Talking Tax – Issue 75
Case law
Full Federal Court dismisses Chevron transfer pricing appeal
On 21 April 2017 the Full Federal Court case of Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62 unanimously dismissed Chevron Australia Holdings Pty Ltd’s (CAHPL) appeal against the decision of the Federal Court. The Federal Court decision was previously discussed in Talking Tax – Issue 12.
Central to the proceedings before the Full Federal Court was the interest rate on the Australian dollar equivalent of a USD 2.5 billion loan from Chevron Texaco Funding Corporation (CFC), a US subsidiary. Broadly, the interest rate on the non-arm’s length loan was found to be excessive.
It is likely that there will be implications for Chevron’s much larger $42 billion loan used to fund the development of its north-west shelf gas facilities. Multinationals with cross-border financing arrangements are similarly reminded that the Chevron decision may have implications for those arrangements. The Court identified that under Division 13 of the Income Tax Assessment Act 1936 (which has been repealed and replaced with Subdivisions 815-B, 815-C and 815-D of the Income Tax Assessment Act 1997), the ‘property’ acquired by CAHPL ‘was the rights or benefits granted or conferred under the Credit Facility, including the sums lent’, and not the absence of security or covenants.
It was held that the former Division 13 was to bring a:
‘commercial reality based on an hypothesis of actors independent of each other to the viewing of a transaction (for the purpose of taxation) in circumstances where that commercial reality so based (for that fiscal purpose) has been distorted by considerations that can be described as a lack of relational independence or … a lack of arm’s length dealing between the parties to the transaction.’
The Court found that, applying the provisions of Division 13 to the loan, there were conditions operating between CAHPL and CFC which differed from those that might be expected to operate between independent parties dealing wholly independently with one another. Specifically, the ‘consideration’ given in respect of the acquisition did not include security and covenants, but at arm’s length would be expected to include such security and covenants.
The Court found that ultimately, an arm’s length loan would have had an interest rate much less than the actual interest rate on the Chevron loan equal to one-month AUD-LIBOR-BBA as determined with respect to each interest period plus 4.14% per annum. This would have resulted in an amount of profit that would have accrued to CAHPL but did not so accrue by virtue of the non-arm’s length dealings.
The Court rejected CAHPL’s contentions that Subdivision 815-A of the Income Tax Assessment Act 1997 was constitutionally invalid, and preferred the Commissioner’s approach that Division 13 and Subdivision 815-A are alternative provisions which could each be used to support the Commissioner’s amended assessments.
The amended assessments were ultimately upheld by the Full Federal Court based on Division 13.
Default assessments upheld – $2m bank deposit assessable as income
In the recent case of Zappia v Commissioner of Taxation [2017] FCA 390, the Federal Court upheld default assessments issued to a taxpayer by the Commissioner of Taxation on the basis that the taxpayer did not have enough evidence to support her position.
This case highlights the importance of maintaining contemporaneous documentation to support any tax position adopted.The taxpayer was the wife of a property developer who had been attempting to develop a property at Shingley Drive, Airlie Beach, in Queensland through an entity called Shingley Projects Pty Ltd (Shingley) of which her husband was the sole director. A unit trust (Trust) was set up in 2007 through which the development was to be effected and Shingley was the trustee of the Trust.
On 30 June 2010, the taxpayer received $2 million into a bank account maintained in her name which she did not include in her 2010 income tax return. During the 2011 year, interest was earned on the same funds but the taxpayer failed to include that interest in her 2011 income tax return either.
The Commissioner was of the view that the $2 million, and interest in the 2010 and 2011 years, should have been returned by the taxpayer as assessable income. Therefore, the Commissioner issued two default assessments against her. When the Commissioner disallowed the taxpayer’s objection against these assessments, the taxpayer appealed and sought review by the Federal Court.
On appeal, the taxpayer contended that the money deposited in her account comprised the proceeds of an equity investment received by Shingley. Moreover, the taxpayer claimed that she was holding the funds in her account on trust for Shingley as trustee for the Trust, and therefore the funds were not taxable in her hands. Both of these contentions were rejected by the court.
The Court found that the money appeared to have ended up in the taxpayer’s account for a better rate of interest, which was scarcely related to the property development project. The Court held that the evidence provided to explain the circumstances in which the funds came into existence, and what the taxpayer correspondingly did with the $2 million, made “no sense”.
As for the taxpayer’s second contention that she held the funds advanced to her on trust for Shingley, it was found by the Court that there was no evidence to support the notion that the $2 million held by the taxpayer was a trust asset. Justice Perram found that a resolution by Shingley suggested that the $2 million was not held by the taxpayer other than as a beneficiary.
It was held that “on the sparse materials available”, there was “only a preliminary sketch, perhaps a suggestion” of an argument that the taxpayer held the funds as a bare trustee (or for that matter, that the funds were a loan). In particular, while his Honour could infer from the available material that such a trust existed he did not think that such an inference was the only available one.
ATO updates
Small businesses entities can claim the cost of depreciating assets before 30 June 2017
Businesses which satisfy the $10 million aggregated turnover threshold set out by the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (Bill) have until 30 June 2017 to immediately claim the cost of depreciating assets that cost less than $20,000.
The immediate deduction is available if the acquisition of the relevant depreciating asset was made on or after 7.30 pm on 12 May 2015, and the depreciating asset was used or installed ready for use between 7.30 pm on 12 May 2015 and 30 June 2017.
The Bill has previously been discussed in Talking Tax – Issue 72 and while it has been awaiting agreement by the House of Representatives for some time the government has indicated that it is likely to be enacted.