Talking Tax – Issue 92

Case law

Director held personally liable for company’s unpaid withholding tax debts

In Deputy Commissioner of Taxation v Caudle; Commonwealth of Australia v Caudle & Anor [2017] ACTSC 216 the Supreme Court of the Australian Capital Territory heard two proceedings arising out of debts incurred by a company in administration and in the process of being wound up (Company).

First Proceeding

The first proceeding was in respect of Director Penalty Notices issued by the Commissioner of Taxation to the first defendant, a director of the Company (First Defendant). The Commissioner argued that the First Defendant, as a director of the Company, was under an obligation to ensure that the Company paid the withheld tax by specified due dates and by failing to do this, became personally liable to pay those amounts by way of a penalty pursuant to section 269-20 of the Taxation Administration Act 1953 (Cth) (TAA).

The First Defendant contended that the relief claimed by the Commissioner should be recalculated based on a number of factors including the over-reporting of income tax withholding amounts, incorrect allocation of amounts, prior lodgement of objections in relation to superannuation guarantee, and agreements entered into between the ATO and the first defendant.

The Court held that the First Defendant was personally liable under section 269-20 of the TAA to pay PAYG withholding tax of almost $1.2 million that the Company had failed to remit to the ATO.

In response to the First Director’s contentions, the Court’s main findings were that:

• there was insufficient documentary evidence to support a contention of an over-reporting of income tax withholding amounts, commenting that it’s difficult to see how the First Defendant could complain of this error when the liability was based on the Company’ self-assessed liability.
• section 8AAZLA of the TAA provides the Commissioner with a broad discretion as to allocation of payments made in “the manner he or she determines”, therefore the allocation by the Commissioner of payments made to the running balance (rather than to debts on a chronological basis) did not amount to an error.
• the objection lodged regarding superannuation guarantee entitlements did not defeat the liability as the Commissioner may recover an outstanding liability notwithstanding a pending review or appeal, and the evidence indicated that the liability was unrelated to superannuation guarantee entitlements.
• the deed between the ATO and first defendant did not operate to prevent recovery of director’s liabilities in these proceedings.

Second proceeding

The second proceeding was in respect of a deed of guarantee and indemnity (Deed) entered into by the First Defendant and his wife (Second Defendant) with the Commissioner. Under the Deed the defendants agreed to personally guarantee debts owing by the Company and future tax liabilities of the Company.

The Court found that the terms of the Deed clearly established that the defendants guaranteed the ongoing tax liabilities of the Company. Moreover, the Court held that the defendants’ obligations did not cease upon the Commissioner’s failure to register a second mortgage, as this was neither fundamental to performance of the Deed nor a contingent condition. Consequently, the Court found that the defendants had breached the Deed and held that they were liable for an amount of almost $2.4 million.

Taxpayer unable to deduct claimed donations

The Administrative Appeals Tribunal in Arnold and Commissioner of Taxation (Taxation) AATA 1318 has affirmed a decision of the Commissioner of Taxation to disallow the Taxpayer from claiming deductions for purported charitable donations of $40,000 and $560,000 in the form of property, for the 2010 and 2011 income years respectively.

The Tribunal considered whether the Taxpayer was entitled to deductions under Item 1 of section 30-15 of the Income Tax Assessment Act 1997 (ITAA97). Where a taxpayer makes a gift of property Item 1 entitles them to claim a deduction being the lesser of the amount the taxpayer paid for the property and the market value of the property as at the date of the gift.

2010 deduction

The Taxpayer claimed that on 30 June 2010 she purchased HIV medicines for $40,000 and donated them to a charity operating in Kenya. The Tribunal ultimately denied the Taxpayer from claiming the deduction as it wasn’t satisfied that the medicines were acquired by 30 June 2010 and it could not, therefore, accept that the relevant donation had been made in that financial year.

The Tribunal noted that even if the Taxpayer had donated the medicines on that day, she would only have been able to claim USD $665.20, being the true market value of the medicines at that time.

2011 deduction

The Taxpayer also claimed that on 28 June 2011 she entered into an agreement with Solstar to purchase a gift certificate for $560,000 (Agreement). The Taxpayer further claimed that she pledged the gift certificate to a charity, with her husband then transferring the gift certificate to the charity.

Under the Agreement, a purchase price of $560,000 was specified. However, the Taxpayer’s repayment obligations were to pay $28,000 within 30 days, with the balance due in 10 years. The Tribunal ultimately found that the Taxpayer was not entitled to a deduction in the 2011 income year, as it was not satisfied that the Taxpayer had made any payment under the Agreement in the 2011 income year, if at all.

HC rejects special leave application

The High Court has dismissed a taxpayer’s application for special leave to appeal the Full Federal Court’s decision in Commissioner of Taxation v Normandy Finance and Investments Asia Pty Ltd [2016] FCAFC 180 (Normandy) as the Court was not satisfied that an appeal would enjoy sufficient prospects of success.

In Normandy, a majority of the Full Federal Court found that a number of loans made by non-resident companies to Australian resident taxpayer companies were shams. Therefore the Taxpayer could not rely on the loans to prove that the Commissioner’s assessments were excessive. The Full Federal Court decision was discussed in Talking Tax – Issue 63.

ATO updates

Tax Avoidance Taskforce – Trusts

From 1 July 2017 the Tax Avoidance Taskforce – Trusts (Taskforce) will take over the work of the Trusts Taskforce, by targeting higher risk trust arrangements in privately owned and wealthy groups. Over the past four years, the Trusts Taskforce raised over $948 million in liabilities and collected in excess of $279 million. Additionally, assets of $55 million have been restrained under proceeds of crime legislation.

The ATO notes that the Taskforce is not concerned with ordinary trust arrangements or tax planning associated with genuine business or family dealings. Arrangements that attract the ATO’s attention include:

• trusts (or their beneficiaries) who have received substantial income, are not registered or have not lodged tax returns or activity statements
• entities with offshore dealings involving secrecy or low tax jurisdictions
• agreements with no apparent commercial basis that direct income entitlements to a low-tax beneficiary, while the benefits are enjoyed by others and
• changes to trust deeds or other constituent documents to achieve a tax planning benefit, with such changes not credibly explicable for other reasons.

Further information released on Australia-USA Competent Authority Arrangement

The ATO has recently released further information on the Competent Authority Arrangement (CAA) entered into by the US and Australia on 1 August 2017. The CAA outlines the rules and procedures for the automatic exchange of Country-by-Country (CbC) reports by the Competent Authorities of the United States and Australia (the Commissioner of Taxation).

CbC reporting

CbC reporting is part of a broad suite of international measures aimed at combating tax avoidance through more comprehensive exchanges of information between countries and takes effect for income years commencing from 1 January 2016. Multinational entities with an annual global income of AUD$1 billion or more must provide the ATO with three statements, the CbC report, Master file and Local file, for each income tax year. The objective is to provide the ATO with a high-level overview of the operations and tax risk profile of these taxpayers.

The CAA

Where a taxpayer is a tax resident in one country and an entity within their multinational group is a tax resident of the other, the Competent Authority of the taxpayer’s jurisdiction of residence must provide the taxpayer’s CbC report to the other Competent Authority. This requirement will also arise where an entity within the multinational group carries out business in the other jurisdiction through a permanent establishment.

Australian Competent Authority

In his role as the Australian Competent Authority, the Commissioner of Taxation provides assistance to people who believe the actions of Australia or a treaty partner result or may result in taxation that is not in accordance with a particular tax treaty.

In addition to his functions in exchanging information, and negotiating bilateral advanced pricing arrangements, the Commissioner resolves cases where there is a conflict with the provisions of a tax treaty, such as juridical and economic taxation, or where taxing a particular class of income breaches a rule in the tax treaty.