Thinking | 30 April 2018

Talking Tax – Issue 116

Case law

Past compliance history and current solvency are key to successfully applying for ATO instalment payments

In Stojic v Deputy Commissioner of Taxation [2018] FCA 483 the Federal Court rejected an application to review a decision of the Commissioner of Taxation (Commissioner) to decline to exercise his discretion under section 255-15(1) of Schedule 1 to the Taxation Administration Act 1953 (Act) to permit the Taxpayer to pay a tax-related liability by instalments.

The Court found that the Taxpayer was not denied procedural fairness, the Commissioner did not take into account irrelevant considerations and that the Commissioner had given proper regard to the merits of the proposed payment arrangement.

The Taxpayer was the sole director and secretary of a company (Company) since its registration. Following an audit of the Company’s activity statements, the Commissioner commenced enforcement action against the Company to secure payment of outstanding tax liabilities. The Commissioner entered into a payment arrangement with the Company in April 2016, which the Company defaulted on.

In addition to its enforcement action against the Company, the Commissioner sought to recover the Company’s tax-related liabilities from the Taxpayer and commenced enforcement proceedings against the Taxpayer. While these were afoot, the Taxpayer proposed two payment arrangements for the payment of the liabilities. Both of these were rejected by the Commissioner.

The Taxpayer brought this application on the following three grounds: a denial of procedural fairness, the taking into account of an irrelevant consideration and the rigid adherence to a policy. For the reasons below, the Court held against the Taxpayer on all three grounds.

Denial of procedural fairness

In deciding to reject the proposed payment arrangement, the Commissioner took into account the fact that no security was offered by the Taxpayer but did not inform the Taxpayer that this was to be a relevant consideration. The Taxpayer contended that this constituted a breach of the rules of natural justice. The Court held that the Commissioner was entitled to take this matter into consideration in making his decision and had no obligation as a matter of procedural fairness to inform the Taxpayer that this would be a relevant factor.

The Court also noted that the Commissioner, in refusing to accept a proposed payment arrangement, stated ‘We are unable to consider another payment plan offer and can only consider full payment’. The Court held that this statement is incorrect and should not have been made, but did not mislead the Taxpayer. The Court noted that if the statement had caused the Taxpayer to incorrectly believe that he was unable to make further proposed payment arrangements, the Commissioner may have breached its obligation of procedural fairness.

Taking into account an irrelevant consideration

In rejecting the Taxpayer’s proposed payment arrangements, the Commissioner took into account the compliance history of the Company with its payment arrangement.

The Court held that the Commissioner may take into account any factor which he believes might bear on whether an instalment arrangement should be accepted and that this could include the compliance history of the Company. In making this decision, the Court noted that an individual’s capacity to pay may be affected by the financial position of a company they run their business through.

Rigid adherence to policy

The Taxpayer argued that the Commissioner failed to give ‘proper and genuine’ regard to the merits of the proposed payment arrangement. He claimed that the Commissioner had refused to agree to the arrangement due to an incorrect belief that he was bound to do so because the Taxpayer had not proffered a ‘preferred security’.

The Court found that the Commissioner had not taken this view but if he had, such a view would be incorrect. The Court held that the Commissioner had simply sought to convey that the proposed arrangement may have been acceptable if security had been offered.

The Commissioner has appealed to the Full Federal Court against the decision in Sharpcan Pty Ltd and FCT [2017] AATA 2948

The Commissioner has appealed the decision of Justice Pagone in Sharpcan Pty Ltd and FCT [2017] AATA 2948, in which the Administrative Appeals Tribunal set aside the objection decision of the Federal Commissioner of Taxation and allowed outgoings for gaming machine entitlement fees to be deducted under section 8-1 of the Income Tax Assessment Act 1997 (Cth). For a detailed discussion of this decision please refer to Talking Tax – Issue 106.

The Full Federal Court hearing has been listed for 11 May 2018.

ATO updates

Digital Service Provider (DSP) Operational Framework readiness

The ATO has introduced new requirements for digital service providers (DSPs) using ATO digital services as part of the DSP Operational Framework. The DSP Operational Framework was put in place to help the ATO to ensure integrity and security of the taxation and superannuation system.

New DSPs are required to be certified before they start interacting with ATO digital services while existing DSPs will have to complete their certification within a specified timeframe. DSPs that are already using or wish to use the ATO’s superannuation services will need to start the approval process by 1 June 2017.

The Full Picture

The ATO has released a publication titled ‘The Full Picture, How the ATO works with and for small business’. It includes an introduction by Deputy Commissioner for Small Business, Deborah Jenkins. It refers to the recent media coverage in respect of the ATO and its relationship with small business and outlines four main topics:

  • ‘Help for small business’ – this topic covers the ATO’s use of technology to enhance interactions, supporting business and focusing on ways to reduce the administrative burden on small business.
  • ‘How we manage debt’ – this topic covers how the ATO is assisting taxpayers to meet payment obligations on time and addressing debts while they are manageable. It also discusses recovery action.
  • ‘ATO approach to ABNs’ – this topic briefly discusses the Australian Business Register and how business may incorrectly use ABNs to engage workers as contractors when they should be classified as employees.
  • ‘How the ATO manage disputes and settlements’ – this topic includes statistics on settlements in dispute resolution, the management of disputes and a reduction in the cost for taxpayers.

Legislation and government policy

Tax treatment of stapled structures

On 27 March 2018, Treasury released an Integrity Package of measures focused on tightenting the rules for stapled structures and limiting the tax concessions available to foreign investors receiving passive income from Australian property investments.

The Integrity Package follows the ATO’s Taxpayer Alert 2017/1 – Re-characterisation of income from trading businesses, issued in January 2017, and Treasury’s extensive consultation regarding potential reforms for stapled structures, conducted throughout 2017.

Broadly, the proposed measures will amend the thin capitalisation rules, increase the withholding rate for certain managed investment trusts (MIT), limit the withholding tax concessions for certain foreign pension funds and limit tax exemptions for foreign Governments.

A key Treasury integrity concern is that the use of existing rules has created a tax bias in investment decisions. That is, foreign institutional capital is attracted towards land-rich businesses rather than businesses that are capital intensive, knowledge based and/or research and development intensive. In addition, most countries do not reciprocate the broad interest and dividend withholding exemptions that Australia’s regime currently offers for foreign pension funds and sovereign wealth funds. The Integrity Package proposes two key start dates for the range of measures it seeks to implement: 1 July 2018 and 1 July 2019.

From 1 July 2018, the amendments to the thin capitalisation rules are proposed to take effect to prevent foreign investors from using multiple layers of flow-through entities to convert trading income into favourably taxed interest income (i.e. ‘double gearing’ structures). This is to be achieved by lowering the thin capitalisation associate entity test (for the purposes of determining associate entity equity and associate entity debt) from ‘50% or more’ to ‘10% or more’ for interests in flow-through entities. In addition, the arm’s length debt test will be clarified to require consideration of gearing against the underlying assets for interests in any entity.

From 1 July 2019, the proposed amendments that will take effect are:

  • An increase in the MIT withholding tax rate on ‘active business income’ from 15% to the corporate tax rate, with a 15-year exemption for new, Government-approved national significant infrastructure assets. The higher MIT withholding tax rate will apply to MIT fund payments derived from cross staple rental payments, cross staple payments made under some financial arrangements, or where the MIT receives a distribution from a trading trust. The higher MIT withholding tax rate is not intended to apply where only a small proportion of the gross income of the trust relates to cross staple payments (i.e. conversion of active business income is not central to the structure) or where the stapled operating entity receives rent from third parties that is merely passed through as rent to the trust.

This integrity measure targets the stapled structures being used to convert active business income into passive rental income, where there is no clear commercial justification for the splitting of a single business and the structure appears to be solely a tax driven strategy to reduce effective tax rates for foreign investors. For example, where land assets necessary for use in a business are held by a MIT but leased to an operating company, the taxable income of the operating company would be reduced by rental payments to the MIT and rental payments received by the MIT would be subject to the 15% MIT withholding tax rate when distributed to foreign investors.

  • A limit to the foreign pension fund withholding tax exemption for interest and dividends, so that the exemption is only available in respect of portfolio investments.

Whilst one of the key aims of the MIT regime was to increase the attractiveness of Australia’s fund management industry to mobile foreign investment, the pool of funds invested by sovereign wealth funds and pension funds has grown rapidly. As these types of investors have access to a range of additional tax concessions, effective tax rates on distributions from stapled businesses for these investors can be between 0% and 15%.

This integrity measure limits the broad unilateral exemptions from dividend and interest withholding tax available to foreign pension funds, largely because most countries do not provide such broad exemptions and Australian superannuation funds are not generally receiving reciprocal treatment when investing offshore.

  • A legislative framework for the existing tax exemption for foreign governments (including sovereign wealth funds), and limiting the exemption so it is only available in respect of portfolio investments.

Similar to the foreign pension fund integrity measure, the proposed legislative framework for foreign sovereign investors aims to limit tax exemptions because most countries do not provide such broad exemptions for Australia’s sovereign wealth funds that invest in those other countries.

  • The exclusion of agricultural land from being an ‘eligible investment business’ for an MIT, meaning that income, rent and capital gains from agricultural land will not be eligible for the MIT concessional withholding tax rate of 15%.

This integrity measure is aimed at levelling the playing field between domestic and foreign investors purchasing Australian agricultural land, as the current rules provide foreigners with a competitive advantage over domestic investors.

Tasmania extends Tax Rebate Scheme to support more young Tasmanians into work

The Tasmanian Government, led by Will Hodgman as Premier, has announced that it is extending its existing Payroll Tax Rebate Scheme (Scheme) for apprentices and trainees to 2021. The Scheme was due to end on 30 June 2019 and the legislation to extend the Scheme is currently being drafted.

Beginning 1 July 2017, the Scheme has provided employers with a rebate on payroll tax that otherwise would be payable for eligible apprentices, trainees and youth employees. This Scheme is particularly focused on supporting youth employment in growing areas of the Tasmanian economy, including building and construction, advanced manufacturing, tourism and hospitality.

Other Australian states have similar payroll tax concessions and exemptions to support investment in apprentices and trainees, such as Victoria’s ‘Approved training scheme’ or Western Australia’s  exemption under section 40(2) of Pay-roll Tax Assessment Act 2002.

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