Talking Tax-Issue 26

Case law

Administrative Appeals Tribunal upholds Commissioner’s amended assessments of company director who understated income

On 3 March 2015, the AAT in Zhang and Commissioner of Taxation (Taxation) [2016] AATA 117 has upheld the Commissioner’s assessments in relation to transactions between the taxpayer and various companies in the High Trade group.  The taxpayer is a director and the controlling mind of the companies in the High Trade group. The taxpayer objected to various amended assessments which was rejected by the Commissioner. The taxpayer then appealed to the Administrative Appeals Tribunal (AAT).

The transactions which were the subject of the appeal included:

• repayments of loans that the taxpayer made to companies in the High Trade group;
• expenses on the taxpayer’s credit card purported to be for expenses of the High Trade group;
• amounts received from the High Trade group claimed to be reimbursements for company expenses;
• repayments of loans that the taxpayer made to third parties; and
• personal loans to the taxpayer from two individuals.

The AAT was not satisfied with the taxpayer’s evidence and upheld the assessments for all but one transaction. The reasoning for the AAT’s decision was that the transactions were poorly documented by the taxpayer such that there was insufficient evidence to support the character of the amounts.

For example:

• the taxpayer asserts that he lent almost $4 million to the High Trade group however there was no documentation provided to the AAT to support that a loan of this amount was ever put in place;
• the AAT found a lack of documentation supporting the split between private and company expenses on the taxpayer’s credit card and therefore could not allow amounts to be deducted as work expenses.

This case highlights the importance of carefully documenting transactions and retaining sufficient evidence, particularly where there are transactions between related parties such as a company and its directors. If you have any questions or concerns about the level of documentation in place within your company, please contact one of our experienced tax lawyers.

ATO updates

ATO outlines corporate tax avoidance focus areas

In his ‘enough is enough’ speech to a Senate Estimates Committee last month, the Federal Commissioner of Taxation, Chris Jordan, sent a clear message to multinationals and large businesses who deliberately seek to avoid their tax obligations, stating that firm action would be taken against them (for further details, see Talking Tax Issue 23).

On 26 February 2016, the ATO updated its Building Confidence publication in line with the Commissioner’s speech to outline its focus areas this year in relation to corporate tax avoidance. These focus areas include:

• implementation of the Multinational Anti Avoidance Legislation (MAAL) and Base Erosion and Profit-Shifting (BEPS) action plan;
• e-commerce arrangements.
• thin capitalisation manipulation.
• related party financing; and
• offshore hubs.

Base Erosion and Profit Shifting announcement by OECD Secretary-General – international tax transparency reaches ‘unprecedented levels’

Last week in Shanghai, the OECD Secretary-General released a report to the G20 finance ministers broadly outlining the implementation of various Base Erosion and Profit Shifting (BEPS) measures.
The report notes the following:

• a number of countries, including Australia have already adopted legislative changes to implement a number of the BEPS measures, particularly with respect to hybrid mismatch legislation and Country-by-Country (CbC) Reporting;
• the European Union took a significant step towards implementing the BEPS package, with the announcement by the EU Commission of an Anti-Tax Avoidance Package, which is among other things, aimed predominantly at implementing a number of the BEPS measures across the Member States of the EU. The EU’s proposed directives would see the implementation of the CbC Reporting requirements for Multi-National Enterprises and measures focused on interest deductibility, hybrid mismatches and controlled foreign companies; and
• the inclusive framework for BEPS implementation has been agreed upon to allow all interested and committed countries to become on equal footing with the G20 and OECD countries on the BEPS standard setting and implementation monitoring.

The report also refers to the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) which is the leading multilateral body working on tax transparency. From 1 January 2016, financial institutions in 55 of the 131 Global Forum member countries began collecting information on non-resident account holders. The information will be exchanged automatically with treaty partners  beginning in 2017. The report indicates that around 90% of the 2017 reporting jurisdictions now have the key overarching elements of the legal framework in place. Australia’s first exchange of information will be in 2018.

On Wednesday 2 March 2016, two senior Treasury officers made a presentation at Hall & Wilcox and noted that Australia is being proactive in implementing the BEPS measures and is one of the countries leading the way in incorporating the measures into its legislation.

If you have any questions about the application of the various BEPS measures to you, please contact one of our experienced tax lawyers.

Legislation and government policy

Malcolm Turnbull confirms the government will make a tax reform announcement prior to the Budget

In response to pressure from the Labor party, on 28 February 2016 Malcolm Turnbull advised that the government will make an early announcement of its tax reforms in the lead up to the 10 May Federal Budget. The announcement is expected in early April, however, Mr Turnbull has emphasised that he will not be rushed to make changes to the tax system and that he prefers a careful approach to avoid being reckless.

The Turnbull government has also criticised Labor’s negative gearing and capital gains tax (CGT) proposals stating that they will distort the property market and disadvantage mum and dad investors with a particular negative impact to be felt in the rental market. After a discussion with former Prime Minister John Howard, Mr Turnbull emphasised the need to consider any changes to the negative gearing regime carefully noting that in the past when the regime has been amended, the changes needed to be reversed due to the adverse impact on the housing market. The government has emphasised it will not be increasing CGT (i.e. by reducing the CGT discount as proposed by Labor).

Senate passes amended Common Reporting Standard Bill

On 24 February 2016, the Senate passed the Tax Laws Amendment (Implementation of the Common Reporting Standard) Bill 2015 (Cth) with a number of amendments. The Bill was returned to the House of Representatives where the amendments were agreed to, and it now awaits Royal Assent.

Please refer to Talking Tax Issue 23 for details of the amendments made by the Bill.

Senate passes Small Business Rollover Bill

On 29 February 2016, the Senate passed the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (Cth) without amendment and it now awaits Royal Assent.

Please refer to Talking Tax Issue 23 for details of the amendments made by the Bill.

This article was written with the assistance of Tim Hutton, Law Graduate.