Talking Tax – Issue 138

Case law

Overseas services provided to Australians subject to Australian tax

In Satyam Computer Services Limited v FCT [2018] FCAFC 172, the Full Federal Court upheld a decision that payments received for services provided to Australian customers by Indian based employees of an Indian company are deemed to have an Australian source and are therefore assessable in Australia.  The Court held that this was not double taxation, even though the payments were also royalties under the Australia-Indian DTA (Indian Agreement).

By way of background, the Taxpayer was an Indian company which provided computer technology services. The Taxpayer also had offices in Australia. The services provided to Australian customers were performed partly by employees located in Australia and partly by employees located in India.

Litigation history

In Tech Mahindra Limited v FCT (2015) 101 ATR 755 (which was in relation to the same transaction), Justice Perry held that the payments received by the Taxpayer for the services provided by the employees located in India were “royalties” as defined in Article 12(3)(g) of the Indian Agreement and that Australia was given the right to tax those payments under Article 12(2) of that Agreement. That decision was upheld on appeal in Tech Mahindra Limited v FCT (2016) 103 ATR 813.

Perry J also held that the payments were deemed to have an Australian source by virtue of Article 23 of the Indian Agreement and section 4(2) of the International Tax Agreements Act 1953 and were therefore assessable as Australian sourced income under section 6-5(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997). It is that decision which was challenged in the Full Federal Court.

Full Federal Court

The Full Federal Court said that, as a matter of language, Article 23 operates to deem an item of income which one of the Contracting States has the right to tax to be from sources in that Contracting State for taxation purposes. As section 6-5(3)(a) of the ITAA 1997 is part of the law of Australia “relating to its tax”, the effect of Article 23 was that the payments in question were deemed to have an Australian source for the purposes of section 6-5(3)(a).

Therefore, the Indian company was taxable on the payments for services provided to Australian customers, performed by employees located in India as well as Australia. This case is relevant for non resident companies providing services for Australian customers and performing those services overseas, in a country that has a double tax treaty with Australia containing a deemed source article. It confirms the effect of that article, allowing Australia to tax that income.

When is a bare trust not a bare trust?

In MD Commercial Pty Ltd & AJ Commercial Pty Ltd v Commissioner of State Revenue [2018] VSC 550, the Victorian Supreme Court confirmed that certain transfers of land to trustees were not exempt from duty under section 35 of the Duties Act 2000 as the trustee was deemed not to be holding the subject property on bare trust for the beneficiaries given it had powers to deal with the subject property.

This case serves as a reminder of the difficulty of creating bare trust relationships and the importance of ensuring that the trustee in a bare trust has no active duties, or potential to perform active duties, in relation to trust property.

The mother of Anthony and Matthew Fox passed away in 2011 and as part of her estate, devised and bequeathed the subject land to her sons. The subject land was transferred as follows:

  • 50% interest to MD Commercial Pty Ltd as trustee of the M David Trust, with Matthew as the beneficiary; and
  • 50% interest to AJ Commercial Pty Ltd as trustee of the A James Trust, with Anthony as the beneficiary.

Effectively, the intention of the Trust Deeds was to hold the subject property on bare trust for the sons.

The Trust Deeds contained a number of similarly worded provisions concerning the powers of the trustee, including:

  • The Trustee is entitled to become registered as the proprietor of one half interest in the subject property;
  • The Trustee holds its interest in the subject property in trust for the beneficiaries and will transfer and deal with its interest in the subject property and any income and all other rights in such a manner as the beneficiaries may direct;
  • The Trustee is empowered at the direction of the beneficiary to hold, use purchase, construct, demolish, maintain, repair, renovate, reconstruct, develop, improve, sell, transfer, convey, surrender, let, lease, exchange, take and grant options or rights in relation to the subject property; and
  • The Trustee is empowered at the direction of the beneficiary to partition or agree to the partition of, or to subdivide or agree to the subdivision of any land or other property.

Taxpayers’ contentions

Section 35 of the Duties Act 2000 exempts transfers of dutiable property from duty broadly, where the transfer is made without any change in the beneficial ownership of the property. The Taxpayers contended that the section 35 exemption should apply as the land was transferred to the trustees to be held on bare trust for the beneficiaries.

Court finding

Justice Croft held in favour of the Commissioner, concluding that it cannot be said that the subject property was transferred to be held solely on bare trust without any changes in beneficial ownership of the property.

In reaching this conclusion, Justice Croft noted that the Trust Deeds empowered the trustee to do certain things with the subject property such as develop, subdivide and renovate, which is inconsistent with the definition of a bare trustee. Per Herdegen v Federal Commissioner of Taxation (1988) 20 ATR 24, a trustee should have no active duties to perform in a bare trust relationship.

In applying section 35 of the Duties Act 2000, the enquiry should focus on the trust deed and the powers of the trustee to potentially alter the beneficial ownership of the underlying property. Any contemplation in the trust deed of a change in beneficial ownership of the property would render section 35 inapplicable.

ATO updates

Failed attempt to claim over $1 million in GST refunds leads to lengthy jail sentence

On 11 October 2018, the ATO advised that Jeffrey Harrison was sentenced in the County Court of Victoria to four years and two months’ jail for more than $1 million of tax fraud committed while he was the director of a company. He was ordered to pay tax, interest and penalties of $884,469 to the ATO.

Mr Harrison’s company, Hey Man Transport Pty Ltd, was audited and the ATO uncovered more than $1 million of fraudulent GST refund claims between 2009 and 2015. In order to legitimately accrue more than $1 million in GST refunds, Mr Harrison would have had to spend a minimum of $11.9 million on goods or services needed to run his business. However, the company appeared to have no commercial business activity leading the court to find these claims to be fraudulent.

Tax Avoidance Taskforce tackling big players

On 9 October 2018, the ATO stated that the formation of the Tax Avoidance Taskforce has allowed for greater scrutiny of the tax affairs of multinationals, large corporations and wealthy individuals. This has helped net $5.6 billion in extra tax in just two years.

Deputy Commissioner Mark Konza said that the $679.9 million the Government provided the ATO for the Tax Avoidance Taskforce has allowed the ATO to significantly expand its compliance approaches. The funding means the ATO can focus on the top 1,000 multinational and public companies as well as the top 320 private groups and the high net wealth individuals who control them.

Other highlights of the Tax Avoidance Taskforce work in 2017-18 include:

  • Nearly $3 billion in liabilities raised against large public groups and multinational corporations and $1.8 billion in liabilities raised against wealthy individuals and private groups.
  • 68 audits covering 63 multinational corporations in progress.
  • 700 audits for wealthy individuals and associated groups in progress.
  • 44 taxpayers brought or bringing their Australian sourced sales back onshore in response to the multinational anti avoidance legislation resulting in an expected $7 billion per annum return to the Australian tax base.

Cleaning and courier services subject to tax reporting

The ATO updated its website to confirm that the taxable payments reporting system now includes cleaning and courier services. If a business provides cleaning and courier services, they need to lodge a Taxable payments annual report (TPAR) each year to inform the ATO about payments made to contractors. This is required even if cleaning or courier services are only part of the business activities.

The first TPAR will be due by 28 August 2019 for payments made from 1 July 2018 to 30 June 2019.

Businesses can prepare for their TPAR by making sure they keep records of the payments made to contractors for cleaning or courier services. Generally, the information that needs to be reported can be found on the invoices received from contractors, including the contractor’s:

  • ABN;
  • Name;
  • Address; and
  • Gross payment for the financial year (including GST).

Exemptions for non-business travel costs incurred in relation to residential rental properties

On 10 October 2018, the ATO released Law Companion Ruling LCR 2018/7 (Ruling) which provides guidance on the recently introduced amendments that limit the circumstances in which taxpayers can claim a deduction for travel costs incurred in relation to residential rental properties.

Section 26-31 of the Income Tax Assessment Act 1997 (ITAA 1997) was introduced in 2017 and operates to restrict the travel costs that are deductible to individuals, SMSFs, private trusts and partnerships. Specifically, section 26-31 will deny a deduction for travel where it is related to income derived from the use of a residential premises as residential accommodation. A deduction is not denied under section 26-31 for travel expenditure necessarily incurred in carrying on a business.

The Ruling provides guidance on the meaning of key terms in section 26-31 and on apportioning travel expenses that serve mixed income-producing purposes. It applies to losses or outgoings incurred from 1 July 2017.

The ATO’s view is that this exclusion covers taxpayers carrying on a business of property investment or a business of providing retirement living, aged care, student accommodation or property management services. The ATO adds that it is harder for individuals to demonstrate they are carrying on a business of property investment than it is for companies and the receipt of income by an individual from the letting of property to tenants will not typically amount to the carrying on of a business as such activities are generally considered a form of investment rather than a business.

If a single outlay of travel expenditure is incurred partly for producing rental income and partly for other income-producing purposes, such as business or employment, the ATO expects the taxpayer to make a fair and reasonable assessment of the extent to which the amount relates to each purpose.

Under section 26-31 of the ITAA 1997, losses or outgoings incurred to the extent that it is related to travel, if it is incurred to gain or produce assessable income from certain uses of residential premises as residential accommodation, cannot be deducted. However, this does not apply where the losses or outgoings are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Residential premises

The term takes its meaning from A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to mean land or a building that is occupied as a residence or for residential accommodation or is intended to be occupied and is capable of being occupied, as a residence.

To be a residential premises, the premises must be fit for human habitation. This means it must feature shelter and basic living facilities. This is an objective consideration of the circumstances.

Carrying on a business of property investing

This is a question of fact which requires the consideration of factors which are no different from the indicators as to whether activities of a non-primary production nature in any other area constitute the carrying on of a business. The Ruling specifically lists the following factors the Commissioner may consider in determining whether an individual carries on a business:

  • Whether the activities have a significant commercial purpose or character;
  • The existence of a profit-making purpose and a prospect of profit;
  • The complexity and magnitude of the undertaking;
  • Whether the activities involve a degree of repetition and regularity;
  • The size and scale of activities;
  • Whether the activities are systematic and organised; and
  • The amount of time, effort and capital employed.

Travel expenditure that serves more than one purpose

An apportionment is required when one incurs a travel-related loss or outgoing in gaining or producing income from the use of residential premises as residential accommodation, and also in gaining or producing other assessable income. Taxpayers are expected to make an assessment of the extent to which the expense is related to producing rental income and other income producing purposes. In making this apportionment, factors that can be taken into account may include floor-area ratio, rental income and travel time spent attending to each purpose.

Guidance on GST tax for inbound tour operators

On 10 October 2018, the ATO issued Practical Compliance Guideline PCG 2018/6 which provides guidance to inbound tour operators on the circumstances in which compliance resources will not be applied to determine whether the inbound tour operator is acting as an agent for GST purposes. Where an inbound tour operator supplies a tour in Australia to a non-resident client and is acting as an agent, any commission charged will be GST-free to the extent that it relates to those agency services.

Inbound tour operators can rely on PCG 2018/6 and expect the ATO not to examine whether it is acting as an agent where the following conditions are satisfied:

  • The inbound tour operator has a written agreement with non-residents which authorises the agent to book products on their behalf;
  • Any agreements with an Australian Product Provider, such as a hotel, must acknowledge that the agent has the authority to act for non-residents, rights under the agreement are enforceable by the non-residents, and that the Australian Product Provider is aware of the identity of the non-residents through the booking process;
  • Non-residents must be aware of the commission paid to agents or expressly allow agents to retain the difference between a purchase price and the amount that can be negotiated with the relevant Australian Product Provider, as a commission or fee;
  • Any fees charged to non-residents for cancellations must not exceed the sum of the agent’s commission or fee and the costs incurred in processing the cancellation; and
  • Agents must maintain the capacity to provide non-residents details of the transactions entered into on their behalf.

Legislation and government policy

Government fast-tracks tax concessions to small businesses

On 11 October 2018, the Government announced that it intends to introduce legislation during the next session of Parliament to fast-track business tax relief for small and medium-sized businesses five years earlier than planned.

The changes mean businesses with a turnover below $50 million will face a tax rate of just 25% in 2021-22 rather than from 2026-27, as currently legislated.

This means that a small business that makes a $500,000 profit will have an additional $7,500 in 2020-21 and $12,500 in 2021-22. Below is a table provided by the Government of the existing tax rate compared with the proposed fast-tracked tax rates.

18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27
Existing rate 27.5% 27.5% 27.5% 27.5% 27.5% 27.5% 27% 26% 25%
Fast-tracked 27.5% 27.5% 26% 25% 25% 25% 25% 25% 25%

WA Duties Bill awaits assent

The Duties Amendment (Additional Duty for Foreign Persons) Bill 2018 (Bill) has been passed by the WA Legislative Council and is awaiting assent. The Bill amends the Duties Act 2008 to impose additional transfer duty or landholder duty on transactions arising from direct or indirect acquisitions of residential property.

Broadly, residential property excludes retirement villages, aged care facilities and commercial residential premises. The Bill also entitles taxpayers to refunds of the surcharge for certain acquisitions of residential development where construction or subdivision commences within five years of completion of the purchase.

The Bill will subject foreign buyers of residential property in Western Australia to a foreign buyers surcharge of 7% starting from 1 January 2019. The Bill implements a measure announced in the WA 2018/19 Budget which increased the previously proposed rate of 4% to 7% to bring the rate in line with New South Wales, Victoria, South Australia and Queensland, all of which levy surcharges at 7% or 8%.

Greater guidance for foreign purchasers

On 11 October 2018, the Victorian Government revised the Foreign Purchaser Additional Duty exemption guidelines to include examples of how build-to-rent developments may qualify for the exemption.

The exemption is intended to apply to foreign corporations or trusts that are Australian based and whose activities in developing or re-developing property add to the supply of housing stock in Victoria. The effect of an exemption is that the foreign corporation or foreign trust, in which the person has a controlling or substantial interest, will not have to pay the additional duty.

A foreign purchaser may be subject to additional duty where it is transferred an interest in residential property on or after 1 July 2015. Additional duty may also apply where a foreign purchaser is nominated to take a transfer of an interest in residential property, the nomination is executed on or after 1 July 2015 (even if the contract of sale was entered into before 1 July 2015) and it triggers a sub-sale event.

A sub-sale event will be triggered where a person is nominated to take a transfer under an off-the-plan contract. In this case, land transfer duty is generally only charged on the transfer to the nominated person. Therefore, additional duty applies where a foreign purchaser is nominated on or after 1 July 2015 to take a transfer of residential property under an off-the-plan contract.

Where there is no sub-sale event, the transaction is considered to have been entered into on the date of the contract and not the date of the nomination. In this case, additional duty will not apply in respect of a nomination made in respect of a contract entered into before 1 July 2015.

Calculating additional duty

The additional duty is calculated on the dutiable value of the foreign purchaser’s share of the residential property.  This is the greater of the price paid and the market value of the property/land prior to any land transfer duty concessions being applied.

Exemption from additional duty

Foreign corporations and foreign trusts may be eligible for an exemption from additional duty. The intention of the exemption is to benefit Australian based corporations or trusts who are developing or re-developing property that adds to the supply of housing stock in Victoria.

If a foreign purchaser is entitled to the exemption, the foreign corporation or foreign trust in which the foreign person has a controlling or substantial interest, will not have to pay the additional duty.

This article was written with the assistance of David Peng, Law Graduate.


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