Talking Tax – Issue 198

In Talking Tax this fortnight we look at the Victorian Supreme Court decision of Razzy Australia Pty Ltd & Anor v Commissioner of State Revenue, where it was held that a restructure of the interests in land held by three superannuation funds is exempt from duty. We also provide an update on the appeals in the Commissioner of Taxation v Auctus Resources Pty Ltd and Carter v Commissioner of Taxation as well as look at the latest ATO rulings and guidelines.

Case law

Auctus Resources Pty Ltd lodges appeal to the High Court following Full Federal Court decision

The taxpayer in Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39 (19 March 2021) has lodged an application for special leave to appeal to the High Court following the Full Federal Court decision which held that the ATO could recover an overpayment of the research and development tax offset, claimed by mistake, as an administrative overpayment pursuant to s 8AAZN of the Tax Administration Act 1953 (Cth).

For further information and background to the Full Federal Court’s decision, see our previous issue of Talking Tax.

Carter goes to the High Court

The Commissioner’s special leave application to appeal to the High Court has been granted in Carter v Commissioner of Taxation [2020] FCAFC 150 (10 September 2020). The case concerns the validity of declaimers made by default beneficiaries.

The central issues in dispute at the Full Federal Court were:

• whether the distribution of 100% of the income for the 2014 income year had been validly appointed to another trust, such that the default distribution clause in the Trust Deed was inoperative; and
• if the first issue is resolved in the negative, that despite there being no valid appointment of the income to the other trust, whether each taxpayer beneficiary had validly disclaimed the distributions.

The Full Federal Court held that there was no valid distribution to the other trust, but that the taxpayer beneficiaries had in fact validly disclaimed their entitlement to the income under the default distribution clause and thus the Commissioner’s assessment was excessive.

For further in-depth background on the Full Federal Court’s decision, see issue 192 of Talking Tax.

We will update you on the High Court’s decision shortly.

Exemption doesn’t stop aggregation – superannuation restructures and duty

The Victorian Supreme Court in Razzy Australia Pty Ltd & Anor v Commissioner of State Revenue [2021] VSC 124 considered whether landholder duty was payable on a restructuring between superannuation funds.  The key issues in dispute were:

• whether exempt transactions are considered for aggregation purposes;
• where part of a ‘significant interest’ is exempt, is duty chargeable on the whole of the significant interest;
• does the super fund restructure exemption apply to notional transfers, such as those caused by the redemption of units in a unit trust;
• what the meaning of ‘transfer’ was in the context of the relevant exemption provision; and
• what was required by the words ‘in connection with’ under that same exemption provision.

Ultimately, it was determined that sections 40 and 89D of the Duties Act 2007 (Vic) (DA) applied to the notional transfer between the superannuation funds, however, that transfer was still taken into account for aggregation purposes. This resulted in a notional transfer to a related unit trust being subject to duty, where, without the aggregation, there would have been no duty payable.

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Background

Two brothers held interests in 3 complying superfunds called: DLF Super Fund, DLF Executive Super Fund and JT Super Fund. The investments held in these superannuation funds comprised of units in two separate unit trusts (L Unit Trust and SM Unit Trust respectively). These unit trusts held an interest in land in Victoria meaning that they were private unit trust schemes pursuant to s 71(1)(a) of theDA.

The two brothers in 2018 entered into a deed that resulted in them conducting various transactions to restructure the 3 superfunds in a way in which one brother was the sole member of one fund and the other brother was the sole member of the other two funds. These transactions were consistent with the proportion of assets each held prior to the transactions.

Part of the restructure involved the redemption of units in the L Unit Trust and SM Unit Trust.  As a result of the redemption of units by the DLF Super Fund, the JT Super Fund’s interest in the L Unit Trust increased by 10.25% while a related unit trust, the FFUT, which is not a complying super fund, also had their interest increase by 12.09%.

Analysis and reasoning

Aggregation & significant interest

Section 77 of the DA provides that liability for duty arises when a relevant acquisition is made. This can be when a person acquires a ‘significant interest’, which is an interest of 20% or more in the landholding entity. Relevantly, the Commissioner can aggregate acquisitions of associated persons, and, where the aggregated interest is over 20%, charge duty on the aggregated acquisitions individually.

Here, the increase in FFUT’s and the JT Super Fund’s interest met the 20% threshold when aggregated.  The question was, assuming the increase in the JT Super Fund’s interest was exempt, could this be taken into account for determining whether a ‘significant interest’ was acquired.  Ultimately, the Court determined that it could, stating that whether or not an acquisition was exempt had no bearing on whether it could be taken into account for aggregation purposes.

The result of this was that the increase in the FFUT’s interest by 12.09% was subject to duty where, if not for its aggregation with the JT Super Fund, it would not otherwise have been subject to duty.

Notional transfers

The Commissioner attempted to argue that the exemption under section 40 and 89D(a) did not apply as the redemption of the units in the L Unit Trust did not amount to a ‘transfer’ as the word appears in section 40.  However, the Court dismissed this argument, adopting a broad interpretation of the term, citing the history of the exemption and the remedial nature of the section as being amongst its reasons for doing so.

The Court also rejected a ‘form over substance’ argument of the Commissioner regarding the redemptions not being transfers, stating that they had failed to grapple with the fact that the landholder provisions are intentionally concerned with substance and not form.

The Commissioner’s attempt to artificially split the redemption of the units from the other transactions that effected the restructure also failed.  The Court accepted that the wording of the deed was sufficient to demonstrate the clear link between the redemption and the restructure.

In connection with

Lastly, the Commissioner argued that the redemption was not ‘in connection with’ a person ceasing to be, and becoming a member of a fund as required under section 40(1)(c) of the DA.

The Commissioner relied on four matters to demonstrate the lack of required connection, these were:

1. a lack of correspondence between the amount of money realised from the redemption of units in the first fund and the amount of money rolled over as cash to the second fund;
2. that the ‘connection’ was dependent upon the rollover of funds and not upon the redemption of the units;
3. the timing of the events that occurred with the redemption of units and the rollover of funds did not take place simultaneously; and
4. the redemption resulted in a ‘relevant acquisition’ by the FFUT which was not exempt.

The Court did not accept that a lack of correspondence between the funds transferred and value of units redeemed illustrated a lack of connection.  Regarding the second point, the Court viewed the restructure as requiring both the initial redemption of units and cash roll-over as constituting the restructure, this being supported by the wording of the deed which clearly set out the restructure plan that included the redemption.

Regarding the third point the Court said that:

The fourth point above was also rejected as the relevant acquisition by the FFUT is considered separately from the exemption eligibility of the JT Super Fund.

ATO Rulings and Guidelines

ATO releases decision impact statement on Slatter Case

The AAT in Slatter Building Group Pty Ltd v Federal Commissioner of Taxation (Taxation) [2021] AATA 456 (10 March 2021) had previously held that a company incorporated in January 2020 which accounted for GST on a quarterly basis was not eligible to receive the first cash flow boost under the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth) (BCF Act) which requires that the relevant entity make a taxable supply in a tax period that applied to it which ended before 12 March 2020.

The ATO in their decision impact statement, state that the AAT’s decision is consistent with the Commissioner’s view of how the BCF Act applies and further emphasised that:

• entities which came into existence or commenced business, after 31 December 2019 and report GST on a quarterly basis; or
• entities that came into existence, or commenced business, on or after 1 July 2019 and elected to report GST annually,

could not satisfy the eligibility criteria for the cash flow boost.

For further background information regarding the AAT’s decision, please see Issue 196 of Talking Tax.

Imported hybrid mismatch rule: PCG 2021/D3

The ATO has released new draft practical compliance guideline, PCG 2021/D3, regarding the relative levels of tax compliance risk associated with hybrid mismatch rules set out in subdivision 832-H of the Income Tax Assessment Act 1997 (Cth). The draft guideline clarifies the Commissioner’s assessment of risk and approach to reviewing whether a taxpayer has undertaken reasonable enquiries in relation to the rules for non-structured arrangements.

The compliance approach is based on a review of the extent to which taxpayers have obtained information to establish that the imported hybrid mismatch rules do not apply to their circumstances or how the taxpayer has neutralised any imported hybrid mismatch in respect of non-structured arrangements. The draft guideline sets out risk zones accompanied by certain principles to assist tax-payer self-assessing their position. This is relevant as, where the ATO requires the taxpayer to complete a Reportable Tax Position schedule, they may also ask the taxpayer to disclose their self-assessed risk zone.

Submissions regarding the draft guideline are due by 21 May 2021.

Phoenixing and tax refund retention: PS LA 2021/2

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) has amended s 8AAZLG of the Tax Administration Act 1953 (Cth) to give the Commissioner unlimited application on the exercise of discretion to retain a refund in circumstances where taxpayers are identified as engaging in high-risk behaviour, including illegal phoenix activity.

The purpose of Practice Statement PS LA 2021/2 is to provide guidance on how the Commissioner may exercise the discretion.

Overall, it provides that the discretion to retain refunds should be exercised ‘where there is reasonable grounds to believe the taxpayer is, or the controller or associates of the taxpayer are, engaged in phoenix‘ or high risk behaviour.

The Practice Statement then goes on to provide guidance on what is considered as phoenix or high risk behaviour and gives practical examples of when the discretion may be exercised.

Legislation

NSW cracks down on payroll tax avoidance on wage theft

The NSW government has announced that it will introduce tough new legislation aimed at targeting companies who avoid their payroll tax obligations in instances of wage theft. The laws are designed to act as a deterrent that will include harsher penalties and powers provided to Revenue NSW to name and shame companies who have underpaid payroll tax on wages.

Despite Australia having an established legislative and award framework that is designed to ensure minimum pay for employees, it is still considered that there are many Australian workers who are currently underpaid and, consequently, millions of dollars of unpaid payroll tax in each of the States.