Talking Tax – Issue 107

Case law

Commissioner of Taxation v Miley [2017] FCA 1396

This AAT case concerned whether the Taxpayer satisfied the $6m maximum net asset value (MNAV) test in section 152-15 of the ITAA 1997. The Taxpayer was one of 3 equal shareholders in a private company, who entered into an agreement to sell their shares to an arm’s length purchaser for a total of $17.7m. Each shareholder received $5.9m. The Taxpayer claimed the general 50% discount as well as a 50% reduction under the small business CGT concessions.

The AAT initially found that the market value of the Taxpayer’s shares should be reduced by 16.7% to $4.9m on the basis of a ‘relative lack of control’ that the purchaser of the Taxpayer’s parcel of shares would have. Therefore, the Taxpayer satisfied the MNAV test. However, the Federal Court found that the AAT erred by ignoring or disregarding the fact that each of the three shareholders in the company, including Taxpayer, were willing to sell their shares to a single purchaser, for $17.7m, and that purchaser was willing to purchase the shares at a price higher than the price that other purchasers would have been prepared to pay if they were only purchasing a minority shareholding.

The case highlights the importance of ‘market value’ in these types of transactions where the small business concessions are relied on. Where the asset has been the subject of a recent arm’s length sale, it is generally unnecessary to hypothesise on market value. It is what a willing and knowledgeable, but not anxious purchaser, would pay a willing and knowledgeable, but not anxious vendor. In this case, there was no question of what was being valued. They were clearly identifiable shares, sold pursuant to a share sale agreement, and all shares were sold contemporaneously. Therefore, where there is no special circumstance, there is no reason to apply a discount for lack of control.

ATO updates

Unit trust arrangements and unpaid present entitlements

The ATO has expressed concern about a number of arrangements involving one or both of unpaid present entitlements and unit trusts.

Specifically, the ATO has stated that it has identified cases where a private group seeks to extinguish unpaid present entitlements (UPEs) or avoid obligations under Division 7A of the ITAA 1997 by implementing an arrangement where a private company subscribes for units in a unit trust.

Various tax consequences may arise for parties who have entered into these schemes, including under:

• Division 7A ITAA 1936 – which may apply where a private company is a corporate beneficiary of a trust and is made presently entitled to income of the trust, but does not receive payment of the distribution
• Section 100A of the ITAA 1936 – which covers ‘reimbursement agreements’ where a party is presently entitled to trust income in circumstances where both
  • someone other than the presently entitled beneficiary actually benefits from that income and
  • at least one party enters into the agreement for purposes that include getting a tax benefit – for example, the beneficiary who was made presently entitled to the trust income pays a lower amount of tax than would have been payable by the person who actually enjoyed the economic benefits of that income
• Part IVA of the ITAA 1936 – namely, the general anti-avoidance rules which may apply to schemes entered into for the sole or dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme.

While the exact nature of the schemes identified by the ATO may vary, the ATO has indicated that activities that will attract their attention include the following:

• private companies including assessable trust distributions in their assessable income, but not receiving payment of the distribution from the trust before the earlier of either the due date for lodgement of their tax return, or the date of lodgment of the trust’s tax return for the year in which the loan was made
• complying loan agreements not being put in place
• a failure to put funds on a sub-trust for the sole benefit of the private company beneficiary
• a failure to repay loans or sub-trust investments at the conclusion of the term specified in the original agreement
• arrangements purporting to extinguish the UPE of the private company beneficiary and
• non-lodgment of returns and activity statements.

The ATO has stated that parties who have entered into, or are considering implementing, such an arrangement contact the ATO Aggressive Tax Planning hotline. Ostensibly, this suggests that the ATO may be seeking to identify promoters of the schemes that they have identified.

2017/D10 Income Tax: Trust Vesting – amending the vesting date and consequences of a trust vesting

Just a short note on this Draft Ruling, as comments to the ATO closed on 16 February. To read our full article on the Draft Ruling, please click here.

In this Draft Ruling, the ATO considers three key points:

• Prior to the vesting date, a trustee may extend the vesting date either by a power under the trust or by Court application. The rule against perpetuities still applies to limit the extension to the perpetuity period provided under statute. This means a period not exceeding 80 years for most states (excluding South Australia).
• Once the vesting date has passed, the trust has vested and extending the trust is not possible. Even if all parties continue to treat the trust as being in existence, for tax purposes, the trust property has become fixed.

Practically, it is recommended that planning for the vesting of a trust begins a number of years prior to the vesting date, and that appropriate legal and accounting advice is obtained. If a trustee is operating without looking at the trust deed, and not knowing whether a resolution it is making is in accordance with the deed, it could be constitute recklessness’ for penalty purposes.

Legislation and government policy

Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018

In December 2016, the Black Economy Taskforce was established to develop a policy framework involving new proposals to tackle black economy activity.

In the 2017-18 Budget, the Government responded to an Interim Report from the Black Economy Taskforce and announced a number of measures to address the growing economic and social problem of the black economy.

An exposure draft was released on 23 October 2017, and on 7 February 2018, the Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018 (Bill) was introduced into the House of Representatives.

Schedule 1 to the Bill creates a new offence which aims to prohibit the production, manufacture, distribution, sale, use and possession of electronic sales suppression tools; effectively targeting each stage of the supply chain of electronic sales suppression tools.

Broadly, these are tools which are:

• capable of ‘falsifying, manipulating, hiding, obfuscating, destroying, or preventing the creation’ of records that an entity is required to keep or make under a taxation law (ie in electronic record keeping systems) and
• a reasonable person must be able to conclude that one of the tool’s ‘principal functions’ is to ‘falsify, manipulate, hide, obfuscate, destroy, or prevent’ the creation of such records.

The offences created by the Bill are strict liability offences, with significant penalties which can reach up to 5,000 penalty units (or $1,050,000).

Schedule 2 to the Bill extends the Taxable Payments Reporting system obligations to the courier and cleaning industries, which were identified by the Black Economy Taskforce as high risk sectors. Specifically, the Bill requires entities providing courier or cleaning services that have an ABN to report to the ATO information about transactions where they have engaged other entities to undertake those courier or cleaning services for them.

The terms ‘courier’ and ‘cleaning’ are not defined in the Bill, and are intended to take their ordinary meaning. Administrative penalties will apply where entities fail to give the Commissioner of Taxation a valid report in accordance with the Taxable Payments Reporting system.

The Bill confirms the Governments ongoing objective to restrict the avenues for people participating in the black economy.

Treasury Laws Amendment (Tax 3 Transparency) Bill 2018: Transparency 4 of taxation debts

The Government has released draft legislation that will authorise the ATO to disclose business tax debts to registered credit reporting bureaus (CRBs) where the businesses have not effectively engaged with the ATO to manage their debt.

To be the type of ‘entity’ which the Minister for Revenue and Financial Services may disclose information, the business must meet the following criteria:

• are registered in the Australian Business Register
• have a tax debt, of which at least $10,000 is overdue for more than 90 days
• are not excluded entities
• are not effectively engaging to manage their tax debt and
• the Commissioner of Taxation has taken reasonable steps to confirm that the Inspector-General does not have an active complaint from the entity that is, or could be, the subject of an investigation by the Inspector-General of Taxation relating to the Commissioner’s intention to disclose the tax debt information of the entity.

There is provision for ‘excluded entities’ which fall outside the class of entities that can have their tax debt information disclosed to CRBs. Some excluded entities include deductible gift recipients, not-for-profit entities, government entities and complying superannuation funds.

Feedback on the consultation paper closed on 9 February 2018.