Talking Tax – Issue 45

Case law

Land Tax and the Principal Place of Residence Exemption

There have been two recent decisions of the Victorian Civil and Administrative Tribunal (VCAT) relating to land tax and the principal place of residence (PPR) exemption.

Robbins v Commissioner of State Revenue (Review and Regulation) [2016] VCAT 1265

In this case, the taxpayer objected to reassessments of land tax in respect of land in Sandringham for the years 2011 to 2014. She contended that at all material times she was entitled to a PPR exemption. The taxpayer also argued that if the Tribunal found that the Sandringham property was not her PPR, she should be entitled to a PPR exemption in respect of another property held in Balnarring.

The Tribunal decided that the taxpayer did not reside in the Sandringham property as her PPR in the relevant years. In making this finding, the Tribunal relied on water and electricity usage data produced by the Commissioner for the Sandringham property showing that the property recorded zero water usage for numerous billing quarters, which was inconsistent with the taxpayer’s contention of an occupation of that property on a permanent basis.

In respect of the Balnarring property, the Tribunal indicated that little to no objective evidence had been led in favour of the applicant having a Balnarring PPR in the relevant years.

The Tribunal had regard to s 53(2) of the Land Tax Act 2005 (Vic) (Act) which contemplates that none of a person’s several residences may satisfy the PPR criteria, for example if a taxpayer lives interstate. As a result the Tribunal did not accept the applicant’s argument that a Balnarring PPR must be found if the Sandringham PPR is denied.

Landowners should be mindful that when seeking to claim a PPR exemption, other than having access to utilities records, the Commissioner also has powers to obtain bank records from third parties in accordance with s 73 of the Taxation Administration Act 1997 (TAA) at which point the Commissioner can ascertain where the majority of transactions take place. Such an approach is similar to the tests applied for income tax purposes for main residence by the Commissioner of Taxation, where a number of factors are considered to establish that a property qualifies as a main residence.  For more information on the application of these tests, please contact us.

Ward v Commissioner of State Revenue (Review and Regulation) [2016] VCAT 1307

In another land tax case, the Commissioner assessed the taxpayer for land tax pursuant to the Act in respect of residential premises (Property) for the years 2011 to 2015, a property bequeathed to him from his mother’s will. The taxpayer objected to the assessment and after the Commissioner disallowed the objection, the taxpayer sought a review in VCAT. The main issue before the Tribunal was whether the taxpayer was entitled to the PPR exemption under s 54(1)(a) and s 56(1) of the Act.

The taxpayer gave the following evidence as to where he spent his time during 2010-2014:

• In 2010 he spent 177 days in Australia
• In 2011 he spent 61 days in Australia
• In 2012 he spent 90 days in Australia
• In 2013 he spent 141 days in Australia
• In 2014 he spent 156 days in Australia

with the remainder of his time spent in Canada and other overseas destinations.

Under s 56 of the Act, land is taken to be used and occupied as the PPR of a person despite the person’s absence from the land if the Commissioner is satisfied that the absence is “temporary” in nature and that the person intends to resume use or occupation of the land as his or her PPR after the absence.

The taxpayer was a semi/retired architect with three children and eight grandchildren. His particular circumstances involved a first and second marriage, in which the second wife lived in Canada with a disabled child. The Tribunal found that the taxpayer demonstrated significant communal family ties to the suburb of Shoreham in Victoria generally.

The Tribunal determined that the taxpayer’s absence was temporary in nature, despite being away for prolonged periods. In particular, the taxpayer always had the intention of returning to his home despite circumstances preventing him from doing so. On evidencing an intention to return, the Tribunal had regard to the following principles from Ferrington’s¹ case:

• When gauged objectively, the Property is where the taxpayer kept all the things that he values, it was close to his family, his friends, and to the associations he was involved with.
• The taxpayer had been occupying the Property since 2003 and therefore it had been long established as place of residence.
• There were mitigating factors (health reasons) as to why the taxpayer spent extended periods overseas in two of the relevant tax years.

After applying the relevant Ferrington principles to the taxpayer’s situation, the Tribunal determined that the taxpayer had made out the PPR exemption under the Act and the assessments were set aside.

Date of Effect for Payroll Tax Exemption

Association of Mining and Exploration Companies Inc v Commissioner of State Revenue [2016] WASCA 131

This payroll tax case involved an appeal from the State Administrative Tribunal (Tribunal) to the West Australian Supreme Court of Appeal (WASCA) regarding the applicable date that the Association of Mining and Exploration Companies (AMEC) would receive an exemption from liability for payroll tax, on the basis that it was a charitable body or organisation.

It was agreed that AMEC had been a charitable body or organisation for the purposes of the Pay-roll Tax Assessment Act 2002 (WA) (WA Act) since at least 1 July 2007. However, on 6 September 2013, the Commissioner gave notice under s 41(2) of the Act exempting AMEC from liability to payroll tax from 1 July 2012 being the day on which the exemption came into operation under s 41(4) of the WA Act.

Section 41(4) of the WA Act provided as follows:

‘An exemption given by the Commissioner under subsection (2) comes into operation on the day specified in the notice, which may be the day on which the notice is given, or an earlier or later day.’

AMEC objected to the Commissioner’s decision to specify a date of 1 July 2012, rather than 1 July 2007, (being 5 years prior to the assessment year in which the exemption application was made) The Commissioner disallowed the objection. The Tribunal dismissed AMEC’s application for a review. AMEC then appealed to the WASCA on the basis that the operative date should be 1 July 2007, because AMEC had been charitable throughout that period. The Commissioner contended that the power to specify a date before the exemption application was made is not properly exercisable solely because AMEC was charitable before that time. The Commissioner in forming this view relied on its policy which indicated that the commencement date will generally be applied to an exemption from 1 July in the assessment year in which the exemption application is received.

The Court in considering the construction of s 41(4) of the Act held that it conferred a broad discretionary power which neither required the Commissioner to specify 1 July 2007, nor prohibited the Commissioner from specifying that day, as the date on which the exemption came into operation.

However, the Court did accept AMEC’s submissions that the Tribunal erred in law by treating AMEC’s charitable status as an irrelevant consideration and by incorrectly identifying an “appropriate starting point”. The Court indicated that the Commissioner may have regard to the following factors when exercising the discretion in respect of the specified date, such as:

• the reasons for the delay in applying for the exemption
• the impact which the decision will have on the charitable body or organisation concerned
• the orderly and proper administration of the Act.

The Tribunal’s decision to dismiss AMEC’s review application was set aside and the matter was sent back to the Tribunal for reconsideration.

This case demonstrates that notwithstanding a taxpayer satisfies all statutory and common law conditions for demonstrating a charitable purpose, the Commissioner is likely to adopt a restrictive approach regarding the retrospective application of the exemption in the context providing a refund of pay-roll tax at the first instance.

ATO updates

Taxpayer Alerts: TA2016/7, TA2016/8 and TA 2016/9

On 10 August 2016, the ATO released a series of taxpayer alerts identifying a number of arrangements it considers to pose a significant tax risk and its views.

These included:

TA 2016/7 – Arrangements involving offshore permanent establishments

This Alert is concerned with arrangements involving consolidated groups where one subsidiary holds an interest in an offshore permanent establishment (PE). The concern is that income from the PE would be treated as non-assessable non-exempt income despite the fact that other subsidiaries within the consolidated group are incurring expenses and claiming deductions associated with deriving that income, creating a mismatch. The ATO’s concern is that such an arrangement may result in double non-taxation together with excessive claims for deductions. It proposes to review such arrangements and where necessary apply Part IVA.

TA 2016/8 – GST implications of arrangements entered into in response to the Multinational Anti-Avoidance Law (MAAL)

This Alert deals with arrangements involving restructures associated with the distribution of intangible products and services into Australia so as to avoid the operation of the MAAL. The concern is that there are inconsistent positions taken by companies for GST and income tax where a company claims that there is a PE in Australia so it falls outside MAAL but also makes claims that the supply is not “connected with Australia” so that no GST is payable. TA 2016/2 already addressed this type of arrangement, however the ATO’s concern is that these arrangements are artificially structured to avoid GST. The ATO’s view is that the arrangements are not effective in avoiding GST but will be reviewing taxpayer responses to the application of MAAL to assess the GST consequences

Since then the GST ruling has been updated to confirm that a supply in furtherance of an Australian PE is “connected with Australia” for GST purposes, to clarify the position.

TA 2016/9 – Thin capitalisation – Incorrect calculation of the value of debt capital treated wholly or partly as equity for accounting purposes.

This Alert is concerned with the definition of “debt capital” for thin capitalisation purposes and in particular arrangements where an arrangement results in an amount that is classified as debt for tax purposes, but is treated wholly or partly, as equity for accounting purposes. The ATO is concerned that taxpayers may calculate average debt based on accounting values therefore ignoring the amounts from these arrangements and incorrectly calculating the value of debt capital, resulting in excess debt deductions. The ATO are reviewing the debt capital values used by taxpayers in thin capitalisation calculations. If it considers taxpayers to have undervalued its debt capital, the Commissioner has the ability under 820-690 to substitute an appropriate value or apply Part IVA.

ATO focus on marketing hubs – practical compliance guidelines released

The ATO has also released a draft Practical Compliance Guideline (PCG) and consultation paper dealing with offshore marketing hubs. The PCG sets out the ATO’s proposed compliance approach, based on a risk management framework to be applied going forward for investigating transfer pricing issues. It is concerned with centralised operating models, referred to as hubs.

Under this risk management framework, companies with international hubs would be subject to compliance activities and scrutiny by the ATO, based on a five tier grading system, Those companies with a green or blue rating are considered to be of lower risk and would be subject to less reporting requirements whereas those arrangements perceived to be of a yellow, amber and red rating pose higher risks and would be prioritised for review. The PCG suggests that companies use this framework to self-assess its risk rating taking into account various factors such as net tax impact and transfer pricing documentation and may be ultimately asked to report its rating in its Reportable Tax Position schedule.

The ATO have asked for comments on this PCG by 30 September 2016. It is expected to have a significant impact on the energy and resources sector, particularly with the increase in exports of LNG.

Decision Impact Statement – Rigoli v Federal Commissioner of Taxation 2016 ATC 20-556

In Issue 1 of Talking Tax we covered the case of Rigoli v FC of T. In that case, the Full Federal Court confirmed that an expert report containing estimates of certain partnership income did not establish the actual taxable income of a taxpayer from all sources. This meant that the expert report was insufficient to discharge the taxpayer’s burden to show that tax assessments were excessive.

The ATO has now released a decision impact statement on the decision of the Full Federal Court in Rigoli v FC of T 2016 ATC 20-556.

The ATO’s view is that the Court’s decision was consistent with the Commissioner’s view.

For more information on the case of Rigoli and its consequences, please contact us.

Phoenix Taskforce swoops on pre-insolvency industry

The Phoenix Taskforce has conducted access visits without notice on several business and residential sites across Victoria and Queensland. This operation was part of an ongoing investigation into pre-insolvency advisors and their alleged involvement in illegal phoenix activity, evading GST and failing to pay tax on $22m of unreported income.

The ATO and ASIC are increasingly concerned about the pre-insolvency industry and its role in promoting illegal phoenix activity (the ATO conducted almost 1,000 audit and review cases involving phoenix behaviour in 2015/16, raising $250m in liabilities).

The ATO is concerned that unlike registered liquidators, the pre-insolvency industry operates in an unregulated environment. Tax professionals, liquidators and their professional associations have said that they are concerned about how the behaviour of a minority undermines the whole insolvency industry.

Legislation and government policy

Parliament to resume 30 August 2016

During the election campaign, the Prime Minister promised that legislation relating to tax cuts would be prioritised. Both houses are sitting from 30 August, and we expect to see new tax-related bills.

Treasurer Scott Morrison confirms exemptions to $500k lifetime super cap

The Treasurer has confirmed that there will be changes to the Government’s proposed lifetime cap of $500k on non-concessional superannuation contributions.

Some of the exemptions the treasurer mentioned include:

• getting a payout as a result of an accident
• if you entered into a contract before Budget night to settle on a property asset out of a SMSF and you are using after-tax contributions to settle that contract
• other measures, which will be included in the exposure draft legislation.

He also confirmed that it would be unlikely that the $500k cap will be lifted.

The draft legislation is due to be released soon. We will be reviewing this legislation in detail, and if you have any questions about its application to yours or your client’s circumstances, please contact us.

¹Commissioner of State Revenue v Ferrington (2004) 57 ATR 170.