Thinking | 31 March 2017

Talking Tax – Issue 71

Case law

AAT decision emphasises the need for contemporaneous records

In Spence v Commissioner of Taxation (Taxation) [2017] AATA 307 the Commissioner disallowed the Taxpayer’s claim for deductions under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 97), due to a lack of evidence that he was carrying on a share trading business.

The AAT’s decision highlights the need for taxpayers to maintain contemporaneous records in respect of each financial year. Where the Commissioner imposes a default assessment, the burden is on the taxpayer to prove that the assessment is excessive and to prove what the correct position should be. This can be difficult to achieve without proper documentation of your activities. The Taxpayer did not lodge income tax returns for a number of years and was issued with default assessments by the Commissioner. The Taxpayer objected and claimed that he was carrying on a business of share trading and had made substantial losses during the relevant periods, which he attempted to claim as deductions. The alleged losses were summarised in a spreadsheet prepared by the Taxpayer, but he provided no further documentation in support.

The Commissioner utilised his information gathering power to obtain information from COMMSEC, CMC Markets and E*Trade regarding the Taxpayer’s trading activities which demonstrated a number of discrepancies between the data obtained and the Taxpayer’s spreadsheet. The Commissioner disallowed the objections due to a lack of information to substantiate the Taxpayer’s claimed losses.

The AAT upheld the Commissioner’s decision to disallow the Taxpayer’s claimed deductions due to the Taxpayer’s failure to produce sufficient evidence to support his case such as bank statements, share trading reports, business plans and loan agreements.

Owner of golf course not entitled to land tax exemption where it forms part of a larger estate

In Lotus Projects Pty Ltd v Commissioner of State Revenue [2017] VSC 63 the Victorian Supreme Court rejected the Taxpayer’s claimed entitlement to a land tax exemption under section 71 of the Land Tax Act 2005 (Vic) (Land Tax Act) which exempts land that is for outdoor sporting or outdoor recreational use from land tax. The land in question was being developed as a residential estate (Estate). A portion of the land comprising 60% of the Estate was leased to another entity and operated as a golf course open to the public (Leased Land). The Taxpayer was claiming the exemption on the basis that the Leased Land was leased for outdoor sporting or recreational use and available for use by members of the public, with the proceeds of the lease being donated to charity.

The Taxpayer argued that the Leased Land was separately identifiable from the remainder of the Estate and they were entitled to the exemption in respect of the Leased Land. The Court rejected this argument and held that the land which is subject to analysis by the Court under section 71 of the Land Tax Act, is the entirety of the land held by the registered proprietor. The Leased Land was not separately identifiable to the remainder of the Estate, simply due to the fact that it was subject to a lease.

The Taxpayer also argued that as the Leased Land formed 60% of the Estate, the entire Estate took on the character of land leased for outdoor sporting or recreational use and available for use by members of the public, based on the ‘essential and overall use made of the land’. The Court rejected this argument and held that the exemption under section 71 of the Land Tax Act did not allow the Court to apply the requirements of the exemption by reference to the essential and overall use of the land.

The Court further said that where part of the land is used for a purpose which is not merely ancillary and incidental to the purpose which is the subject of the exemption (in this case, outdoor sporting or recreational use), it will constitute an independent or collateral purpose which would defeat the conditions of the exemption.

ATO updates

New consolidated GST Legislative Determination for child care services

On 19 March 2017, the Minister for Education and Training issued the GST-free Supply (Long Day Care and In-home Care) Determination 2017, under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The aim of this instrument is to ensure that supplies of child care remain GST-free where funding is provided by the Commonwealth for in-home care or long day care services.

The determination repeals the GST-free Supply (In-home Care) Determination 2001 and the GST-free Supply (Long Day Care) Determination 2002, which were due to expire, and consolidates them into a single instrument.

Draft GST determinations

The ATO has released four draft Legislative Determinations under the GST Act, that deal with attribution rules, cash accounting, waivers of tax invoices and adjustment notes. In each case, the draft Legislative Determination will, once finalised, repeal and replace an existing instrument. Details of the draft Legislative Determinations are as follows:

Attribution rules

The Goods and Services Tax: (Particular Attribution Rules Where Total Consideration is Not Known) Determination 2017 (PAR 2017/D8) sets out particular rules that arise where an invoice is issued or part-payment is received in respect of a taxable supply or creditable acquisition, but the Taxpayer cannot yet know the total amount of consideration payable, as it is dependent on future events outside their control.

Where this is the case, this Legislative Determination sets out specific rules with regard to the amount and timing of the GST payable on a taxable supply and the amount and timing of the available input tax credits arising from a creditable acquisition.

Cash accounting

The Goods and Services Tax: Accounting on a cash basis Determination (No XX) 2017 — Industrial Trade Unions (CASH 2017/D1) states that an Industrial Trade Union, being a trade union registered under Australian law, is an enterprise of a kind that may choose to account on a cash basis pursuant to section 29-40 of the GST Act.

Waiver of tax invoice

The Goods and Services Tax: Waiver of Requirement to hold a Tax Invoice Determination — Members of MasterCard International and Visa International — Bank Interchange Services (WTI 2017/D4) sets out the circumstances in which there is a waiver of the requirement for an entity to hold a tax invoice where that entity has made a creditable acquisition of bank interchange services and is entitled to an input tax credit.

Broadly, this Legislative Determination requires the entity to hold a bank interchange services report that includes certain specified information.

Waiver of adjustment note

The Goods and Services Tax: Waiver of Adjustment Note Requirement Determination (No XX) 2017 — Members of MasterCard International and Visa International — Bank Interchange Transfers (WAN 2017/D3) sets out the circumstances in which an entity that is the recipient of bank interchange services, is not required to hold an adjustment note in order to attribute a decreasing adjustment to a tax period.

Broadly, this Legislative Determination requires the entity to hold a bank interchange services report that includes certain specified information.

Legislation and government policy

Diverted profits tax Bills pass House of Representatives

On 27 March 2017, the House of Representatives passed Bills introducing the diverted profits tax (DPT) with a single amendment. These Bills are designed to prevent the diversion of profits offshore through contrived arrangements. The purpose of the DPT has been previously discussed in Talking Tax - Issue 60.

The Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 introduces the DPT, while the Diverted Profits Tax Bill 2017 will impose tax on the amount of the diverted profit at a rate of 40%. The DPT aims to ensure that the tax paid by large multinational corporations properly reflects the economic substance of their activities in Australia, by strengthening the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936). It also encourages these corporations to provide sufficient information to the Commissioner to allow for the timely resolution of tax disputes.

The amendment to the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 clarifies the interaction between the DPT and the controlled foreign company (CFC) rules in Part X of the ITAA 1936.

It ensures that where the CFC rules act to include an amount of attributable income in the assessable income of the taxpayer, this amount will reduce the relevant taxpayer’s DPT tax benefit. The reduction to the taxpayer’s DPT tax benefit is limited to the extent that: