Talking Tax – Issue 87

Case law

Is it ‘dominant use’? A lesson for taxpayer seeking to claim primary production land tax exemption

In Redmadi Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 231, the Civil and Administrative Tribunal (Tribunal) dismissed the application and affirmed the Chief Commissioner for State Revenue’s (Commissioner) decision to deny a primary production land tax exemption to a taxpayer on the basis that it was not satisfied that land was used for the dominant purpose of primary production within the meaning of section 10 AA of the Land Tax Management Act 1956 (Act).

This case serves as a warning for taxpayers using rural land for multiple purposes. If the dominant use of the land is for primary production activities, they will be entitled to a full land tax exemption. However, if there is another dominant use of the land, the taxpayer will not be entitled to a partial exemption for primary production activities.

Facts and submissions

The Taxpayer (the Applicant in the matter) owned land on which it ran a farm stay accommodation business and also maintained and bred alpacas, goats and some chickens.

The access to the land tax exemption under subsection 10AA(1) of the Act requires that the dominant use of the land is for primary production. However, the primary production activities do not need to have a significant and substantial commercial purpose.

The Taxpayer contended that the land was used during the 2011 – 2015 land tax years (Relevant Years) for the ‘dominant purpose of the maintenance and breeding of animals for the purpose of selling them or their natural increase or bodily produce’ (being the alpaca fleece). The Taxpayer argued that the use of the land as a home stay accommodation business was a non-dominant purpose.

In refusing to grant the exemption, the Commissioner contended that there was no primary production activity whatsoever and that the animals were an incidental feature of the home stay use of the premise in that they provided an attraction for the home stay business. Among other reasoning to support this view, the Commissioner referred to a grossly disproportionate difference between the income and expenditure as disclosed in the applicant’s income tax returns and other financial records regarding the livestock and the accommodation activities during the Relevant Years.

Findings

Was the land used during the Relevant Years for primary production?

The Tribunal determined that the land was used for primary production during the Relevant Years. In forming its view, the Tribunal noted that, although the records indicated that the livestock operations had never generated any significant profit and did not, on its own, comprise a viable commercial operation, there was still sufficient evidence of a use of the land for the purpose of selling the animals and their fleece.

Was the land used for the dominant purpose of primary production?

The Tribunal determined that the land was not for the dominant use of primary production.

In reaching its decision, the Tribunal noted that determining what dominant use means requires a comparison between the nature and intensity of the different uses of the land, the area over which those uses took place, the time and labour spent in conducting them and the goal to be achieved by each activity. Whilst regard can be had to the relative expenditures on and the revenue derived from the various uses of the land, the Tribunal noted that this is not of itself a determinative consideration.

The Tribunal referred to the following factors which supported the view that the land was not for the dominant use of primary production:

  • when the land was purchased it was used for the purposes of, and widely advertised as, a farm stay accommodation business and that has continued throughout the Relevant Years
  • in the employment contracts of the managers of the accommodation and livestock business, there was no ‘substantial reference’ in relation to duties to maintain or care for the animals, suggesting that it wasn’t an important part of the managers’ duties
  • the goats were sold for relatively insignificant amounts and no reliance is placed on the sale of chickens or eggs to support the exemption claim and
  • the tax returns of the Taxpayer for the Relevant Years show a far greater revenue of activities on the accommodation operations as opposed to livestock operations ($1.15 million of revenue compared to $46,000 from sales of alpacas and fleece).

Having regard to these factors, the Tribunal concluded that this land was not exempt from land tax. Further, as the exemption requires that the dominant use of the land is for primary production, the Taxpayer was not entitled to a partial exemption for the portion of the land that was used for primary production activities.

Federal Court refuses interlocutory relief for Taxpayers

In Nelson v Commissioner of Taxation [2017] FCA 819, the Federal Court of Australia refused to; grant the Taxpayers seeking to stay the effect of notices issued under section 353-10 of the Taxation Administration Act 1975, set aside the Commissioner’s decision to issue the notices, compel the Commissioner to finalise his decision, and quash the assessments. Of particular relevance are the notices requiring that the Taxpayers attend closed-door interviews in relation to an unresolved objection.

The Taxpayers submitted that the Commissioner issued the notices for an improper purpose. This submission which centred around the timing of when the Commissioner had issued the notice. As part of this submission, the Taxpayer suggested that it would have been difficult to discern jurisdictional error if the notices were issued at an earlier stage and further, it would have been difficult to question the validity of such notices at the assessment stage.

The Court ultimately rejected this contention and dismissed the Taxpayers’ injunction application on the basis that they could not establish a prima facie case. Further, the Federal Court noted that, the relief would have nevertheless been refused on the ground that the Taxpayer had acted in a manner that caused an ‘inexcusable and unreasonable delay’ (which comprised of a 7 day delay between the time that notices were issued and the Taxpayer contacted the relevant officer at the ATO in respect of the same).

ATO release draft Law Companion Guideline on the business continuity test

On 21 July 2017, the ATO released the Law Companion Guideline LCG 2017 D6 (Guideline), which describes how the Commissioner will apply the new ‘similar business’ test to determine whether a business can utilise losses incurred in a business which had been incurred prior to a change of ownership or control of that business.

The test was introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 (Bill), which proposes to amend the Income Tax Assessment Act 1997 (ITAA 97) and Income Tax Assessment Act 1936 (ITAA 36). This Bill was discussed in Talking Tax – Issue 72 and applies to income years starting on or after 1 July 2015. The Bill is currently before the Senate and the second reading appears to have been moved by the Senate on 22 June 2017.

The new, more flexible test will supplement the existing ‘same business’ test and together they have been referred to as the ‘business continuity test’.

The Guideline represents the first guidance provided by the ATO on what it means to ‘carry on a similar business’ for the purposes of this new test, which has been highly sought after given that the test’s application is largely unknown. Whilst the Guideline provides helpful examples of how the test will be applied, the test is ultimately fact-based and there will invariably be some degree of uncertainty for entities that choose to rely on it.

ATO on how to apply the test

The ATO considers that, for the purposes of the test, the focus should be on the identity of the business, as well as continuity of business activities and use of assets to generate assessable income. The ATO noted that ‘similar business’ does not mean a similar ‘kind’ or ‘type’ of business.

The Guideline notes that it will be difficult to satisfy the similar business test if substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time. In contrast, where a company develops a new product or function from the business activities already carried on and this development opens up a new business opportunity or allows the company to fill an existing gap in the market, the business is likely to satisfy the similar business test.

The Bill provides that the following factors must be taken into account in considering if the current business is similar to the former business:

The extent to which the assets (including goodwill) used in the current business to generate assessable income were also used in the company’s former business to generate assessable income

The Guideline notes that where the assets of the business are being used to the same extent as at the test time to generate assessable income, even though they may be producing a different result or effect due to innovative changes, this factor would indicate that the business remains similar to that previously carried on. Moreover, the Guideline suggests that assets closely linked to the identity of a particular business, such as goodwill, will be more relevant than standard items such as office premises, equipment, and stationery.

The extent to which the activities and operations from which the current business generates assessable income were also the activities and operations from which the former business generated assessable income

The Guideline provides that where the business operator maintains the income generating activities and operations that were previously being undertaken, despite doing them in a different or more efficient way due to innovative improvements, this factor would indicate that the business remains similar to that previously carried on.

The identity of the current business and the identity of the former business

The Guideline provides that where new activities have not resulted in the identity of the business changing, this factor would indicate that the business remains relevantly similar to that previously carried on.

The extent to which any changes to the former business resulted from the development or commercialisation of assets, products, processes, services, or marketing or organisational methods, of the former business.

The Guideline notes that these changes will not always cause a business to be considered dissimilar. Where those changes are due to an innovative evolution or development of the business, the business is more likely to be similar to that previously carried on.

PCG 2017/D11 – Tax treatment of payments for use and exploitation of a professional sportsperson’s ‘public fame’ or ‘image’

The ATO has recently released Draft Practical Compliance Guideline PCG 2017/D11 (Guideline) The Guideline sets out a ‘Safe Harbour’ of 10% (attributed to exploitation of ‘public fame’ or ‘image’) when apportioning lump sum payments for the provision of a professional sportsperson’s services and the use and exploitation of their ‘public fame’ or ‘image’ under licence.

This draft Guideline is proposed to apply from 1 July 2017.

Typically, the exploitation of an individual’s ‘public fame’ or ‘image’ will be connected to activities that primarily involve the exploitation of the professional skills of the individual. Consequently, payments received from these activities will generally involve the provision of their personal services and be considered to be within the definition of ‘Personal services income’ under subsection 84-5(1) of Part 2-42 of the ITAA 1997 because it is income that is mainly a reward for the individual’s personal efforts or skills.

Where a professional sportsperson undertakes the commercial exploitation of their ‘public fame’ or ‘image’ through an associated entity, to which they have also granted a licence to use and exploit their ‘public fame’ or ‘image’, they or their associated entity may receive a single payment representing:

  • payment for use of the entity’s assets, being their contractual licence to use and exploit the professional sportsperson’s ‘public fame’ or ‘image’ – this portion of the payment will be assessable to the entity as income and
  • a reward for the efforts or skills of the professional sportsperson – this portion of the payment will be assessable to the sportsperson as income.

In providing a 10% safe harbour, the Guideline provides that exact proportion of any payment attributable to the sportsperson’s ‘public fame’ or ‘image’ is to be determined by the marketability of the sportsperson’s ‘public fame’ or ‘image’ measured, in part, by:

  • the demand for use of the sportsperson’s ‘public fame’ or ‘image’ by sponsors and
  • community awareness of the sportsperson and the level of community association of that sportsperson with their sport.

The ATO states that the draft Guideline can be relied upon where:

  • a professional sportsperson grants an associated resident third-party a non-exclusive licence to use and exploit the sportsperson’s ‘public fame’ or ‘image’
  • it is the resident third-party who is contractually entitled to receive the income from the use and exploitation of the professional sportsperson’s ‘public fame’ or ‘image’ and
  • the payment is not referable to the use or exploitation of rights which are recognised and specifically protected under Australian law, such as copyright, trademarks or registered design rights.

For further analysis and discussion on this topic and relevant commercial considerations, please refer to ‘Image Rights: High profile individuals can benefit from ATO tick of approval’ published by the sports and entertainment tax specialist team at Hall & Wilcox.

OECD Guidance on the Implementation of Country-by-Country Reporting: BEPS Action 13

The Inclusive Framework on BEPS (which brings together over 100 countries and jurisdictions to collaborate on the implementation of the OECD/G20 Base Erosion Profit Shifting (BEPS) Package) has recently released additional guidance on the implementation of Country-by-Country (CbC) Reporting (BEPS Action 13) to assist, and give greater certainty to, tax administrators and Multinational Enterprises (MNEs).

The additional guidance deals with two specific issues:

  • whether aggregated data or consolidated data for each jurisdiction is to be reported in Table 1 of the CbC report and
  • how to treat an entity owned and/or operated by two or more unrelated MNE Groups.

For more information on CbC reporting – and BEPS generally – see Talking Tax – Issue 86 and Talking Tax – Issue 64.

This article was written with the assistance of David Holland, Law Graduate.

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