Thinking | 29 March 2018

Talking Tax – Issue 112

Case law

LLUN and Commissioner of Taxation (Taxation) [2017] AATA 3058

In this case, Deputy President  Frost (Deputy President) held that a trust was not a superannuation fund for Australian tax purposes and the Taxpayers were presently entitled to a share of the fund’s income.

This decision turned on the fact that the ‘Principal Employer’ under the deed had not in fact ever employed the Taxpayers, and that while the Fund’s deed prescribed a retirement age, it allowed the Taxpayers to receive their benefits in the Fund prior to this age.

Initially the Commissioner assessed the Taxpayers under Part XI of the 1936 Act for having an interest in a ‘foreign investment fund’ on the basis that a Samoan superannuation fund (Fund), in which they were members, was not a superannuation fund for Australian tax purposes, but rather a foreign trust estate. Prior to this hearing, the parties agreed that the Fund was an Australian tax resident, but the issue of whether it is a superannuation fund for Australian tax purposes remained.

Section 6(1) of the 1936 Act and section 10 of the SIS Act provide two definitions of a ‘superannuation fund’. In what the Deputy President viewed as ‘a masterstroke of circularity’, paragraph 10(a)(ii) of the above definition required the AAT to determine whether the Fund was a superannuation fund, in order to determine whether it was a superannuation fund. The AAT held, in accordance with common law precedent, that a superannuation fund is a fund which has, as its sole purpose, the provision of benefits to participating employees upon their reaching a prescribed age or upon their retirement, death or other cessation of employment.

The Fund’s deed provided that all rights under the deed flowed from the Taxpayers being employees of a nominated ‘Principal Employer’. However, the AAT found that the Principal Employer had never in fact employed the Taxpayers. Moreover, while the Fund’s deed prescribed a retirement age, it allowed the Taxpayers to receive their benefits in the Fund prior to this age. Therefore the AAT found that the Fund was not a valid superannuation fund within the ordinary meaning of that expression and failed the test at paragraph 10(a)(ii) of the SIS Act.

The AAT held that the Fund was a resident trust estate and, by virtue of the terms of the Fund’s deed, the Taxpayers were presently entitled to a share of the Fund’s income.

PZTL and Commissioner of Taxation (Taxation) [2018] AATA 461

In PZTL and Commissioner of Taxation (Taxation) [2018] AATA 461 the AAT held that the income by an Australian Defence Force (ADF) subcontractor was not exempt under section 23AG of the 1936 Act as foreign service income.

Under this section, where a resident has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service are exempt from tax.

The AAT held that the entity responsible for the Applicant’s employment, and therefore the entity he was deployed by, is the entity that controls or determines his requirement to undertake the foreign service, the length of that service, and his overall conditions of employment. These conditions include the Taxpayer’s manner of remuneration, how that remuneration is determined and incidental components of that remuneration.

The AAT held that the Taxpayer was deployed by the contractor that employed him, not the ADF. The AAT, therefore, ruled that the Taxpayer’s foreign service income was not tax exempt as he had not been deployed ‘by’ the Commonwealth or a Commonwealth authority for the purposes of section 23AG(1AA)(d) of the ITAA 1936.

ATO updates

Fact sheet for employers – Superannuation Guarantee compliance approach

The Australian Taxation Office (ATO) has released a fact sheet explaining its compliance and penalty approach in relation to employer superannuation guarantee (SG) obligations set out in the Superannuation Guarantee (Administration) Act 1992 (SGA Act).

The ATO’s compliance and penalty approach applies to employers who are unable or unwilling to meet their SG obligations, including non-payment, under-payment, or late payment of SG contributions to an eligible employee.

Employers who don’t pay the minimum amount of SG for an employee by the due date are liable for the super guarantee charge (SGC), which is made up of:

  • SG shortfall amounts calculated on an employee’s salary or wages
  • interest on those amounts (currently 10%) and
  • an administration fee ($20 per employee, per quarter).

Additional penalties may also include:

  • Part 7 penalties under the Superannuation Guarantee (Administration) Act 1992, which are up to double the SGC amount payable for the quarter
  • General Interest Charges (GIC) and
  • administrative penalties, with a base penalty amount of up to 75%.

Further, a director of a company that fails to meet an SGC liability in full by the due date automatically becomes personally liable for a penalty equal to the unpaid amount. The fact sheet also provides examples of behaviour that will attract closer scrutiny from the ATO and mitigating factors that may be taken into account when determining the appropriate level of penalties.

Legislation and government policy

State debt recovery Bill (NSW) receives royal assent

The State Debt Recovery Act 2018 (NSW) (Act) received Royal Assent on 21 March 2018, which makes provision for the recovery of certain state debts. The Act authorises the Chief Commissioner of State Revenue of New South Wales (Commissioner) to take action to recover three types of state debts, being:

  • taxation debts owing to the Commissioner
  • debts referred to the Commissioner from a public authority and
  • debts arising from non-payment of grants and rebates under certain public schemes.

While both tax and grant debts are already recoverable by the Chief Commissioner, this Act allows them to be recovered as part of consolidated State debt, using the same powers for all civil debts.

Consolidation integrity measures passes into law

The Treasury Laws Amendment (Income Tax Consolidation Integrity) Act 2018 (Act) has been passed by the Senate with no amendments and received Royal Assent on 21 March 2018. The Act amends the Income Tax Assessment Act 1997 to make a number of amendments to the income tax consolidation regime. For further details on the changes made by the Act, see Talking Tax – Issue 108.

Contact

Anthony Bradica

Anthony specialises in taxation planning and structuring for corporate clients, including advising on capital raisings and M&A.

Todd Bromwich

Todd is a taxation lawyer with experience in charity law, general commercial matters, trust law and estate planning.

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