Talking Tax – Issue 65

Legislation

Next stage for Diverted Profits Tax

In the next stage of implementing the Diverted Profits Tax (DPT) for large multinational corporations, the Diverted Profits Tax Bill 2017 and the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 (Bills), have been introduced into Parliament.

The final Bills contain some minor amendments and additions to the draft. The key amendments and additions include:

• the inclusion of an objects clause to provide clarity on the purpose of the DPT
• provisions to provide clarity on the interaction between the DPT and other rules
• the threshold conditions for the DPT have been amended to resemble existing provisions, including a ‘principle purpose’ test which is aligned with the anti-avoidance regime in Part IVA of the Income Tax Assessment Act 1997 (Cth)
• the test involving a comparison between the tax benefits and non-tax benefits of a scheme is included as a factor for consideration in determining whether there is a principal purpose of tax avoidance
• the inclusion of an option for taxpayers subject to a review to give the Commissioner 30 days’ notice to terminate the review period and
• an increase in the period of time a taxpayer has to appeal against a DPT assessment from 30 days to 60 days.

The draft legislation and explanatory memorandum released in November 2016 are discussed in Talking Tax Issue 60.

It is proposed that, when passed, the Bills will apply to tax years commencing on or after 1 July 2017 and will apply both to new schemes and those already in existence.

Accordingly, entities that may be affected should be reviewing their arrangements prior to this date to determine whether they have any exposure to the DPT.

Cases

Commissioner of State Revenue v ACN 005 057 349 Pty Ltd [2017] HCA 6

This High Court decision illustrates the importance of keeping to statutory deadlines for taxpayer’s requesting an amended to an assessment, which will apply even in circumstances where a taxpayer has overpaid tax (in this case land tax) due to an error of the Commissioner (which the taxpayer did not detect and challenge in time).

The High Court has allowed the Commissioner’s appeal against the Victorian Court of Appeal decision in ACN 005 057 349 Pty Ltd v Commissioner of State Revenue [2015] VSCA 332, setting aside the amended assessments and ordering repayment of the refunded amount together with interest.

The High Court considered the appeals against two respondent taxpayers, both of whom were assessed for land tax for the 1990 to 2002 years in respect of two adjoining properties in Toorak, Victoria.

The taxpayers had sold the properties to a related company in December 2007, which was assessed for land tax for the 2008-2011 years. After discovering that there was an error in the valuation of one of the property in the land tax assessments, being that it was in fact the value of both adjoining properties combined, the Commissioner issued a refund cheque for the excess land tax paid by the company in the 2008 – 2011 years.

The taxpayers then discovered that the same ‘duplicate property’ error had been made in the 1990 – 2002 assessments, and sought to lodge objections under section 24 of the Act. The time period for these objections had expired, and the Taxpayers requested that the Commissioner issue amended assessments pursuant to section 19 of the Act.

This request was refused, on the basis that section 90AA of the Act did not allow the refund sought, regardless of whether the assessments were amended. Section 90AA of the Act states that proceedings for a refund of tax paid under the Act must not be brought against the Commissioner unless an application for the refund was lodged within three years of the payment being made.

The taxpayers commenced proceedings against the Commissioner in the Victorian Supreme Court in 2013, which were dismissed. The taxpayers were then granted leave to appeal to the Court of Appeal, and each appeal was allowed. The Court of Appeal held that the Commissioner was obliged to exercise the power under section 19 to amend the assessments and make the refund. The Court of Appeal found that the taxpayers were entitled to bring the proceedings and made an order directing the Commissioner to issue amended assessments to the Taxpayer and refund the excess land duty paid, together with interest from the date of payment and compound interest from the commencement of proceedings in 2013. The Court also held that there had been “conscious maladministration” by the Commissioner in failing to apply section 19 to benefit the taxpayers. The Commissioner appealed this decision to the High Court.

The High Court allowed the Commissioner’s appeal against the Court of Appeal’s decision. The High Court held that the Court of Appeal had erred in finding that:

• section 90AA allowed the proceedings to be brought and
• there had been a conscious maladministration of justice by the Commission by not amending the assessments under section 19.

The High Court came to this finding on the basis that section 19 merely granted the Commissioner the discretionary power, rather than an obligation, to amend the assessments.  Moreover, the High Court recognized the practicality that even if the assessments were to be amended, no refund of the excess tax paid could be made out of public funds as the application for a refund was not made within three years of the payments, as required by section 90AA(6).

The decision serves as a pertinent reminder about the importance of statutory limitations on applications to amend assessments, as the High Court strictly interpreted the provisions even where a significant overpayment of land duty had occurred.

Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11

This decision looks at when land is used for the ‘dominant purpose’ of primary production. While this case specifically looks at the NSW land tax provisions, the ‘dominant purpose’ element is the basis of exemption in many other jurisdictions as well.

The New South Wales Court of Appeal has dismissed an appeal by the Chief Commissioner of State Revenue (Commissioner) of the decision in Metricon Qld Pty Limited v Chief Commissioner of State Revenue (No 2) [2016] NSWSC 332.

The issue at trial was whether certain land at Terranora in the Tweed Valley owned by Metricon was exempt from taxation by force of section 10AA(2) of the Land Tax Management Act 1956 (NSW) (Act) in respect of the 2009 – 2013 tax years. The section 10AA(2) exemption applies where land that is not ‘rural land’ is used for primary production, the use has a significant or substantial commercial purpose or character, and is that use is continually or repetitively engaged in for the purpose of profit. It was accepted that the land satisfied all criteria for exemption except that it was, at the relevant time, ‘land used for primary production’ as defined in section 10AA(3)(b) of the Act.

While it was accepted that the land was used for the maintenance of cattle, the Commissioner disputed that this was the ‘dominant use’ of the land as required for use for a primary production purpose. Further, the Commissioner contended that, in certain areas, the residential use of the land outweighed any use for primary production.

The primary judge found that the primary production use was the dominant use of the land. No factor was determinative in the characterisation, but the Court considered the associated profit and expense figures, the proportion of the land used, and the amount of time dedicated to each use of the land. The decision of the primary judged is discussed further in Talking Tax Issue 29.

The Court of Appeal considered three main issues in determining the dominant use of the land:

• whether the use of the land for ‘land banking’ or ‘land development’, as distinct from ‘physical use’ (being the carrel grazing) is relevant for the purposes of section 10AA(2) and, if so, whether this use is the ‘dominant use’ of the land in question
• whether the residential use was predominant over the physical use for cattle grazing
• whether the use for ‘land banking’ or ‘land development’ when aggregated with residential use predominated over the cattle grazing use.

While providing different reasons, the Court of Appeal unanimously held that the primary judge was correct in his conclusion that there was no ‘use’ for the purposes of the section 10AA(2) exemption in the relevant tax years. While the Taxpayer had undertaken a property development venture, this did not amount to ‘use’ of the land.

The Court of Appeal rejected the view of the primary judge that the possible uses of the land to be considered in determining the dominant use are not restricted to the physical uses of the land. The concept of ‘use’ for the purposes of section 10AA requires physical deployment of the land in pursuance of a particular purpose of obtaining a present benefit or advantage from it, which may include inactivity adopted as a means to do this. In making this finding, the Court of Appeal departed not only from the primary judge’s decision but also the recent decisions in Bellbird Ridge Pty Ltd v Chief Commissioner or State Revenue [2016] NSWSC 1637 and Leppington Pastoral Co Pty Ltd v Commissioner of State Revenue [2017] NSWSC 9.

ATO Guidance

Taxpayer Alerts: Claiming the Research and Development Tax Incentive

The Australian Taxation Office (ATO) has released two Taxpayer Alerts in relation to claiming the Research and Development (R&D) Tax Incentive. The ATO will focus on reviewing the arrangements of entities claiming the R&D Tax Incentive for expenditure related to their ordinary business activities or is incurred on building and construction activities.

The ATO and AusIndustry are reviewing arrangements where:

• participants who claim the R&D Tax Incentive where the expenditure is incurred on building or construction activities excluded in calculating an R&D offset or does not otherwise relate to eligible R&D activities (TA 2017/2) and
• where some or all of the expenditure claimed relates to their normal business activities rather than eligible R&D activities (TA 2017/3).

The ATO is concerned that, and has seen a number of cases in which, participants are registering their activities for the R&D Tax Incentive when, in fact, they are ineligible or expressly excluded.

In both Alerts, the ATO has also emphasised the importance of adequate corporate governance procedures in relation to reviewing and documenting any R&D activities. The ATO has identified the following deficiencies in the corporate governance of some companies:

• qualified company officers and employees not reviewing and approving R&D registration applications
• company management delegating the decision of distinguishing between ordinary and eligible R&D activities to external advisors without confirming that the external advisor’s understanding of the activities is correct
• accounting systems and records not distinguish R&D expenses from other expenses.

Entities should also ensure that they maintain and keep contemporaneous documentation supporting their registration application and claim of the R&D Tax Incentive.

Taxpayer Alert 2017/2: Claiming the Research and Development Tax Incentive for construction activities

The particular arrangements being targeted in the review include those with one or more of the following:

• standard construction contracts between a builder and acquirer that do not specify that R&D activities will be carried out by the builder
• where a party to the contract registers an activity associated with the contraction for the R&D Tax Incentive on the basis that the structure or construction techniques as involving untested or novel elements
• some or all of the registered activities are non-specific or encompass the whole construction project
• the registered activities are ordinary construction activities or related to expenditure excluded from the R&D Tax Incentive
• the construction methods are already known with the industry or involve the adaptation of existing methods and
• the acquirer or builder claims the R&D Tax Incentive for expenditure not eligible for that incentive, or which is expressly excluded.

Taxpayer Alert 2017/3: Claiming the Research and Development Tax Incentive for ordinary business activities

The ATO and AusIndustry are reviewing the arrangements of companies claiming the R&D Tax Incentive where some or all of the expenditure claimed relates to their normal business activities rather than eligible R&D activities.

The particular arrangements being targeted in the review include those with one or more of the following:

• a company registers one of more of its activities for the R&D Tax Incentive
• some of the activities are broad or non-specific
• some or all of the activities registered are ordinary business activities that are not eligible for the R&D Tax Incentive
• some or all of the registered activities were part of the company’s ordinary business activities and later re-characterised as R&D activities and
• the company claims the R&D Tax Incentive for expenditure that is not eligible.