Talking Tax – Issue 132

Case law

Whether steps made to inquire about land tax constitutes ‘reasonable care’ in complying with the legal obligation to pay land tax

In Marks & Anor v Commissioner for ACT Revenue (Administrative Review) [2018] ACAT 84, the Tribunal considered whether a penalty tax of 50% for failure to pay land tax rates was reasonable. Mr Marks (Applicant) failed to pay land tax on one of his rented properties but made enquiries to both his real estate agent and the office of the Commissioner for ACT Revenue (Commissioner) about whether land tax had been paid.

Under section 31 of the Taxation Administration Act 1999 (TAA), the amount of penalty payable in relation to tax default is 25% of the amount of unpaid tax. However, if the Commissioner is satisfied that the tax default is caused by a failure of the taxpayer to take reasonable care to fulfil obligations under the law, then a default rate of 50% applies.

The Tribunal articulated the test under section 31 of the TAA, stating that whether an applicant takes ‘reasonable care’ to fulfil obligations under the law is a factual enquiry. The individual taxpayer’s circumstances, knowledge, experience, education and skill must be considered in deciding whether the taxpayer made a reasonable and serious attempt to comply with the law.

The Tribunal ultimately held that the Applicant had taken reasonable care as he made numerous attempts to establish whether land tax had been paid through contacting his agent and the Commissioner’s office.

By way of background, the Applicant owned another property that was rented and had notified the Commissioner of that fact. When the subject property was purchased, the Applicant wrote to the Commissioner advising him that an agent was managing the property and to send the Rates and Land Tax Notices to the Agent’s office.

The Applicant noticed an absence of land tax payments on his properties and wrote to the agent about this and made enquiries with the Commissioner’s office. A disbursement of $3,247.75 was sent to the Applicant for rates and land tax payable for the Applicant’s other property and a statement of receipts and disbursements for the subject property was also sent to the Applicant by the agent. This statement included $2,500 for “rates and Land Tax”. The Applicant thought this meant that $2,500 was paid for land tax but conceded to the Tribunal that this, in fact, indicates a source of funds to come from the subject property to pay the land tax for the Applicant’s other property. In 2017, the Commissioner issued a notice to the Applicant imposing a penalty tax.

The Commissioner’s submissions

The Commissioner imposed a 50% tax penalty rate as he was satisfied that the Applicant’s failure to pay land tax was caused by his failure to take reasonable care to fulfil obligations under the law.

The legal test

According to section 31 of the TAA, the amount of penalty payable in relation to tax default is 25% of the amount of unpaid tax. However, if the Commissioner is satisfied that the tax default is caused by a failure by the taxpayer to take reasonable care to fulfil obligations under the law, then the default rate is 50%.

For the Commissioner to be ‘satisfied’ requires the Commissioner to be convinced or confident to a practical standard. ‘Reasonable care’ requires a factual consideration which does not require perfection or success, rather, a reasonable and serious attempt to comply with the law, having regard to a person’s circumstances, knowledge, education, experience and skill.

Application to the facts

The Tribunal held that the Commissioner should not have been satisfied that the failure to pay land tax was caused by the applicant’s failure to take reasonable care. In reaching this conclusion, the Tribunal considered the fact that the Applicant made enquiries by email and telephone to his agent and the Commissioner’s office about the land tax. This suggested that the Applicant knew about his obligation to pay land tax and had made efforts to discharge this obligation.

Can an organisation be considered a charity while pursuing a separate, non-charitable purpose?

In Australian Pork Limited v Commissioner for ACT Revenue (Administrative Review) [2018] ACAT 85, the Tribunal considered Australian Pork Limited’s (Australian Pork) objection to the Commissioner for ACT Revenue’s (the Commissioner) decision to decline to make a ‘Beneficial Organisation Determination’ in Australian Pork’s favour for payroll tax purposes.

Australian Pork Limited sought to be granted a payroll tax exemption based on section 6 of the Payroll Tax Act 2007 which exempts certain wages from taxation if they are paid or payable by a charitable organisation.

The dispute centred around the test contained in Part 3A of the Taxation Administration Act 1999 (TAA) for determining whether a particular organisation’s predominant purpose is charitable and whether Australian Pork is a charitable organisation under this definition.

Australian Pork contended that their primary purpose is to benefit the community and the commercial advantages derived for members of the pork industry is an independent purpose which can be simultaneously pursued alongside their primary, charitable purpose.

Ultimately, the Tribunal held that the test in Part 3A of the TAA is restrictive. The predominant purpose of Australian Pork is to advance and promote the pork industry and any benefits and activities derived from this purpose primarily flow to participants in the pork industry. Any benefits to the wider community are incidental to this primary purpose.

Australian Pork’s submissions on factual indicators of charitable purposes

Australian Pork submitted that their key strategic objectives are to grow consumer appeal for pork products, and to negotiate trade protocols with markets where Australian pork is not currently sold. However, their primary objective benefits the wider community as their aims revolve around increasing sustainability, reducing biosecurity risks and investment in digital agricultural incentives. They also develop education resources for the Australian Schools Curriculum and raise public awareness of sustainable farming and the pork industry. All these factors point to the broader aim of servicing the community.

The Commissioner’s submissions

The Commissioner submitted that Australian Pork’s primary goal is to advance and promote the Australian Pork industry. It ensures the pork industry revenues are as high as possible, industry costs are low and risks to industry participants are minimised. All key results and key performance indicators focus on industry performance, not the impact on the wider community.

Legal test

For Australian Pork to qualify for a Beneficial Organisation Determination under Part 3A of the TAA, the Commissioner must be satisfied that:

• its predominant purpose is to advance religion, advance education, relieve poverty or otherwise benefit the community;
• the objects and activities of the organisation that make the organisation non-charitable are not significant in relation to the purpose of the organisation considered as a whole; and
• the purpose of the organisation is not beneficial to a particular class of people rather than the whole community.

Tribunal’s decision

The Tribunal found that Australian Pork’s primary purpose is to advance and promote the Australian Pork Industry. The Tribunal considered Australian Pork’s allocation of expenditure, finding a significant amount directed to promoting and advocating for the Australian Pork industry. This was relevant to the Tribunal’s finding that the predominant purpose of Australian Pork was to derive a benefit for a class of people who are pork producers, with any benefit to the community as secondary.

Heavy penalties for unsubstantiated and inconsistent transactions in an input tax credits claim

In Mango Reef Pty Ltd and FCT [2018] AATA 3091, the AAT rejected a taxpayer’s claim for input tax credits for the purported purchase of approximately 145kg of gold as there was insufficient evidence to substantiate the alleged transactions. This case serves as a reminder that claims for input tax credits must be supported by well-documented transactions and that any inconsistencies can carry heavy penalties.

The taxpayer claimed that certain transactions took place but was unable to substantiate the transactions. The AAT were not satisfied that the alleged transactions took place given the lack of evidence and the lack of credibility of the witnesses. Further, certain documents contained errors, omissions and inconsistencies. In addition to rejecting the claim for input tax credits, the AAT decided to impose a 75% penalty for intentional disregard of the law.

By way of background, the taxpayer claimed that in May and June 2014 it purchased, in 16 transactions, a total of approximately 145kg of gold from another company. The transactions allegedly took place in Sydney at the airport carpark, in hotels or at the taxpayer’s office. In each case, the gold was allegedly transported to Melbourne to be refined by a third company.

The taxpayer claimed input tax credits totalling almost $621,000. However, the ATO issued amended GST assessments rejecting the claim for input tax credits, alleging that the transactions never took place.

ATO incorrectly groups taxpayer’s business activities when taxpayer had not opted to do so

In McGlinn v Commissioner of Taxation [2018] FCA 1275, the Federal Court set aside an ATO decision in a non-commercial loss matter and referred it back to the ATO for re-determination. The court found that the ATO incorrectly focussed on whether the taxpayer’s business activities were of a similar kind when the taxpayer had not opted to group the activities for the purposes of non-commercial loss.

The taxpayer submitted that the ATO should exercise its discretion under section 235-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA) to allow certain business losses to be deducted due to the fact the taxpayer had started a new and distinct business activity. The Court held that the ATO should not have considered whether the taxpayer’s business activities were of a similar kind as the taxpayer had not opted to group the activities. Because the ATO’s error was one which could have affected the determination of the taxpayer’s case, the Court decided to return the matter to the ATO for re-determination.

By way of background, in 1998, the taxpayer commenced a business of breeding Australian bloodline Arabian horses. As the business was not successful, in the 2007-08 income year, she switched to breeding horses from overseas bloodlines. For the 2011-12 income year, the business made a tax loss and the taxpayer applied the loss against her other assessable income. The ATO applied the non-commercial loss rules in Division 35 of the ITAA to defer the loss.

The taxpayer submitted that switching to breeding horses from overseas bloodlines as opposed to Australian bloodlines constituted a new and distinct business activity which would become profitable within a commercially viable period. As such, the taxpayer submitted that the ATO should exercise its discretion under sections 235-55 (1)(c) of the ITAA to allow the loss to be deducted in 2011-12. The ATO contended that breeding horses using overseas stallions was not a new business activity; rather, the business had evolved with a new focus.

ATO updates

Updates to the Top 1,000 Tax Performance Program

On 31 August 2018, the ATO released updated guidance on the operation of the Top 1,000 Tax Performance Program (the Program). The Program aims to obtain additional evidence to achieve greater assurance that the largest 1,000 public and multinational companies are reporting the right amount of income tax.

Under this program, specialist tax performance teams engage with each taxpayer using tailored compliance approaches to ensure they are reporting the correct amount of income tax, or identify areas of tax risk for further action.

Who is covered by the Program?

The Program covers public and multinational companies, focusing on the income tax dealings of taxpayers with over $250 million turnover.

Tailored compliance approach

The ATO obtains assurance or identifies areas of tax risk by engaging with the taxpayer through a four-month streamlined assurance review. The taxpayer will be notified beforehand and provided a short amount of time to consider whether to make a voluntary disclosure of any tax concerns.

Legislation and government policy

New tax rate for car expenses

On 31 August 2018, the ATO announced the rate for work-related car expenses has increased for the income year starting 1 July 2018 to 68 cents per kilometre.

This means employers paying employees a car allowance in excess of 68 cents per kilometre need to withhold tax on the amount paid over 68 cents.

Increased support for farmers

On 29 August 2018, the Farm Household Support (Farm Assets Value Limit) Minister’s Rules 2018 (Rules) were registered. The Rules temporarily increase the asset threshold to qualify for Farm Household Allowance (FHA) from $2.635 million to $5 million until 30 June 2019.

The Rules make payable up to two additional supplements to the regular FHA payments between 1 September 2018 and 1 June 2019.

FHA is a Government payment for farming families in financial hardship. To calculate FHA, the Department of Human Services compares the farmer’s estimated and actual business income. It reconciles the business income at the end of each financial year. The Department compares various tax returns and financial records submitted by the farmer to work out the right amount of FHA for that year.