Talking Tax – Issue 29

Case law

Consolidated group: The allocable cost of rolled over pre-CGT assets determined at joining time

The Full Federal Court has overturned the Federal Court’s decision in Financial Synergy Holdings Pty Ltd v FCT [2015] FCA 53. By way of background, the Taxpayer is the head company of a consolidated group with effect from 1 July 2007. In July 1985, it agreed to conduct its business as trustee for a soon to be created unit trust. This unit trust is considered a pre-CGT asset and in June 2007 it became a member of the consolidated group under a CGT rollover, which preserved the pre-CGT status of the units. The Taxpayer was required to calculate the ‘allocable cost amount’ for the unit trust, by calculating the cost base of the units it acquired.

This dispute hinged on the court’s interpretation of ‘the time of acquisition’ of these units. The Commissioner was successful in the first instance, in arguing that the time for determining the market value cost base was the deemed pre-CGT acquisition date ie. before 20 September 1985. The Trial Judge assigned a value of $1.5 million to the business, that was deemed to be acquired at this date.

The Full Federal Court unanimously allowed the Taxpayer’s appeal. They held that the ‘time of acquisition’ for the purpose of section 110-25(2) is the date of actual acquisition of the units by the Taxpayer in June 2007. This decision is significant as it increased the cost base of the units from $1.5 million to $30 million; which was the market value of the shares provided in consideration for the units in June 2007.

MNAV test: Commissioner appeals decision in re Miley and FCT

The Commissioner has appealed to the Federal Court against the decision in Re Miley and FCT [2016] AATA 73. In this case, the AAT considered the ‘market value’ of shares in a private company sold in an arm’s length transaction, in the context of the ‘maximum net asset value test’ used for the purpose of qualifying for the CGT small business concessions.

The Taxpayer only held one third of the company’s shares, and 100% of the company’s shares were sold to a single purchaser. The AAT stated that the purchase price was relevant but merely indicative of the value of the shares. The Taxpayer argued for applying the market valuation principles in the case of Spencer v Cth, whereby his valuer applied a 16.7% discount to the consideration received for the shares, reflecting that his one-third interest meant that he did not have a controlling interest in the company.

The AAT agreed with this method of valuation, finding that the market value of the Taxpayer’s parcel of shares was not the sale price received. It was held that the market value must be a discounted amount, as this parcel of shares comprised a non-controlling stake in the company. Moreover the AAT held that it was correct for the Taxpayer’s shares to be valued independently. As a result the value of the Taxpayer’s CGT assets were reduced significantly and he was entitled to the small business CGT concessions.

Land developer entitled to land tax exemption

On 31 March 2016, The New South Wales Supreme Court in Metricon Qld Pty Limited v Chief Commissioner of State Revenue (No. 2) NSWSC 332 considered the dominant use of land, in relation to the primary production exemption from the application of land tax. The land itself was owned by a property developer (Taxpayer), but used for cattle-grazing under an agistment agreement. There were also residential tenants living on this land. The land tax exemption will apply if the use of the land has a significant or substantial commercial purpose or character, the land was used to earn a profit on a continuing or repetitive basis and that the dominant use of the land was primary production. The Commissioner accepted that the first two characteristics were present in the agreement. The issue for the Court was whether the Taxpayer’s dominant use of the land was for primary production.

The Commissioner alleged that primary production was not the dominant use of the land as it was used for various other purposes. The Court addressed each of these purposes in turn and concluded that primary production was the dominant use of the land by the Taxpayer:

Residential tenancy use

The Court held that the primary production use was more dominant. No one factor is determinative, but associated profit and expense figures, proportion of the land used and the amount of time dedicated to each use of the land, will all assist this determination.

Rental use in respect of the agistment of cattle

This amounts to actual use of the land but the Taxpayer’s benefit derived from this was insignificant. It was considered to be but an aspect of the use of the land for primary production.

The land formed part of a land bank held by the Taxpayer and was held for the purpose of future development.

The Court held that claiming deductions for borrowing expenses is not sufficient to constitute ‘use’, where they arise out of the ordinary financing of the land’s purchase.

The land was part of current commercial land development with related ongoing expenses.

Preliminary activity necessary to obtain approval for the use of land for a particular purpose, such as engaging consultants to prepare reports, does not constitute ‘use’.

The Court stated that these competing uses cannot be combined in determining whether the primary production use was the dominant use and ordered that the assessments for land tax be set aside. Interestingly, the Court differentiated this case from circumstances where physical property development works, such as earthmoving, had displaced the primary production use as the dominant use of the land.

This decision assists in clarifying what activities can constitute ‘use’ of land for the purpose of land tax liability but ultimately it will depend on the facts and the balance of the particular activities undertaken by each taxpayer.

ATO updates

ATO releases tax information for over 300 private companies and ATO report

On 18 March 2016 the ATO released its report Taxation Statistics 2013-14. It provides an overview of the taxes it administers, as well as the cost of tax compliance and industry benchmarks. It will be an annual publication produced by the ATO.

The ATO also released the tax information on 321 Australian-owned resident private companies, as reported for the 2013-14 period. This is due to the new disclosure requirements implemented under the recently passed Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, which came into effect on 1 January 2016. Please see our earlier publication for a detailed discussion of this Bill.

All entities included in the release, reported a total income of $200 million or more in 2013-14. The information includes:

• company name;
• ABN;
• total income;
• taxable income;
• tax payable;
• PRRT and MRRT payable.

These companies reported income tax payable of $2 billion for this period, while their associated entities reported another $1.6 billion. Since 2013 the ATO have sought information from a majority of these companies or their associated groups, in order to clarify their tax position. A quarter of these engagements have resulted in additional assessments of over $531 million in liabilities.

In December 2015 similar data was released for corporate taxpayers who reported a total income of $100 million or more in 2013-14. In the future, these reports will be released together.

Addendum issued for AMIT Law Companion Guideline

The Draft Law Companion Guideline LCG 2015/D5 has been amended ahead of the likely passing of the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 by the Senate which introduced the Attribution Managed Investment Trust (AMIT) rules. These rules have been discussed in detail in our earlier publication New AMIT Rules.

LCG 2015/D5 discusses the circumstances in which the trustee of a multi-class AMIT can make the choice to apply the ‘separate class rule’ and the tax effects of making that choice. The separate class rule allows an AMIT to elect to treat each class of membership interests as a separate AMIT for the purposes of applying certain provisions.

This addendum outlines the ATO’s intention to closely monitor the use of arrangements which seek to obtain tax benefits by creating separate classes that would not otherwise qualify as an AMIT. In particular the addendum notes:

• This situation may arise where a class comprised of a single member is attached to an existing AMIT to allow this class to be considered a separate AMIT.
• To be considered a ‘contrived arrangement’, there must be an absence of objectively justifiable commercial reasons for creating separate classes.
• Where there is a contrived arrangement in place, the ATO may apply the anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936.
• If you have any questions about the separate class rule or the AMIT provisions more broadly, please contact one of our experienced tax lawyers.

No GST refund for increasing adjustments

A Draft Goods and Services Tax Determination (GSTD 2016/D1) has been released, which confirms that suppliers may be prevented from claiming a GST refund, where there is an amount of excess GST resulting from an increasing adjustment.

Currently, if you make an overpayment of GST to the ATO through a misapplication of GST or miscalculation of the amount payable, it gives rise to ‘excess GST’. If you have not reimbursed this amount to the recipient, you are prohibited from claiming a refund for this amount by Division 142 A New Tax System (Goods and Services Tax) Act 1999.

Where you have undercharged a recipient through a pricing error and then receive the additional amount payable, an ‘increasing adjustment’ will need to be made in respect of the GST component of this amount. GSTD 2016/D1 clarifies that where this adjustment subsequently gives rise to excess GST, Division 142 will prevent the supplier from claiming a refund where the recipient was not reimbursed.

Small business restructure roll-over guidelines released

Two Draft Law Companion Guidelines have been released for the small business restructure rollover, which takes effect on 1 July 2016. This rollover allows small businesses to change their legal structure without incurring a capital gains tax liability. Please see our earlier publication outlining the main features of the legislation.

LCG 2016/D2

This Guideline explains the consequences and adjustments that occur when the small business restructure rollover is applied. The Guideline achieves this by providing six detailed examples that vary, based on the different business structures involved and some common circumstances that may be seen.

LCG 2016/D3

This important Guideline explains the meaning of a ‘genuine restructure of an ongoing business’, which is a requirement that must be demonstrated in order to access the rollover. There is a ‘safe harbour rule’ contained in the legislation which can negate the need to satisfy this test. Where the requirements of this rule are not satisfied, the ATO will consider whether it is a genuine restructure, by considering the surrounding circumstances. This Guideline provides some common reasons a business may undergo a restructure and how these will be viewed by the ATO.

Legislation and government policy

Statutory remedial power bill introduced

On 18 March 2016 the Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016 was introduced to Parliament. This Bill was discussed in detail in our previous article Talking Tax Issue 16. The Bill seeks to expand the Commissioner’s remedial power to modify the operation of a taxation or superannuation law, to allow them to be administered consistently with their intended purpose or objective. This power is limited in its application and entities are entitled to ignore the modification if it would produce a less favourable result.

New AMIT rules one step closer to becoming law

On 10 March 2016 the Senate Economics Legislation Committee handed down its report on the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015, in which it recommended that the bill be passed by the Senate. The Committee has also recommended that a formal post-implementation review of the new rules be undertaken by Treasury, to be completed by 1 July 2018. These upcoming changes have been discussed at length in our earlier publication: New AMIT Rules.