Talking Tax – Issue 143

Double the value - employee share schemes

The Federal Government has announced plans to double the employee share schemes (ESS) value limit for eligible financial products, from $5,000 to $10,000 per employee within a 12 month period. By doubling this cap, the Government intends to help employers attract, retain and motivate employees and grow their businesses.

However, taxpayers will still need to consider the ordinary tax rules that apply to ESS arrangements. Currently, where the ESS tax deferred scheme conditions are satisfied, an employee taxpayer can defer taxation of an ESS interest acquired at a discount and avoid upfront tax on the discount component.

The proposed reforms will also:

• create an exemption for disclosure, licensing, advertising and on-sale obligations under the Corporations Act 2001;
• expand ESS to include contribution plans, enabling employees to pay to acquire eligible financial products; and
• permit small businesses to offer ESS without publicly disclosing commercially sensitive financial information (unless otherwise required to do so).

These changes follow reforms in 2015, which created an ESS tax concession for eligible start-ups.

While it is not yet known when the changes will take effect, they are a welcomed introduction given they should operate to reduce the compliance costs in establishing an ESS.

The former wife of Panama Papers executive refused a stay of proceedings in $14 million income tax sting

In DCT v Doyle [2018] NSWSC 1704, the Supreme Court of NSW has refused a stay of proceedings brought by the Commissioner to recover $14 million in income tax, penalties and interest from Ms Doyle (Taxpayer) in respect of default assessments for the years 2008 to 2016.

There are key lessons to be taken from this case, including the following:

• Early and proactive engagement during a dispute with the Commissioner is vital. If possible, and where appropriate, information that will assist a taxpayer’s position should be provided to the ATO prior to the issue of default or amended assessments.
• Where a default assessment is issued, the onus is on the taxpayer to show that the assessment is excessive, and it will not be enough to merely show that there has been an error in making the assessment.

The default assessments issued to the Taxpayer pursuant to section 167 of the Income Tax Assessment Act 1936 arose following a covert audit that began in July 2016. The audit related to offshore accounts held by the Taxpayer, as well as her alleged failure to declare income from overseas sources.

While it was accepted that the default assessments may well be revised in light of information provided by the Taxpayer following the issue of the default assessments, the Court was not convinced that the assessments would necessarily be reduced, or by how much.

As such, the Court was not satisfied that the Taxpayer had established that the default assessments were excessive, and refused to grant a stay of recovery proceedings pending the determination of the Taxpayer’s objections to the default assessments. Relevantly, the Court noted that:

It was accepted, in accordance with these principles, that the power to grant a stay ought be exercised sparingly, having regard to the clear legislative policy in provisions such as ss 14ZZM and 14ZZR of the TAA which give priority to the recovery of taxation revenue notwithstanding that objections made by taxpayers have not yet been determined…

The Full Court in Gashi v Federal Commissioner of Taxation also referred to Ma v Federal Commissioner of Taxation (1992) 37 FCR 225 at 230 where Burchett J identified a number of steps which would be involved in a taxpayer discharging the onus of proving that an assessment under s 167 of the ITAA 1936 is excessive: identifying sources of income; explaining a taxpayer's activities; and explaining the source or sources of a taxpayer's assets…

Further, the Court did not regard the entry of judgement itself as creating any particular hardship for the Taxpayer.

Federal Court emphasises the significance of terms of deeds between ATO and taxpayers

While providing little in the form of technical tax guidance, the case of Caratti v FCT [2018] FCA 1691 is a reminder of the importance of meeting the terms of agreements reached with the Commissioner.

In this case, two taxpayers entered into a deed with the Commissioner whereby it was (among other things) agreed that the Commissioner would forbear from taking recovery action provided that security in the form of mortgages over specified property was provided within 30 days of the agreement.

The taxpayer failed to provide the required security, but nevertheless claimed that:

…equitable principles as to relief against forfeiture or unconscionability apply in a manner that should excuse them from the consequences of any failure to meet the terms of the agreement within the time specified. They contend that they have now met the requirements of the agreement concerning the provision of the security and, on that basis, relief should be granted recognising that the Commissioner is bound to forbear…

...an alternative claim to the effect that they remain entitled to perform the agreement by providing 'sufficient security' in the future. They say that the Commissioner has not terminated the agreement and it remains on foot.

Among other things, the court found that there was no unconscionability as it has not been shown that there was conduct on the part of the Commissioner that in some significant respect caused or contributed to the breach of the essential time stipulation.

This case demonstrates that the Commissioner will if pressed, cease negotiations with taxpayers and rely on the terms of any agreement reached as well as legislative powers to ensure the recovery of tax liabilities.

The dispute between the taxpayers and the Commissioner was also discussed in Talking Tax Issue 120.