply in both New South Wales and Victoria, however the surcharge rates applied vary from state to state.  From 21 June 2016 foreign purchasers who acquire and interest in residential property in NSW will face a 4% duty surcharge.  With effect from 1 July 2016, the surcharge rate of additional duty that is chargeable in respect of a transfer of Victorian residential property to a foreign purchaser is 7%.

Given these varying rates, foreign property investors and developers should be aware that the cost of their exposure to the stamp duty surcharge may vary from state to state.

Register of Foreign Ownership of Agricultural Land Amendment (Water) Bill 2016 (Cth)

The Register of Foreign Ownership of Agricultural Land Amendment (Water) Bill 2016 (Water Register Bill) has been introduced into the House of Representatives.

The Water Register Bill establishes a Register of Foreign Ownership of Water Entitlements to be administered by the Commissioner of Taxation.  It also provides for the collection of information and publication of statistics about foreign holdings of registrable water entitlements and long term contractual water rights.

Currently all states and territories collect data on the entitlements and rights they confer on a person or business, but this data does not capture information on the status of the holder as a foreign person. The aim of the Water Register Bill is to allow for increased transparency on the levels of foreign ownership of water entitlements through the creation of a comprehensive collection of such data at a federal level. It follows similar regulation of foreign ownership of agricultural land.

ATO updates

NANE treatment of foreign entity distributions - draft Taxation Ruling TR 2016/D2 

The ATO has released a draft ruling providing practical guidance for taxpayers and advisers on applying the ‘participation test’ in Subdivision 768-A of Income Tax Assessment Act 1997 (ITAA 1997).

Subdivision 768-A of the ITAA 1997 provides that an equity distribution received by an Australian corporate tax entity from a foreign company is non-assessable, non-exempt (NANE) income in certain circumstances.  For a distribution to be NANE, the entity must have a direct or indirect participation interest in the foreign company, the sum of which is at least 10% (the participation test).

While determining whether a corporate shareholder holds a 10% or greater interest in a foreign company is straightforward in most circumstances, TR 2016/D2 is intended to provide guidance in more complex situations where an answer is not so readily apparent.

The ruling outlines the Commissioner’s view that:

• to have a participation interest in the foreign company, an entity must be a registered member of the foreign company at the start of the day that the distribution is made
• where the distribution is a dividend or a non-share divided, the distribution is made on the day that the foreign company pays or credits the distribution
• where the distribution is a deemed dividend, the distribution is made on the day the tax legislation deems the dividend to have been taken to be paid.

The ruling will take effect for distributions made on or after 17 October 2014, when Subdivision 768-A came into force. Comments and submissions on the ruling may be made until 25 November 2016.

Case law

Payroll taxes - no relief for the Brisbane Lions or NIDA

Two cases were decided this week regarding payroll tax liabilities.

Brisbane Bears – Fitzroy Football Club Ltd v Commissioner of State Revenue [2016] QSC 231

Brisbane Bears – Fitzroy Football Club Ltd (the Club), known as the Brisbane Lions,  has lost an appeal to the Supreme Court of Queensland regarding payroll tax reassessments for financial years ending 30 June 2008 to 30 June 2012.

The Club took the position that various payments made to players and coaches for the use of image rights were not payments of taxable wages, and accordingly were not payments which were liable to payroll tax under the Payroll Tax Act 1971 (Qld) (the Act). The Queensland Commissioner of State Revenue disagreed with this interpretation, and increased the payroll tax payable by the Club in the reassessments.

Justice Bond undertook a process of characterisation by reference first to whether the payment falls within the definition of ‘wages’, and secondly, to whether payments were made by an employer for or in respect of services performed or rendered.

In relation to the characterisations, Bond J found that payments for marketing and promotional services were included in the definition of ‘wages’ under the players’ and coaches’ service agreements and were otherwise directly associated with services rendered.

The use of the player’s image was for purposes related to or connected to the player’s actual performance of promotional or marketing activities governed by the service agreements in place between the parties. As such, it was correct for the payments made by the Club to be characterised as payments made as an employer in consideration of promotional and marketing services performed under that agreement, and therefore subject to payroll tax.

The Club’s application was dismissed.

The National Institute of Dramatic Art v Chief Commissioner of State Revenue [2016] NSWCA 1471

This case involved and application by the National Institute of Dramatic Art (NIDA) for the review of a decision of the Chief Commissioner of State Revenue (the Commissioner) to refuse a refund of payroll tax over a four year period, amounting to $2,540,040.

It provides useful guidance on payroll tax obligations for charitable or not-for-profit organisations operating educational programs.

NIDA argued that the wages payable were exempt for the purposes of the Payroll Tax Act 2007 (NSW) (Act) pursuant to clause 12(1)(c)  of that Act, which provides (amongst other things) that wages are exempt if they are paid by a non-profit organisation other than a school or college.

While it was accepted that NIDA was a non-profit organisation, the dispute related to whether it could be classified as a school or college, or whether its higher education elements were only ‘the jewel in the crown’ of a range of philanthropic activities undertaken as a promoter of the arts.

Justice White of the NSW Supreme Court found that the term ‘school or college’ should be given a wide interpretation, and that as such, NIDA did conduct a ‘school or college’ through its offering of undergraduate and graduate programs and Vocational and Education Training Programs.  White J went further to say that this was the predominant and characteristic purpose of NIDA.

As such, NIDA was not entitled to the exemption and the application for a refund of payroll taxes paid was refused.