Talking Tax – Issue 123

Case law

NSW Payroll Tax: appeal dismissed in Cessnock Tyres P/L v CCSR [2018] NSWCATAP 147

In Cessnock Tyres, the appeal panel of the NSW Civil and Administrative Tribunal (Tribunal) refused leave to appeal the Tribunal’s decision at first instance in respect of a decision by the Chief Commissioner of State Revenue (Commissioner) regarding the de-grouping of companies within the O’Neills Tyres group under section 79 (Exclusion of persons from groups) of the Payroll Tax Act 2007 (NSW) (PTA).

In order to be de-grouped (in accordance with section 79(2) of the PTA), the taxpayer must show that the relevant business or businesses are carried on independently of and without connection to any other business in the group, having regard to the nature and degree of ownership and control of the businesses, the nature of the businesses, and any other relevant matters.

The taxpayer’s group consisted of three separate entities founded by Mr O’Neill (Senior) in the 1950s, namely, Cessnock Truck Tyre Centre Pty Ltd, O’Neill Tyres Gateshead Pty Ltd and Bayrond Pty Ltd.

The taxpayer sought leave to appeal a decision of Senior Member R Hamilton at first instance on the ground of an error of law. However, the appeal panel took the view that there was no error of law in the approach taken by the Tribunal at first instance as the Tribunal referred to the factors of ownership, potential control and the intragroup loans in assessing the factors for de-grouping.

Taxpayers should be mindful of the two factors which had substantial weight in the matter at first instance, leading to the conclusion that the O’Neills Tyres businesses did not exist independently for the purposes of payroll tax, and consequently should not be de-grouped. These factors were:

• Public representation: the separate businesses were of a similar nature and were held out to the public via the website and advertising as being a ‘group’ of companies; and
• Intragroup loans: existed between the businesses that were of a considerable size and frequency, and additionally did not appear to be on commercial terms as they were not interest-bearing, nor did they appear to be properly documented.

For payroll tax purposes, this emphasises the need for taxpayers to be diligent in all aspects of business operations to ensure that all factors are considered in addition to public appearance and intragroup loans.

Queensland Land Tax: Harrison v Commissioner of State Revenue [2018] QCATA 075

In this appeal, the issue for consideration by the Queensland Civil and Administrative Tribunal (Tribunal) was whether the Tribunal at first instance was correct in concluding that the taxpayer is the owner in his own right of each the three properties (which had been aggregated under a land tax assessment) or whether the taxpayer was the trustee in respect of each property for his individual adult children and therefore ought not be assessed on an aggregated basis.

An agreement existed which involved the taxpayer personally purchasing a property near his own home for each of his three children subject to certain obligations. Each child would live with their own families in the house purchased for them and pay a reasonable rent to the taxpayer in order to compensate for the costs of the mortgage over each house, and the taxpayer would in turn make a bequest of each house to the relevant child.

In 2013 and 2014, the taxpayer became the registered owner of three Brisbane properties and was duly assessed by the Commissioner on the aggregate value of the properties as the owner under the Land Tax Act 2010 (Qld) (LTA).

At first instance the Tribunal found in favour of the Commissioner and upheld the assessments. On appeal, it was determined that the Tribunal erred in concluding that there was no evidence of a constructive trust.

The Tribunal (on appeal) determined that the taxpayer was the trustee for each of the properties under a constructive trust either by way of proprietary estoppel or common intention, and should therefore be separately assessed under section 20 of the LTA. In light of the circumstances, the Tribunal ruled that there was sufficient evidence to justify a finding that a constructive trust existed, and therefore the taxpayer was entitled to be separately assessed.

If seeking to hold real property on trust for another, be sure to unequivocally establish the trust and lodge the respective documentation with the Revenue Office. Otherwise, pursuing ownership challenges at law will involve additional costs to the land tax levied on the aggregation of properties.

Company residency: the central management and control test following Bywater

Following the High Court of Australia’s (HCA) decision in Bywater Investments Limited & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45 (Bywater), the ATO has released the following guidance:

• Taxation Ruling TR 2018/5  Income Tax: central management and control test of residency TR 2018/5 (TR 2018/5)
• Draft Practical Compliance Guideline PCG 2018/D3 Income tax: central management and control test of residency: identifying where a company’s central management and control is located (PCG 2018/D3)
• Ruling Compendium TR 2018/5 (TR 2018/SEC)

These publications emphasise the increasing importance of reviewing whether foreign-incorporated companies are residents for Australian tax purposes.

By way of background, in Bywater, which was discussed in detail in Talking Tax Issue 59, the HCA held that the residency test used in determining a company’s liability to income tax under section 6(1)(b) of the Income Tax Assessment Act 1936 (Cth) should be undertaken by considering the actual central management and control of the taxpayer company as a matter of fact, rather than by merely looking at the formal decision making powers of the company. The HCA was clear that company directors will not have ‘central management and control’ of a company if they are acting merely as a ‘rubber stamp’ for another person, who exercises the true control and decision making power.  Further, the mere fact that a person has legal authority to manage and control a business will not be conclusive evidence that they actually do exercise these powers.  Conversely, a person without legal authority may nonetheless have central management and control of a business for the purposes of the test, even if that person is an outsider with no formal role at the company.

TR 2018/5

TR 2018/5 sets out the Commissioner’s view on how to apply the central management and control test for residency, in light of the Bywater decision. Broadly, residency will turn on whether a company:

1. carries on business in Australia and
2. has its central management and control in Australia.

TR 2018/5 discusses the following four matters that are relevant in determining whether the above criteria are met:

1. whether the company carries on business in Australia
2. the meaning of central management and control
3. the party/entity that exercises central management and control and
4. the location of where central management and control is exercised

TR 2018/5 applies from 15 March 2017, however, there is a grand fathering of the former Ruling until six months after the release of the TR 2018/5, and therefore the true commencement date is likely to be 21 December 2018.

TR 2018/SEC

TR 2018/SEC contains responses that were raised in consultation with respect to draft Taxation Ruling TR 2017/D2 Income tax: Foreign Incorporated Companies: Central Management and Control test of residency. It is useful to read the issues raised and the action taken in respect of these, as it adds meaning and intention when interpreting specific guidance provided by the Commissioner (such as various additional guidance provided in PCG 2018/D3).

PCG 2018/D3

PCG 2018/D3 contains practical guidance to assist foreign incorporated companies and their advisors to apply the principles set out in TR 2018/5 and, in particular, provides commentary in respect of the following matters:

• establishing where a company’s central management and control is located (relevant evidence)
• identifying high-level decision making (and the relevance of a company’s activities)
• distinguishing the real decision maker from a person who is merely influential
• decision making within a corporate group
• exercising central management and control vs day-to-day management of a company’s operations
• considering where decisions are made in more than one place and
• the ATO’s approach to transitional matters.

Draft Practical Compliance Guideline issued for Part IVA of the ITAA36 and restructures of hybrid mismatch arrangements

Following the implementation of the hybrid mismatch rules, the ATO has released Draft Practical Compliance Guideline PCG 2018/D4: Part IVA of the Income Tax Assessment Act 1936 and restructures of hybrid mismatch arrangements (PCG 2018/D4).

PCG 2018/D4 sets out the ATO’s compliance approach with respect to certain types of restructures that have the effect of preserving Australian tax benefits that would otherwise be disallowed with the enactment of the hybrid mismatch rules. Further, it is intended to assist taxpayers in managing their compliance risks with respect to the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth)(Part IVA) in circumstances relating to hybrid tax outcomes.

The hybrid mismatch rules were introduced to implement the recommendations of the Organisation for Economic Cooperation and Development (OECD) and are aimed at deterring the use of certain hybrid arrangements that exploit differences in the tax treatment of an entity or financial instrument where the income tax laws of two or more countries create a situation in which double non-taxation or long-term deferral of tax is possible.

Broadly, the rules operate to eliminate benefits from mismatch tax outcomes where a restructure results in the preservation of a tax benefit in one jurisdiction. For example, if the tax benefit in Australia takes the form of a deduction, the corresponding income in the foreign jurisdiction would be expected to be assessable in the other country

To provide guidance for taxpayers, PCG 2018/D4 outlines a number of restructuring scenarios to illustrate the types of arrangements that would be considered low risk with respect to the anti-avoidance provisions in Part IVA, as well as a number of scenarios that would be considered higher risk.

The PCG 2018/D4 is open for public consultation until 20 July 2018.

If you have questions about how the PCG 2018/D4 or the hybrid mismatch rules might apply to you or your client, please don’t hesitate to contact Rachel Law.

Push to reduce red tape and regulation around registered charities

Incorporated associations that are also registered charities with the Australian Charities and Not-for-profits Commission (ACNC) will benefit from the removal of the double reporting currently required.  At present, charities are required to lodge an annual statement with Consumer Affairs Victoria (CAV) as well as an Annual Information Statement with the ACNC, both of which broadly cover the same information.

From 1 July 2018, incorporated associations registered with the ACNC will no longer be required to pay an annual fee to CAV, nor lodge an annual statement. Instead, they will simply submit their ACNC Annual Information Statement each year, and the relevant information will be automatically shared with CAV on the charity’s behalf, by the ACNC. Incorporated associations will still need to notify CAV of any changes such as name, details or rules.  For the 2018 financial year, the charity will still need to submit separate annual statements to the ACNC and CAV.

In signing on, Victoria joins South Australia, Tasmania and the ACT in their efforts to streamline reporting arrangements for charities, with more states and territories expected to follow suit in the coming year.

This change is intended to minimise the administrative burden on charities involved in reporting to multiple agencies.

Wine equalisation tax: Decision Impact Statement for Divas Beverages Holdings

On 18 June 2018, the ATO released a Decision Impact Statement (DIS) in relation to the Federal Court decision in Divas Beverages Holdings Pty Ltd v Commissioner of Taxation [2018] FCA 576 (DBH).  In DBH, the Court determined that one of the taxpayer’s products (made with Grape Concentrate VKAT) was ‘grape wine’ whilst the other product (made with Liquid Sugar VKAT) was not a ‘grape wine product’  for the purposes of subsection 31-1 of A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act). One of the main distinctions between the two products was the fact that the grape wine product was derived solely from fresh grapes.

Under the DIS, the Commissioner of Taxation accepted the Court’s decision and noted that advice regarding ‘Clear or characterless grape-based products’ (QC 46919) has been withdrawn.

The taxpayer sought approval to acquire duty-free spirits to manufacture two alcoholic products (VKAT and VKAT Raspberry) using two alternative production methods.  The two alternative production methods arise as a result of the second stage of the production process, being:

1. where low sugar juice is blended with Liquid Sugar VKAT or
2. where low sugar juice is blended with Grape Concentrate VKAT.

In DBH, the Court found that:

• the test of whether a product is ‘wine’ requires consideration of the finished product only, and not to the liquid as it exists during the final stages of production
• the statutory definition of grape wine:
  • does not impose requirements relating to the appearance, state or other characteristics of the final product;
  • centres around whether the beverage is produced from the fermentation of fresh grapes or from products derived solely from fresh grapes
• following amendments to the WET Act, there is no residual operation of the ‘essential character’ test in relation to determining whether a beverage is grape wine.
• the application of processes that are commonplace in winemaking do not prevent finished product from being product of fermentation of fresh grapes or products derived solely from fresh grapes
• Liquid Sugar VKAT is not grape wine as the liquid sugar is not derived from grapes and it does contain at least 700 millitres of grape wine per litre
• Grape Concentrate VKAT is grape wine as:
  • low sugar juice and grape concentrate are products derived solely from fresh grapes and
  • application of post fermentation processes that are common wine making techniques, do not result (merely due to the application of those processes) on the Grape Concentrate VKAT falling outside the concept of ‘grape wine’.

Legislation and government policy

Government releases an Exposure Draft Bill proposing technical amendments to the AMIT regime

On 18 June 2018, the Federal Government released an Exposure Draft (ED) for the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018.  The ED contains a number of technical amendments to the Attribution Managed Investment Trusts (AMIT) regime which are designed to address the various teething issues that have been raised in respect of the operation of the regime

The ED proposes the following changes to the AMIT regime:

• AMIT eligibility - MITs with a single unitholder will be eligible as an AMIT if the only member is a specified widely-held entity.
• Calculating rounding adjustments – in calculating rounding adjustments and trustee shortfall tax for the character of discount capital gains, both the determined trust component and the determined member component will be calculated on the discounted amount.
• Net amount of adjustments to give rise to CGT event E10 - where a member of an AMIT receives non-assessable distributions from the AMIT and the cost base of the membership interest cannot be reduced to nil (as it was already nil), the net amount of adjustments will give rise to a capital gain under CGT event E10.
• CGT amounts included in non-assessable payments – where capital gains that have been applied against capital losses, these will be included in the amount of non-assessable payments.
• Fund payments to include capital losses from non-taxable Australian property – in calculating a fund payment of a MIT or AMIT, capital losses from non-taxable Australian property which have been applied against capital gains from taxable Australian property will be added back.
• TFN withholding rules – amounts which have already been subject to TFN withholding will not be subject to the TFN withholding rules for AMITs.
• Franking credits for former public trading trusts and corporate unit trusts - former public trading trusts and corporate unit trusts will now be permitted to distribute franking credits to beneficiaries until 30 June 2018, provided that the distribution is paid out of income derived on or before 1 July 2016.
• Election into the AMIT regime for MITs with substituted accounting periods – MITs with substituted accounting periods will now be able to elect into the AMIT regime for the 2016-17 income year and later income years.

Submissions in respect of the ED are required by 16 July 2018. Should you wish to make a submission, please contact us.

Income tax legislation modifying tax brackets has passed the Senate in its entirety

On Thursday 21 June 2018, the Senate approved and passed the entirety of the changes (in the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 (Cth), which received Royal Assent the same day) to personal income tax brackets proposed by the Federal Government in the 2018-19 Budget introduced by Treasurer the Hon. Scott Morrison on 8 May 2018.  Broadly, the changes:

1. Introduce the low and middle income tax offset to reduce tax payable by low and middle income earners in the 2018-19, 2019-20, 2020-21 and 2021-22 income years.
2. Merge the low and middle income tax offset and LITO (which is the offset under section 159 of the Income Tax Assessment Act 1936 (Cth)) into a more generous new low income tax offset.
3. Amend the income tax rate thresholds to progressively income the income tax rate thresholds in 2018-19, 2022-23 and 2024-25.

New South Wales State Budget

The 2018/19 NSW Budget was handed down by the Treasurer the Hon. Dominic Perrottet MP on Tuesday 19 June 2018 (NSW Budget).

On 19 June 2018, the Treasurer introduced the State Revenue Legislation Amendment Bill 2018 (NSW) (The Bill) for the purpose of effecting the state taxation changes outlined in the Budget.

The Bill proposes to amend the Payroll Tax Act 2007 (NSW) to progressively lift the payroll tax threshold amount from the current level of $750,000 to $1 million by the 2021-22 financial year. Specifically, the threshold is due to increase each year for the next four years as follows:

• From 1 July 2018: $850,000
• From 1 July 2019: $900,000
• From 1 July 2020: $950,000 and
• From 1 July 2021: $1 million.

The NSW Budget also proposes to introduce a Point of Consumption Tax (PoCT) from 1 January 2019, to impose a PoCT at the rate of 10% on wagering operators above the $1 million tax free threshold.  The tax will apply to all bets placed in NSW or by NSW residents, including those placed online and over the phone, based on the location of the customer (instead of the location of the wagering operator).

Please refer to Talking Tax - Issue 122 which outlined the various PoCTs for wagering and betting operators currently in existence in other states and those which have recently been introduced.

Tasmanian State Budget

The 2018/19 Tasmanian Budget was handed down by the Treasurer the Hon. Peter Gutwein MP on 14 June 2018, whereby key proposals include delivering $100 million of the new $125 million Stage 2 Affordable Housing strategy to assist people into homes and deliver 1,500 affordable homes to families in need and delivering tax incentives to support jobs.

As part of the Budget, the Treasurer introduced the Taxation Related Legislation (Housing Availability and Payroll Relief) Bill 2018 (Tas) into Parliament for the purpose of amending state revenue legislation.

The key changes are outlined below:

Three year land tax exemption for new long-term rentals

A three year land tax exemption for all newly-built housing made available for long-term rental.  This measure is aimed specifically at encouraging the construction of more long-term rental accommodation.

To be eligible for the land tax exemption a property must:

• be general land
• be a new dwelling that has not been previously occupied
• have an Occupancy Permit issued between 8 February 2018 and 7 February 2021
• be rented for a minimum residential lease term of 12 months or, where the property is in between tenants, be untenanted for no more than six weeks each financial year and
• be rented out entirely.

If the criteria are met and the taxpayer has applied for the exemption, the land tax exemption will be provided the following financial year once the Commissioner has approved the taxpayer’s application. We note that the exemption ceases if the land is sold, and land tax will be payable for the entire financial year during which it was sold.

Land tax exemption for short-stay accommodation offered to long-term tenants

A one-year land tax exemption will be made available for land subject to a long-term residential tenancy agreement within the Greater Hobart Area, if the land was used or advertised for use as short-stay accommodation in the 3 months preceding the commencement of the long-term rental.  This measure will be subject to eligibility criteria and the approval of an application made by the taxpayer to the Commissioner and, similar to the land tax exemption for newly built properties, will be provided in the form of a land tax exemption in the following financial year.  The exemption will be available between 15 March 2018 and 14 March 2019.

50% reduction in duties for first-home buyers of established dwellings

The Government has proposed a 50% duty concession for first home buyers purchasing an established home with a dutiable value which does not exceed $400,000.  The concession, which will apply retrospectively from the date of the Government’s announcement on 7 February 2018, will be available where the transfer or settlement occurs during the 12 month period from the date of announcement until 6 February 2019. The Commissioner must therefore refund any duty paid in relation to eligible purchases after 7 February 2018.

However, the concession will not apply the concession to:

• vacant land purchased with the intention to build
• newly-constructed homes
• spec homes or
• owner-builder homes.

First Home Owner Grant extended

As announced on 20 May 2018, the $20,000 First Home Owner Grant for newly constructed homes will be extended by one year from 1 July 2018.  The grant of $20,000 for eligible first home buyers who enter an eligible transaction for the purchase of a newly constructed home or construction of a new home will be extended from 1 July 2018 to 30 June 2019 inclusive.

50% reduction in duties for seniors downsizing their homes

This Bill amends the Duties Act 2001 to provide a 50% duty concession on the purchase of a property at a lower cost than their current principal place of residence for eligible pensioners who are looking to downsize their home or unit. The concession will be available for the purchase of an eligible home if a pensioner’s existing home is sold and settled within the 12 months from 10 February 2018, and again will be implemented by providing a concessional rate of duty, subject to eligibility criteria, to ensure that the concession targets the intended taxpayers.

Key eligibility criteria include:

• the purchased home having a dutiable value which does not exceed $400,000
• the purchased home costing less than the dutiable value of the existing home upon sale and
• the sale of the existing home occurring within six months before or after the purchase of the downsized home.

It is proposed that this measure should help seniors to downsize - freeing up larger, family-style housing for growing families and allowing pensioners to move to homes which suit their lifestyles that require less maintenance.

Foreign Investor Duty Surcharge

The Foreign Investor Duty Surcharge imposes an additional duty of:

• 3% on residential property which is acquired by a foreign person; and
• 5% on primary production property which is acquired by a foreign person.

The surcharge will commence on 1 July 2018.

Payroll tax bracket

For taxable wages between $1.25 million and $2.0 million per annum, the rate of payroll tax will be reduced to 4% through the introduction of a new tax bracket.  For taxable wages above $2 million per annum, the previous rate of 6.1% will apply.  The changes will take effect from 1 July 2018.

Payroll tax exemption

A three year payroll tax exemption will apply for mainland businesses that relocate to Tasmania between 1 July 2018 and 30 June 2021 and establish their operations in a regional area.

Extension of the payroll tax rebate scheme

The payroll tax rebate scheme for apprentices and trainees in targeted areas of skills shortage will be extended.  Businesses that employ apprentices and trainees from 1 July 2019 will be eligible for a two year rebate of the payroll tax paid for those eligible apprentices and trainees employed in the areas of building and construction, tourism and hospitality, and manufacturing.

Queensland Revenue Legislation Amendment Bill 2018 has passed

This Bill, which introduced the changes proposed in the 2018/19 Queensland State Budget discussed in Talking Tax Issue 122 was passed on 15 June 2018 and assented to on 21 June 2018.  Broadly, the Bill increases the additional foreign acquirer duties, prescribes new rates of land tax, and extends the payroll tax rebate for wages paid to apprentices and trainees.