Talking Tax – Issue 81

Case law

Income scheme for law firm breaches Part IVA

In the recent case of Hart v Commissioner of Taxation (No 4) [2017] FCA 572, the Federal Court confirmed the Commissioner’s assessment and amended assessment, in which he determined that payments made to the Taxpayer were assessable income for the purposes section 97 and Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).

Large amounts of income were paid to or for the benefit of the Taxpayer through a series of interposed trust entities. The Court held that the Taxpayer acquired an immediate vested and indefeasible interest in the amounts paid to him or for his benefit, and was presently entitled to those amounts.

The Taxpayer was a solicitor who carried on a legal practice in the form of a unit trust (Unit Trust). The units in the Unit Trust were held by discretionary trusts, of which the Taxpayer and his associates in the legal practice were beneficiaries. The Taxpayer developed a scheme called the new venture income scheme (NVI Scheme) that involved a series of trusts and related transactions, which essentially allowed the Taxpayer and his associates to avoid paying income tax on their respective shares of income generated by the legal practice.

A notice of assessment was issued by the Commissioner in respect of the 1997 income year (Relevant Period) that identified two amounts produced under the NVI Scheme, which the Commissioner determined to be undeclared income of the Taxpayer, comprising:

• a portion of the net income of the Unit Trust (or alternatively, a portion of the net income of the Taxpayer’s discretionary trust (Discretionary Trust) that held units in the Unit Trust) being $220,398 (Practice Amount) and
• a portion of the income earned by a group of trusts associated with the law practice, through tax planning and tax scheme services in which the taxpayer was involved, being $275,481 (IET Amount). These trusts had resolved to distribute amounts through the NVI Scheme,

with each of the Practice Amount and IET Amount passing through a series of interposed trusts and eventually paid to or for the benefit of the Taxpayer.

The Federal Court dismissed the Taxpayer’s appeal and held, among other things, that:

• the Taxpayer failed to demonstrate that the money received by him was received by way of a loan;
• the Practice Amount was assessable income under sections 97 or 101 of the ITAA 1936 as the Taxpayer was as special unitholder in the Unit Trust, or alternatively, by reason of the Taxpayer being a beneficiary of the Discretionary Trust, which was itself a unitholder of the Unit Trust. In determining this, the Court held that by virtue of the relevant trust deeds, the Taxpayer acquired an immediate vested and indefeasible interest in the amounts paid to him or for his benefit, and was presently entitled to those amounts for the purposes of these provisions and
• the Practice Amount and IET Amount were assessable income under the anti-avoidance provisions contained in Part IVA of the ITAA 1936, as the NVI Scheme was entered into by the Taxpayer with the overwhelmingly dominant purpose of obtaining a tax benefit.

Alexander v Chief Commissioner of State Revenue [2017] NSWCATAD 180

On 9 June 2017 the New South Wales Civil and Administrative Tribunal (Administrative and Equal Opportunity Division) in Alexander v Chief Commissioner of State Revenue [2017] NSWCATAD 180  held that a transfer of property to the Taxpayer, pursuant to the will of a deceased person under which the Taxpayer was a beneficiary, was assessable for duty under section 63(2) of the Duties Act 1997 (NSW) (Duties Act).

Broadly, the Tribunal held that where a transfer of dutiable property is made by the executors of an estate to a beneficiary, pursuant to an agreement between beneficiaries of the estate to vary the distributions that would otherwise be made under the will, the dutiable value of the property is to be reduced by the transferee beneficiary’s proportionate entitlement to the dutiable property, rather than their proportionate entitlement to the estate as a whole.

Under the relevant will, the Taxpayer’s mother bequeathed her residuary estate (which included but was not limited to, her home (Property)) equally to her three children. Upon her death, the beneficiaries under the will agreed to transfer the Property to the Taxpayer. As the value of the Property outweighed the Taxpayer’s entitlement under the will, the Taxpayer agreed to pay the difference between the value of the Property and his share of the estate to his two siblings, in full settlement of his entitlement under the will.

The Commissioner assessed the transfer as dutiable and this assessment was challenged by the Taxpayer on the grounds that the amount of duty payable was incorrect, and that the Commissioner hadn’t properly applied section 63(2) of the Duties Act in making the assessment.

The main issues in dispute were:

• Whether section 63(2) applies to reduce the dutiable value of the property by the value of the transferee’s proportionate entitlement to the dutiable property, or by their proportionate entitlement to the estate as a whole.

The Tribunal held that section 63(2) provides that where a transfer of dutiable property is made by the executors of an estate to a beneficiary, pursuant to an agreement between beneficiaries of the estate to vary the distributions that would otherwise be made under the will, the dutiable value of the property is to be reduced by the transferee beneficiary’s proportionate entitlement to the dutiable property, rather than their proportionate entitlement to the estate as a whole.

• Whether the application of section 63 is limited to commercial transactions.

The Tribunal held that section 63 applies equally to commercial transactions and family transactions.

• Whether the transfer of the Property was produced and effected under and in accordance with the will, thereby attracting the application of section 63(1)(a) of the Duties Act and a concessional duty amount of $50.

The Tribunal rejected the Taxpayer’s contention that section 63(1)(a) applied, on the basis that the will clearly reflected the deceased’s intention that the estate be divided equally among her children. The transfer of the Property to a single child was held to be inconsistent with that intention.

ATO updates

GSTR 2017/1 – Goods and services tax: making cross-border supplies to Australian consumers

On 7 June 2017 the Commissioner of Taxation released Goods and Services Tax Ruling GSTR 2017/1 (GSTR 2017/1). This ruling is designed to assist taxpayers in determining whether they are making supplies to Australian consumers and as such, are making supplies that are ‘connected with Australia’. This is important in determining whether the taxpayer needs to account for GST on the supplies and whether the taxpayer needs to register for GST.

To achieve this, the ruling sets out:

• how you decide whether a recipient of a supply is an Australian consumer and
• what evidence you should have, or what steps you should take to collect evidence, in establishing if the supply is not made to an Australian consumer.

GSTR 2017/1 applies to taxpayers who are overseas-based suppliers making supplies of services, digital products or rights to Australian consumers that use or enjoy those supplies in Australia and applies in respect of for tax periods starting on or after 1 July 2017.

TR 2017/D5 – Income tax: employee remuneration trusts

On 8 June 2017 the Commissioner released Draft Taxation Ruling TR 2017/D5 (replacing TR 2014/D1). This draft ruling sets out the Commissioner’s provisional views on how the taxation laws apply to an employee remuneration trust (ERT) arrangement that operates outside of Division 83A of the Income Tax Assessment Act 1997, which deals with employee share schemes.

An ERT arrangement involves a trust being established to facilitate the provision of payments or other benefits to employees. The trustee provides the benefits at the direction of, or by arrangement with, the employer. This ruling applies to all Australian resident employers, employees and trustees who participate in an ERT arrangement.

TR 2017/D5 considers the taxation consequences of:

• making a contribution to an ERT and
• investing the contribution and providing benefits to employees from the ERT,

broadly considering issues such as, whether contributions to an ERT will be deductible in the hands of the employer or assessable in the hands of the employee, when contributions will be a fringe benefit and when a contribution is a deemed dividend to the trustee.

Where contributions are invested by the trustee and the benefits are provided to the employees, the ruling considers issues such as, how the benefits are assessed to the employee, whether or not an employee is entitled to tax offsets for franking credits, when loans and other benefits provided by a trustee are a fringe benefit, when a loan by a trustee is taken to be a deemed dividend and when a gain derived by the trustee is ordinary income.

When the final ruling is issued, it is proposed to apply both before and after its date of issue. However, it will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute that are agreed to before the date of issue of the ruling.

LCG 2017/D4 – GST on supplies made through electronic distribution platforms

The Commissioner of Taxation has released Draft Law Companion Guideline LCG 2017/D4 (LCG 2017/D4) for public comment. This LCG provides guidance on the how the Commissioner will apply the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Act 2016 (TSLA Act), which makes an electronic distribution platform (EDP) operator responsible for GST on supplies of digital products and digital services made through their platform. It also provides guidance on how the Commissioner will apply the Treasury Laws Amendment (GST Low Value Goods) Bill 2017 (TLA Bill) which seeks to extend these provisions to offshore supplies of low value goods, with some modifications.

LCG 2017/D4 broadly explains how GST will apply to supplies of digital products and services and low value goods made through an EDP from 1 July 2017 and in particular, explains the four steps of the EDP rules, being:

• whether a supply is made through an EDP
• whether a supply is subject to the EDP rules
• whether a supply is excluded from the EDP rules and
• if multiple EDPs are involved, which EDP operator is responsible for the GST.

If each of the four steps are satisfied, an EDP operator will be responsible for GST on a supply made through their platform and the merchant will not be responsible for GST.

When issued in final form, LCG 2017/D4 will apply in respect of:

• supplies of digital services and digital products, in working out net amounts for tax periods starting on or after 1 July 2017 and
• offshore supplies of low value goods, if the Treasury Laws Amendment (GST Low Value Goods) Bill 2017 is enacted as introduced, in working out net amounts for tax periods starting on or after 1 July 2017 and to taxable importations relating to supplies made on or after 1 July 2017.

LCG 2017/D5 – When is a redeliverer responsible for GST on a supply of low value imported goods?

On 8 June 2017 the Commissioner released Draft Law Companion Guideline LCG 2017/D5 (LCG 2017/D5) that discusses the amendments proposed by the Treasury Laws Amendment (GST Low Value Goods) Bill 2017 which make a ‘redeliverer’ responsible for GST on an offshore supply of low value goods.

LCG 2017/D5 clarifies who is a deliver, who is not a deliver, when a redeliverer is responsible for GST on an offshore supply of low value goods and who is responsible for GST when there are multiple redelivers of such supplies.

It is proposed that when LCG 2017/D5 is issued in final form, it will apply from 1 July 2017, if the Bill is enacted as introduced. If this occurs, the new law would apply in working out net amounts for tax periods starting on or after 1 July 2017 and to taxable importations relating to supplies made on or after 1 July 2017.

Legislation and government policy

Queensland Budget announcement

On 13 June 2017, the Queensland Government (Government) released their 2017-18 Budget. The following key announcements were made:

Surcharge for absentee payers of land tax

• The Government will introduce a 1.5% land tax surcharge on absentee land tax payers, as defined under the Land Tax Act 2010, if the value of their taxable land is $350,000 or higher, in addition to other land lax payable from 1 July 2017.
• The surcharge has no direct impact on Queensland residents.
• Unlike Victoria and New South Wales, the Government has currently not made any further changes to the Foreign Acquirers Transfer Duty Surcharge.

Extension of increased payroll tax rebate for apprentices and trainees

• The payroll tax rebate for apprentices and trainees will continue at the increased rate of 50% for an additional 12 months, until 30 June 2018. This rebate is in addition to their wages being exempt and will be used as an offset against payroll tax payable on the wages of other employees.

Changes to fees and charges escalation

• The Government has a policy in place that requires Government departments to regularly review their fees and charges to ensure that they remain appropriate and that the cost structure underlying the amount of the fee or charge remains accurate and efficient. As it is not economical for a detailed review to be conducted each year, Government departments will generally apply the Government’s indexation policy (Indexation Policy).
• In June 2012, the Indexation Policy became an annual indexation rate of 3.5% per annum, which did not reflect any specific cost index. The penalty unit indexation rate was also set at 3.5% to align with the ‘other fees and charges’ indexation rate. As part of the 2017-18 Budget, the Government has now decided to instead base the escalation of fees and charges and the penalty unit on the Consumer Price Index (CPI) from 2019-20. At the current CPI level, this would result in a lower fees and charges escalation rate from 2019-20.
• The Indexation Policy does not apply to intra and inter-departmental charges, fees and charges of an ad hoc nature, nationally agreed fees (eg. heavy vehicle registration) or where a specific indexation policy has been approved by the Cabinet Budget Review Committee.