Talking Tax – Issue 114

Case law

The Harman Obligation and the requirement to produce documents under a Tax audit

In DCT v Rennie Produce (Aust) Pty Ltd (in liq) [2018] FCAFC 38, the Federal Court considered the constraints on the Commissioner of Taxation’s (Commissioner) power in section 353-10(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to require a person to produce documents.

The First Respondent (Company) was a company in liquidation and the Second Respondent (Director) was a director of the Company. The Director was being audited by the Commissioner. The Commissioner issued a notice pursuant to section 353-10(1)(c) of the ITAA 1997 to the Company in relation to the audit.

The Commissioner’s power in section 353-10(1)(c) allows him to require a person to produce documents in their custody/control and provide them to the Commissioner for the purpose of the administration or operation of the taxation law.

The Company had the relevant documents but had obtained them by summons and thought it was constrained in providing those documents to the Commissioner on the basis of the decision in Harman v Secretary of State of the Home Department [1983] 1 AC 280 (Harman Obligation). Broadly, the Harman Obligation is where by reason of a rule or order of a court, a party to litigation is compelled to disclose documents/information, the party receiving the documents cannot use it for a purpose other than that for which it was given, without leave of the court.

Instead of providing the relevant documents to the Commissioner, the Company provided them to the Australian Government Solicitor and said they were prevented from being provided to the Commissioner without leave of the court.

The issue for the Court was whether the Harman Obligation constrains the section 353-10(1)(c) power.

The Court held that the Harman Obligation does not:

• prevent a person from complying with a valid section 353-10(1)(c) notice or
• prevent taxation officers from using the documents obtained under a valid section 353-10(1)(c) notice for lawfully exercising the Commissioner’s powers.

Specifically, the Court said that complying with the section 353-10(1)(c) notice was not ‘a use of the documents’ by the Company (which is prevented as part of the Harman Obligation). Rather, the Company is complying with a requirement to provide documents to the Commissioner, failure of which is an offence.

For a duty exemption on a distribution of trust property, the transfer needs to be to the beneficiary directly and not part of a sale or other arrangement

In Fagridas v Commissioner of State Revenue [2018] VSC 145, the Supreme Court of Victoria refused leave for the taxpayers to appeal against a Victorian Civil and Administrative Appeals Tribunal (VCAT) decision in relation to a stamp duty assessment on a transfer of land from the trustee of a discretionary trust to beneficiaries.

The trustee defaulted under the terms of a mortgage it gave over the land. By exercising the statutory power of sale, the mortgagee sold the land for $1.9 million. Pursuant to a nomination clause, the named purchaser under the contract of sale nominated the beneficiaries of the discretionary trust as purchasers under the contract. The beneficiaries, as nominated purchasers, paid the consideration under the contract, the mortgagee transferred the land to the beneficiaries, and the transfer to them was registered with the mortgage having been discharged.

The beneficiaries paid stamp duty on the transaction as assessed by the Commissioner of State Revenue (Commissioner).

However, having done so, the beneficiaries objected to the assessment on the following grounds:

• The beneficiaries claimed that what had occurred was simply that the trustee distributed an asset of the trust to them directly, independently of any sale for which there had been consideration paid. They maintained, in effect, the payment of $1.9 million to the mortgagee was merely a refinancing of the trustee’s mortgage and
• The transfer of land was exempt from duty under section 36A of the Duties Act 2000 (Vic) (Duties Act) as an in-specie distribution from the trustee to beneficiaries of a discretionary trust.

The Commissioner reviewed the facts and determined that the beneficiaries did not receive the land in their capacity as beneficiaries of the trust, rather the land was transferred to the beneficiaries in their capacity as nominated purchasers under a contract of sale. Under section 36A of the Duties Act, the Commissioner also needs to be satisfied that the transfer is not part of a sale or other arrangement under which there exists any consideration for the transfer. The Commissioner held that this requirement had not been satisfied as the beneficiaries purchased the land from the mortgagee for $1.9 million. VCAT upheld the Commissioner’s decision to deny the exemption from duty.

The Supreme Court of Victoria refused leave to appeal against the VCAT decision as the appeal is confined to a question of law and the beneficiaries had not outlined any grounds in the proposed notice of appeal that established any proper basis for challenging VCAT’s decision.

ATO updates

Huge fine for Queensland company promoting R&D tax schemes

The Australian Taxation Office (ATO) announced on its website that the Federal Court ordered a Queensland company to pay a $4.25 million penalty to the ATO for its promotion of tax exploitation schemes. Specifically, the company’s conduct involved encouraging clients to lodge overstated or ineligible claims for refundable Research & Development (R&D) tax offsets and, in the Court’s opinion, breached the promoter penalty laws in relation to 10 separate schemes.

ATO focus on holiday home deductions

The ATO has published a warning to taxpayers, stating that it is setting its sights on false or mistaken deductions claimed in respect of holiday homes that are not actually available for rent, or are only available to friends and family.

The ATO reminds taxpayers that while private use by family and friends of a holiday home is entirely legitimate, it reduces your ability to earn income from the property which reduces your available deductions. Where a taxpayer’s claimed deductions are disproportionate to the income received from the property, this is likely to trigger ATO investigation activity.

In addition to holiday houses, the ATO is focusing on other properties that are not rented or genuinely available for rent. Factors that will be taken into consideration in determining whether a property is genuinely available for rent include unreasonable conditions placed on prospective renters, rental rates set above market rates and failing to advertise the property in a way that targets people who would be interested in it.

This announcement serves as a timely reminder to taxpayers and their advisors of the need to maintain sufficient records. While the primary focus should be on keeping records of expenses, income and the efforts taken to rent a property, taxpayers should also keep accurate records of the times that the property is used personally by the taxpayer or their family and friends.

Junior Minerals Exploration Incentive Participation – forms and instructions available online

The ATO has uploaded forms and instructions for entities wishing to participate in the Junior Minerals Exploration Incentive (JMEI).

Broadly, the JMEI will enable eligible companies to create and issue tax credits by giving up a portion of their tax losses from greenfield mineral exploration expenditure, which can then be distributed to eligible shareholders.

The ATO website provides forms that may be completed online and printed. It is noted that regard must be had to lodgement time periods (which depend on the income year to which the lodgement applies).

Legislation and government policy

New Bill with integrity measures to strengthen compliance with taxation and superannuation guarantee obligations

The Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 (Bill) was introduced to Parliament on 28 March 2018 and is currently awaiting passage through the House of Representatives. Schedules 1 to 7 of the Bill provide for amendments to the Administration Act, ADJR, ITAA 1936, ITAA 1997 and Superannuation (Unclaimed Money and Lost Members) Act 1999 to implement certain integrity measures to strengthen compliance with taxation and superannuation guarantee obligations.

The amendments are intended to:

• allow the Commissioner to issue employers with directions to pay unpaid superannuation guarantee and undertake superannuation guarantee education courses in cases, where they fail to comply with their superannuation guarantee obligations
• strengthen the integrity of the director penalty provisions for directors who fail to comply with their superannuation guarantee charge and PAYG withholding obligations;
• enhance compliance with the requirement to provide security through the use of Court orders
• facilitate more regular reporting by superannuation funds
• allow the Commissioner to disclose more information about superannuation guarantee non-compliance to affected employees
• extend Single Touch Payroll reporting to all employers and
• streamline employee commencement processes.

Schedule 7 of the Bill enables the sharing and verification of tax file numbers between the Commissioner and other Commonwealth agencies, where they have been collected for a specific purpose in accordance with a Commonwealth law. This will allow for stronger cross-checking of information between agencies, allowing them to flag potential compliance issues.

A number of other miscellaneous changes have been made to various taxation laws, including minor technical changes and corrections, consequential amendments arising from the above changes and the listing of certain entities in the ITAA 1997 as Deductible Gift Recipients.