Thinking | 6 April 2018

Talking Tax – Issue 113

Case law

SRO is watching - so don’t be short sighted

In The Optical Superstore Pty Ltd & Ors v Commissioner of State Revenue [2018] VCAT 169 Tribunal Member R Tang has found that certain contractor agreements were relevant for characterising payments as wages, certain exemptions applied in relation to services provided to the public generally, the Commissioner should not exercise his discretion in respect of excluding certain entities from the taxpayer’s group and penalties (of 25%) were properly imposed. Amongst the numerous takeaways - the 25% penalty emphasises the importance of obtaining advice as a prudent step in managing a growing business.

The taxpayers in their capacity as trustees of various trusts carried on the business of an optical dispensary under the name The Optical Super Store. In October 2012 the taxpayer was investigated for its compliance with payroll tax and as a result of the investigation was issued with multiple payroll tax assessments for the 2006 to 2011 financial years imposing additional payroll tax, 25% penalty tax and interest in respect of payments made to contractor optometrists under relevant contracts.

Having their objections to those assessments denied by the Commissioner, the taxpayers appealed to VCAT for review of the Commissioner’s decision and for the assessments to be set aside on the basis that exemptions applied and that penalty tax and interest is remitted on the basis that completion of each SRO stage, being the investigation, objection and referral to VCAT took two years.

On the core issues of the dispute, VCAT made the following determinations:

  • in relation to the contractual arrangements under which optometrists were engaged, only certain agreements were relevant and only location attendance premiums were to be treated as wages
  • in relation to whether any of the optometrists to whom wages may prima facie be treated as exempt under the exemption for persons who provide services to the public generally, the exemption should be applied only to some of them
  • the discretion should not be exercised to exclude certain applicants from the group in relation to whether the businesses carried on by the trustees of certain trusts were carried on independently (and not connected with the businesses carried on by the other applicants) and
  • on penalties, the amount of 25% was determined to be properly imposed and neither penalties nor interest should be remitted.

This case is a reminder of the administrative and evidentiary burden placed on businesses which regularly engage contractors to perform key services of the business as they scale-up each business.

Taxpayers should be open to undertaking internal audits prior to any investigation activity by the State Revenue Office to ensure that exemptions can be obtained at the investigation stage without having to engage in dispute resolution processes.

ATO updates

Decision impact statement - Coventry and Commissioner of Taxation (Taxation) [2018] AATA 175

The ATO has released a decision impact statement (DIS) as a result of Coventry and Commissioner of Taxation [2018] AATA 175 (Coventry) where the AAT, in interpreting provisions of the Agreement Between the Government of Australia and the Government of the Islamic Republic of Pakistan on Development Co-Operation (Agreement) did so consistently with Article 31 of the VIENNA Convention on the Law of Treaties 1969 and held that the taxpayer was working on an ‘activity’ and that its costs were funded from the contribution of the Government of Australia to the activity. The DIS agreed with the Tribunal’s decision.

Coventry involved a taxpayer who was an employee of the Australian Department of Foreign Affairs and Trade (DFAT), posted in Pakistan to manage an Australian aid program for more than 91 continuous days in an income year. DFAT paid his salary and wages as official development assistance while he was working in Pakistan.

The taxpayer contended that his salary and wage income was exempt from foreign employment income under section 23AG of the Income Tax Assessment Act 1936 (Cth). Having his objection disallowed by the Commissioner, the taxpayer applied to the AAT for review. The AAT found that the taxpayer was exempt from income tax under section 23AG in regards to his salary and allowances on the basis that the taxpayer was working overseas under the terms of the Agreement between Australia and Pakistan, and his employment complied with the definition of ‘Australian project personnel’ in the Agreement.

The DIS accepts the view of the AAT that:

  • there was no requirement that a person must work on a single or specific activity and
  • the fact that salary and wages are paid from 'departmental' expenses does not mean they cannot be funded from the contribution of the Government of Australia within the meaning of the Agreement.

The DIS notes that the Commissioner will apply these principles in determining whether a person is exempt from income tax in another country by reason of a development agreement or similar Agreement where the objects, purpose and terminology are not materially different to the Agreement considered in this case.

CRT Alert 024/2018 - Final preparation for MAAS implementation

This alert provides important advice and assistance to help prepare for Member Account Attribute Service (MAAS) implementation. Per the ATO website, MAAS is a service for superannuation providers to report changes to a member’s account attributes and will include the following changes:

  • replace the existing ‘Lost Member Statement’ and
  • incorporate an optional build component for a provision of details service to allow trustees to request ATO-held contact details on demand.

Per the alert, the first tranche of super funds will begin transitioning to the new event-based reporting service, MAAS from April 2018. The ATO will publish a product checklist soon and will write to all trustees to advise them of the requirement to complete this checklist. The MAAS Business Implementation Guide will also be updated and republished by 29 May 2018. This new guide will is intended to more certainty around system performance.

Legislation and government policy

Property purchasers beware: you might owe the ATO GST for your purchase

On 29 March 2018 the Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Act) received Royal Assent and, amongst other changes, enacted changes to the way GST is reported and paid to the ATO where there are supplies of new residential premises or potential residential land. Broadly, the changes shift the reporting and payment obligation from the supplier to the purchaser so that the purchaser will need to make the relevant GST payment on the supply to the ATO.

Currently, supplies of new residential premises are subject to GST and the obligation is on the supplier to remit GST to the ATO. According to the Explanatory Memorandum for the Bill, one of the main forms of GST non-compliance on supplies of new-residential premises supplies is where developers supplying properties have collected GST from purchasers but proceed to dissolve their business before their Business Activity Statement (BAS) is due. As such, the Act introduces amendments to address (among other matters) this non-compliance. Under the new law, from 1 July 2018, there will be obligations for both the recipient (Purchaser) of a supply and the supplier (Vendor).

Key Changes

  • the Purchaser is required to make a payment to the ATO of the GST that applies on the supply
  • the Purchaser must withhold an amount if it is the recipient of the taxable supply
  • where there are multiple purchasers; if a purchase is made as tenants in common, each Purchaser is required to make payment (as a joint obligation) in proportion to their interest in the property
  • the Vendor will be required to provide the Purchaser with a specific type of notification (relating to GST on the supply) before making the supply
  • the Vendor will be entitled to a credit for the amount of any payment made to the ATO by the Purchaser.

Relevant matters

Under the changes, there are a variety of commercial considerations that Vendors and Purchasers should consider, including:

  • GST attribution rules and timing around BAS reporting, particularly when payments are made in instalments
  • whilst the amount of GST to be paid is usually 1/11th of the contract price of the supply, pursuant to the changes, where supplies are made under the margin scheme, a statutory rate of 7% (or greater amount as determined by the Minister in a legislative instrument, but no more than 9%) must be withheld by the Purchaser and paid to the ATO and
  • contracts entered into prior to 1 July 2018 will not be impacted by the new rules as long as they are completed prior to 1 July 2020 (providing a two year transitional period for pre-existing contracts).

This summary scratches the surface of these changes and we envisage further discussion on these changes will be soon to follow.

Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 (Cth)

On 12 February 2018, the Treasury Laws Amendment (Enterprise Tax Plan No.2) Bill 2017 (Bill) was introduced in the Senate. The Bill proposes to amend the corporate tax rate to 27.5 percent for all corporate tax entities by the 2023-24 income year. Thereafter, it is proposed that the corporate tax rate is to be cut to:

  • 27% (in the 2024-25 year)
  • 26% (in the 2025-26 year)
  • 25% (in the 2026-27 year)

Under this Bill, the turnover threshold to qualify for a lower tax rate will be progressively raised to cover all companies by 2024-25, before the company tax rate is reduced to 25 percent for all companies by 2026-27.

In the 2023-24 income year, it is proposed that the base rate entity threshold test will be removed and consequently, the corporate tax rate will be 27.5 percent for all corporate tax entities. The corporate tax rate will then be further reduced, for all corporate tax entities to 25 percent by 2026-27.

Australia’s current headline corporate tax rate at 30 percent, is one of the highest in the world and significantly above the average for OECD countries. According to the Explanatory Memorandum for the Bill, the reduction in the corporate tax rate for all companies will encourage investment and higher paid jobs. It will also make Australian companies more internationally competitive in a tough global marketplace. Furthermore, this tax plan is intended to result in higher living standards for Australians.

Revenue Ruling LTA 008 - Grouping of related corporations

On 3 April 2018 the Commissioner of State Revenue (Commissioner) issued Revenue Ruling LTA 008, ‘Grouping of related corporations’ (Ruling) setting out guidelines for the exercise of the Commissioner’s discretion to group related corporations for the assessment of land tax as a single corporation in accordance with section 50 of the Land Tax Act 2005 (LTA).

Taxpayers will be grouped if two corporations are related corporations as defined under section 47 of the LTA. Where two or more corporations are related, they may be grouped and treated as if they were a single corporation under s 50 of the Act if the Commissioner so determines. The Ruling sets out relevant factors that the Commissioner will take into account in exercising his discretion.

Under the former Revenue Ruling LTA 002 the Commissioner took the view that where two or more corporations are related corporations, those corporations will be grouped and assessed as one entity except in circumstances where it was ‘unjust to do so’. This has now been superseded by the factors provided by Justice Harbison in Tadcaster Sorrento Pty Ltd v Commissioner of State Revenue [2015] VCAT 611 (Tadcaster Sorrento).

Under the Ruling, the Commissioner will have regard to the following factors when exercising his discretion to group:

  • whether there is an intention to avoid land tax based on the purpose and history of the ownership structure and whether tax planning was a factor which the Commissioner provides is a highly significant factor
  • the degree of relatedness between the corporations takes into consideration the extent of ownership, control over the composition of the board and management of the corporations and the extent of unity between corporations
  • the degree of day-to-day operational control exercised by the directors of each related corporation and the greater the control the more likely the Commissioner is to group related corporations
  • the degree of interrelationship between each corporation where there are common business activities, operations and the ultimate profits flow to the same or common shareholders;
  • the use of the land takes into consideration the manner in which the land is used, the purpose for which it was acquired and, if there are joint activities or commonalities in use, the Commissioner takes the view that this is a strong factor for grouping
  • other relevant factors may be considered although the Commissioner does not express any view on what these factors may be.

Whilst the Ruling provides some guidance to taxpayers on the factors taken into consideration following Tadcaster Sorrento, the Ruling does not provide any detail on the treatment of shareholders and directors that may be in a non-executive position and the management of the businesses are performed by distinct day-to-day managers.

In addition, the Ruling is silent on ‘hardship’ as a factor for consideration and merely points to ‘other relevant factors’. In the case of Tadcaster Sorrento, Justice Harbison took into consideration the negative impact or detriment to the taxpayer in exercising the discretion. It was not a point which was evidenced well in the case, but something that should be taken into consideration as taxpayers (in most cases) will be retrospectively assessed. For taxpayers leasing land, issues may arise where it may be impracticable to pass on further costs to current and historical tenants.

Contact

Michael Parker

Michael is a tax lawyer who specialises in tax disputes, capital gains tax, business sales and acquisitions and restructuring.

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