Talking Tax – Issue 83

Case law

Gu and FCT [2017] AATA 906

The Administrative Appeals Tribunal (Tribunal) in Gu and FCT [2017] AATA 906 has affirmed the Commissioner’s amended assessment of a taxpayer’s income tax liability for the 2013 income year (the Relevant Year), and his decision to disallow the taxpayer’s objection to the amended assessment (Objection Decision).

The taxpayer was a shop manager who failed to declare income associated with his predominantly cash-based café business, and income which he received from rental properties.

The Tribunal found that the taxpayer:

1. failed to discharge the burden of proving that the Commissioner’s assessment of his taxation liability was excessive and
2. was liable to pay an administrative penalty of 50% on the basis that he made false and misleading statements (in his 2013 income tax return) which constituted recklessness

This case highlights the continued focus of the ATO and the Commissioner on addressing the loss of tax revenue through the black economy. The taxpayer declared income in the Relevant Year of $20,800 which was derived from a related entity (Company) that operated a small café business. In 2014, the taxpayer and Company were audited by the ATO. The audit entailed an examination of the Company’s bank accounts, as well as a number of the taxpayer’s bank accounts which disclosed regular cash deposits into the taxpayer’s personal accounts totalling $608,700.26 for the Relevant Year. The ATO found that:

• the Company had failed to identify all of its income for the 2013 income year and
• the Taxpayer owned a number of residential properties from which he received rent and which had not been disclosed as income.

The Commissioner issued an amended assessment and imposed a shortfall penalty of $28,766.45. Following the disallowance of the taxpayer’s objections, the taxpayer sought review of the Objection Decision.

In relation to the amended assessment, the taxpayer asserted, among other things, that:

• the difference between the Company’s net income and deposits in its bank account were due to the cash basis of operations at the café
• cash was not regularly put into the Company’s bank account, and that money was taken from the till to pay for café supplies and
• the failure to declare rental payments as income was a mistake.

Further, the taxpayer contended that $70,000 of the increased assessable income amount was a gift from his parents. The Tribunal considered that statutory declarations supporting this contention held little weight unless the objective evidence supported the claims made in those declarations.

Tribunal found that the taxpayer had failed to discharge the burden of proving that the Commissioner’s assessment of his tax liability for the Relevant Year was excessive. The Tribunal noted that while it is possible that the Commissioner’s assessment may not be ‘perfectly accurate’, it was a reasonable calculation based on the evidentiary material.

The Federal Court of Australia upholds AAT finding in relation to sham arrangement

On 20 June 2017, Justice Logan in Sunraysia Harvesting Contractors Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 694 upheld the Administrative Appeals Tribunal’s (Tribunal) finding that the taxpayer’s arrangement of paying employees was a sham, and that the Commissioner was correct to disallow income tax credits and impose GST shortfall penalties and other penalties for failure to deduct and remit PAYG amounts.

The Federal Court of Australia agreed with the Tribunal’s findings that the agreements set up with ‘subcontracting entities’ to pay workers was a sham arrangement, in the sense that the surrounding circumstances showed that the arrangement between the parties was never intended to create any legally enforceable obligation.

The AAT’s decision has been previously discussed in Talking Tax– Issue 7.

ATO updates

ATO reminder – increased penalties apply to Significant Global Entities (SGEs) from 1 July 2017

The ATO has reminded all Significant Global Entities (SGEs), including Australian SGEs, to be prepared for their increased reporting obligations, and warned that higher penalties will be imposed to encourage SGEs to take reasonable care when making statements, take positions which are reasonably arguable and to lodge tax forms on time.

An entity is an SGE if it is a:

• global parent entity whose annual global income is A$1 billion or more or
• a member of a group of entities that are consolidated for accounting purposes as a single group and one of the other members of the group is a global parent entity whose annual global income for the period is A$1 billion or more.

Australian entities should be particularly aware of the second limb of this definition, which may cause what is otherwise a small Australian entity to be a SGE where it is part of a large global group.

Increased penalties

From 1 July 2017, the following penalty increases apply for SGEs:

• penalties will be doubled for statements and unarguable positions, including making a false or misleading statement that results in shortfall amount and
• penalties will be increased for failing to lodge (FTL) tax documents on time.

This demonstrates that the ATO is holding SGEs to the highest standard for reasonable and timely tax administration, which is particularly onerous for Australian entities that qualify as SGEs by virtue of their relationship with their parent entity.

Increased reporting obligations

In addition to lodging existing forms and statements on time, SGEs must comply with Country-by-Country (CbC) reporting, and provide a general purpose financial statement to the Commissioner pursuant to section 3CA of the Tax Administration Act 1953.

CbC reporting implements Action 13 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action Plan and is part of a broad suite of international measures aimed at combating tax avoidance through more comprehensive exchanges of information between countries. The measure takes effect for income years commencing on, or after, 1 January 2016.

The measures set out in section 3CA of the Tax Administration Act 1953 apply to income years commencing on or after 1 July 2016. For most affected entities, this means they will not have to give the ATO a general purpose financial statement until early 2018.

Legislation and government policy

Update on the Treasury Laws Amendment (2017 Enterprise Incentives No 1) Bill 2017

The Treasury Laws Amendment (2017 Enterprise Incentives No 1) Bill 2017 was recently passed by the House of Representatives without amendment and is currently being considered by the Senate.

The proposed changes are aimed at providing:

1. companies and listed widely held trusts with better access to previous year tax losses by supplementing the ‘same business test’ with a more flexible ‘similar business test’ and
2. taxpayers with the choice to self-assess the effective life of certain intangible depreciating assets instead of using the statutory effective life (which is specified in the law in its current form).

For more information about this Bill, see Talking Tax – Issue 72.

GST threshold for low value goods to be removed with effect from 1 July 2018

As at 21 June 2017, the Treasury Laws Amendment (GST Low Value Goods) Bill 2017 (Bill) had been passed by both the House of Representatives and the Senate and awaits Royal Assent. The Bill amends the GST laws to ensure that GST is payable on certain supplies of low value goods that are purchased and imported into Australia.

The amendments will apply to tax periods starting on or after 1 July 2018 (which is a change from the initial version of the Bill).

The Senate amendments also included a requirement for the Productivity Commission to conduct an inquiry to review the effectiveness of the amendments, and whether other models for collecting GST would be more suitable.

This Bill has previously been discussed in Talking Tax – Issue 66.

NSW Budget release

The New South Wales Budget 2017-18 was handed down on 20 June 2017. Set out below are the key announcements involving NSW State Taxes which were introduced under the State Revenue and Other Legislation Amendment (Budget Measures) Bill 2017.

Duties

Surcharge purchaser duty

From 1 July 2017, the surcharge purchaser duty rate will increase from 4% to 8%.

From 20 June 2017, permanent residents, including New Zealand citizens holding a Special Category visa (subclass 444), will be exempt from surcharge purchaser duty on their principal place of residence if they occupy the home for a continuous period of 200 days within 12 months of purchase.  The exemption will be granted if the person declares that they will complete the 200 day residence requirement.

An Australian-based developer may be entitled to a refund of surcharge purchaser duty if they are an Australian corporation, and acquired residential land on or after 21 June 2016.  However, the corporation or a related body corporate of the corporation must have constructed a new home on the residential land to which the residential-related property relates after completion of the transfer of the property to the corporation.

The proportion of surcharge purchaser duty refunded in such circumstances will be based on the proportion of dwellings sold (other than to an associated person) within five years of the completion of the purchase of the land by the developer. Where separate dwellings are sold progressively over the five year period, a developer may be granted partial refunds.  A refund will be payable in respect of the sale of a new home. A dwelling that has been rented or occupied at any time while owned by the developer is not eligible for a refund.

Commercial residential property will be exempt from surcharge purchaser duty.  The Chief Commissioner will make a determination identifying classes of commercial residential property.

Purchases ‘off the plan’ by investors

From 1 July 2017, all residential purchases by investors will be excluded from the 12 month off-the-plan transfer duty liability deferral. Purchasers who wish to obtain the deferral will need to declare an intention to occupy the property as their principal place of residence (PPR).

If a purchaser claims an entitlement to the deferral, but the land is not occupied as the purchaser’s PPR for a continuous period of six months, commencing no later than 12 months after completion of the sale or transfer, interest and penalty tax may apply from the liability date.

Other measures

Other measures that are proposed to apply from 1 July 2017, include:

• The First home buyer’s assistance scheme – under this scheme, first home buyers will not be required to pay duty for both new and existing homes for properties up to $650,000. Duty will be reduced for amounts between $650,000 and $800,000.
• The introduction of a shared equity scheme, which applies where a home buyer purchases a property with an approved equity partner (being, the NSW Land and Housing Corporation a registered community housing provider within the meaning of the Community Housing Providers (Adoption of National Law) Act 2012; or approved persons).
• First home owner’s ability to access a $10,000 grant for:
  • building a new home under a home building contract where the contract price, when added with the land value, does not exceed $750,000
  • a new home being built by an owner builder where the value of the land and building does not exceed $750,000 or
  • purchasing a new home worth up to $600,000.

Land Tax

Surcharge Land Tax

From the 2018 tax year the following will apply:

• The surcharge land tax rate will increase from 0.75% to 2%.
• Permanent residents, including New Zealand citizens holding a Special Category visa (subclass 444), will be exempt from surcharge land tax on their principal place of residence, if they occupy the home for a continuous period of 200 days in the land tax year. The exemption will be granted if the person declares that they will complete the 200 day residency requirement.
• Commercial residential property will be exempt from surcharge land tax. The Chief Commissioner will make a determination identifying classes of commercial residential property.

The rules that apply in relation to the refund of purchaser surcharge duty discussed above apply similarly to Australian based developers in relation to the refund of surcharge land tax.

Principal place of residence

The principal place of residence exemption will be extended to land used and occupied by an owner under a shared equity scheme. The exemption will apply from the 2018 tax year.

Insurance duty

From 1 July 2017, a Lender’s Mortgage Insurance (LMI) policy will be exempt insurance in NSW meaning that an insurer who issues a LMI policy will no longer need to pay duty on this premium where the policy is over property in NSW. LMI insurance is insurance taken out by lenders to cover loss arising from default by the mortgagor.

From 1 January 2018:

• crop and livestock insurance will not be liable to duty and
• small businesses are not liable to duty on certain types of insurance, including commercial vehicle/aviation insurance (for a motor vehicle/aircraft used primarily for business purposes), occupational indemnity insurance or product and public liability insurance.

SA Budget handed down

On 22 June 2017, the South Australian Budget 2017 was handed down. The legislative changes to implement the SA Budget 2017 measures are included in the Budget Measures Bill 2017, and the operation of these measures is subject to the Bill coming into force as an Act. Below are the key announcements involving SA state taxes:

• The current stamp duty concession for purchases of off-the-plan apartments (due to expire on 30 June 2017) will be extended for a further 12 months, but will no longer apply to foreign purchasers (from 22 June 2017).
• A $10,000 grant will be provided to eligible off-the-plan apartment purchasers where the contract is entered into between 22 June 2017 and 30 September 2017 (commencing 22 June 2017).
• A stamp duty surcharge of 4% will apply to foreign purchasers of South Australia residential property (commencing 1 January 2018).
• A five year land tax exemption will apply to eligible apartments bought off-the-plan by investors where the contract is entered into between 22 June 2017 and 30 June 2018 (commencing midnight 30 June 2017).
• A payroll tax rate for small businesses lowered to 2.5% (commencing 1 July 2017).
• A major bank levy for major banks offering services in South Australia will be introduced (commencing 1 July 2017).
• The Job Accelerator Grant will be increased by up to $5,000 for each eligible new apprentice or trainee employed by, and eligible for, an existing Job Accelerator Grant. Businesses with payrolls between $600,000 and $5 million will receive up to $15,000 for each new apprentice and training, while small businesses with payrolls up to $600,000 will receive up to $9000. (Scheme commences 1 July 2016).