Talking Tax – Issue 105

Cases

To rule or not to rule: In this instance, Commissioner entitled to say no to private ruling request

On 23 November 2017, the Federal Court of Australia in Commissioner of Taxation v Hacon Pty Ltd [2017] FCAFC 181 overturned the initial decision of Justice Logan. The Court allowed the Commissioner’s appeal finding that he was entitled to decline to rule on a Taxpayer’s application to make a private ruling. This case sheds light on the Commissioner’s discretion to not issue a private ruling in circumstances where a Taxpayer’s application for a ruling requires the Commissioner to make assumptions.

For our notes on the Federal Court Decision of Justice Logan at first instance, please see Talking Tax Issue 82. In that decision, Justice Logan ruled that the Commissioner had unlawfully declined to make a private ruling on the basis that section 357-105 of Sch 1 of the Tax Administration Act 1953 (Cth) (TAA) imposed an ‘imperative obligation’ on the Commissioner to request the information considered necessary to make a private ruling before the Commissioner could decline to make such a ruling.

On appeal to the Full Federal Court, the Commissioner argued that section 357-110(1)(a) in Sch 1 of the TAA allowed the Commissioner to decline to make a ruling should the Commissioner believe that correctness of the ruling “would depend on which assumptions were made about a future event or other matter.” In support of this argument, the Commissioner pointed to several factual matters in this case.

The Court noted that, if the absence of a particular piece of information prevents the ruling being made and the giving of that information would enable such a ruling, then the Commissioner has an obligation under section 357-105 in Sch 1 of the TAA to request that information. However, the Court agreed with the Commissioner that the obligation to require an applicant to give information does not arise where the correctness of a ruling depends on assumptions about a future event or other matters. Furthermore, the court found that section 357-110(1) of the TAA does confer on the Commissioner a discretion to either decline to make a ruling or to make such assumptions as the Commissioner considers necessary.

As an aside, the Court made it clear that an applicant should not be deprived of a ruling by the Commissioner classifying a particular piece of necessarily required information as an assumption so as to fall within the ambit of section 357-110(1) of the TAA.

Domain name payments characterised as income

On 31 October 2017, the Administrative Appeals Tribunal (Tribunal) in VPRX and Commissioner of Taxation [2017] AATA 2156 affirmed the Commissioner’s decision to issue default assessments against the Taxpayer on the basis that certain payments received as part of the sale of a domain name were income and not payments of capital. The Tribunal’s findings demonstrate the Commissioner’s ability to identify and rely on information from Australian Transaction Reports and Analysis Centre (AUSTRAC), the inability of Taxpayers to argue penalties are excessive due to their own failure to keep and provide documentation to support their claims and the importance of submitting objections that include all potential grounds. The Taxpayer was the owner of a domain name and website that generated revenue through Google Advertising. In 2009, the Taxpayer entered into a sale agreement with HGM (an organisation based in the USA) under which the Taxpayer sold the domain name. Additionally, HGM entered into a revenue share agreement (RSA) with HGM for an initial payment in 2009 followed by a series of earn-out payments (contingent on the revenue earned post sale).

The RSA and an email from HGM referred to an additional payment of $250,000 (as payment to buy out the ongoing revenue share obligation) (Buyout Payment).

The Commissioner issued assessments and penalties for the 2010 and 2012 financial years based on the AUSTRAC record of payments, as the Taxpayer did not file a tax return for these years.

The Commissioner relied on AUSTRAC evidence to demonstrate that a series of payments from HGM to the Taxpayer were made (forming part of an earn-out). Whilst there was no evidence of receipt of the Buyout Payment, the Commissioner relied on an email from HGM that referred to the Taxpayer’s entitlement to such payment and the RSA.

The Taxpayer submitted that the payments received in the 2010 financial year were part payment of the sale price and were capital in nature and not income. Further, the Taxpayer explained that the sale was structured in this way because HGM was not prepared to pay a fixed amount in the wake of the global financial crisis. The Taxpayer conceded that payments it received in the 2012 financial year comprised taxable income but challenged the penalty assessment for that year.

The Commissioner accepted that the initial payment made on 9 July 2009 might have constituted a capital payment, but maintained that all subsequent payments should be treated as income.

Evidence of the sale agreement was limited to emails referencing the agreement, as all other relevant documents had been lost. The Tribunal found that all payments that the Taxpayer received from HGM in the 2010 tax year were received pursuant to the RSA, and were revenue or income payments, not payments of capital.

In reaching this finding, the Tribunal affirmed the assessments and penalties issued by the Commissioner.

On the issue of penalties, the Tribunal rejected the applicants claim that penalties are excessive or harsh. Specifically, the Tribunal considered the fact that the Taxpayer was unable to produce the documentation to support his claim was not a justification for a concession.

Further, the Tribunal found that it was too late to raise an entitlement to claim business expenses as the issue was not raised in the taxation objection

Get to know your trees if you want to be eligible for primary production land tax exemption

On 20 November 2017, the New South Wales Civil and Administrative Tribunal (Tribunal) in Teebee Holdings Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 338 found that the owner of a parcel of land partly used for tree cultivation was ineligible for the primary production land tax exemption under section 10AA of the Land Tax Management Act 1965 (LTMA). The case sheds light on the high evidentiary burden imposed on Taxpayers, when litigating matters to prove they satisfy the exemption across a number of years.

The Land

The relevant land comprised 72 hectares on the far north coast of New South Wales. The land was assessed for land tax for the 2013 to 2016 land tax years, and the Taxpayer objected on the basis that the land was used for tree farming and that this use was the dominant use of the land during the relevant tax years.

Section 10AA of the LTMA

In order to be eligible for the primary production exemption under s 10AA of the LTMA, the land must have been:

• rural land, the dominant use of which was for cultivation or
• not rural land, the dominant use of which was for cultivation, in circumstances where the use of the land had a ‘significant and substantial commercial purpose or character’ and was ‘engaged in for the purpose of profit on a continuous or repetitive basis’.

Rural land

The Tribunal found that the land was not rural land as it was not solely zoned as ‘rural’, but was instead within three different zones (rural landscape, environmental conservation and general residential). Further to this finding, the Tribunal rejected the Taxpayer’s submission that despite the mixed zoning, the land should be treated as rural land due to its character.

Thereafter, the Tribunal considered whether the ‘dominant use’ and ‘commerciality’ tests apply to permit the exemption.

Dominant use

Before the Taxpayer purchased the land, the previous owner had planted trees on part of the land.

The Taxpayer had not counted the trees, or planted any further trees since purchasing the land.

The Tribunal commented that the Taxpayer appeared to know very little about the trees.

The Tribunal weighed the facts regarding the competing uses and non-uses of the land and found that the dominant use test failed for cultivation on the basis that:

• only 9 of the 72 hectares was used for growing trees
• in 2016 only 598 trees could be counted
• the land was largely unused
• there was insufficient evidence that the purpose of growing trees was for their sale.

It was not relevant that the Taxpayer had lodged a development application over part of the land, as only the present physical use of the land was under consideration.

Commercial purpose or character

The Tribunal listed a number of factors to be considered when deciding whether the tree-farming had a commercial character, including (but not limited to):

• the intensity of the operation
• the number of trees, their quality and species and
• the resources committed to the operation.

The Tribunal found that the Taxpayer failed the commerciality test. There was little evidence to support that the Taxpayer had knowledge of the value of the trees and there was no business plan in place for the use of the trees, save for an uncertain and unenforceable agreement for the potential purchase of the trees by a development company in the future.

Legislative Updates

BEPS: OECD Hybrid Mismatch Rules Draft Legislation Released

On Friday 24 November 2017, the Federal Government released draft legislation seeking to implement the OECD’s Hybrid Mismatch Rules which are aimed at eliminating double non-taxation benefits from hybrid mismatch arrangements that exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions.

On the same day, Commonwealth Treasurer Scott Morrison MP announced in a media release that the draft legislation reaffirms the Government’s stance on targeting multinational tax avoidance.

Submissions in relation to the draft legislation are due by Friday 22 December 2017. Should you wish to engage with the consultation process, please contact Rachel Law.

State Taxes Update - NT

Revenue Discussion Paper

The Northern Territory Government has released a Revenue Discussion Paper for comment, as it prepares for a $2 billion loss of GST revenue over the next four years. In releasing the discussion paper, the Northern Territory Government has acknowledged the importance of a robust, efficient and stable revenue base for the Northern Territory.

Other updates

No clearance certificates being issued over Christmas period

As the ATO will be closed over the Christmas period they will not be issuing clearance certificates in respect of the foreign resident CGT withholding rules between 22 December 2017 and 2 January 2018. 

The foreign resident CGT withholding rules require anyone who is transferring certain property valued at $750,000 or more to obtain a clearance certificate from the ATO to confirm that they are an Australian resident. If the vendor/transferor does not have a clearance certificate by settlement, the purchaser will need to withhold 12.5% of the purchase price and remit this to the ATO and the vendor will not receive the full amount of the sale price. If the purchaser does not withhold, they will pay the ATO a penalty worth 12.5% of the market value of the property.

If you are an Australian resident intending to transfer a property worth more than $750,000 over the Christmas period, we recommend that you apply for a clearance certificate as soon as possible so that you do not have to withhold tax on the sale.

This article was written with the assistance of Rebecca McMullin, Law Graduate and Charlie Renney, Seasonal Clerk.