Thinking | 4 May 2018
Talking Tax – Issue 117
Aggarwal v Commissioner of State Revenue (Review and Regulation)  VCAT 622
In Aggarwal v Commissioner of State Revenue (Review and Regulation)  VCAT 622, the Victorian Civil and Administrative Tribunal (VCAT) confirmed that the residence requirement for the first home buyer grant is to be assessed objectively, in light of the circumstances relating to the actual occupation of the dwelling.
In this case, the Taxpayer sought review from VCAT of the Commissioner’s decision to disallow its objection to the reversal of the first home owner grant. The Tribunal held that the Taxpayer failed to discharge the onus of proof to show that the home was his principal place of residence (PPR) for a continuous period of 6 months in the twelve month period following completion of the purchase of his home.
The VCAT considered the following key evidence in coming to its conclusion:
- the water usage details provided by the supplier was not consistent with the Taxpayer living in the property during the relevant period
- the Taxpayer failed to provide adequate proof of supermarket or fast food expenditure for the relevant period for his stay in the vicinity of the property and
- other utility bills such as internet usage were considered to be inconsistent with the Taxpayer’s claim.
This case demonstrates that written evidence is critical in supporting the Taxpayer’s assertions. In the present case, utility usage will be strongly weighted as evidence of a PPR but internet usage, local shopping and take away receipts will also be relevant.
Ellison v Sandini Pty Ltd  FCAFC 44
In Ellison v Sandini Pty Ltd  FCAFC 44, the Full Federal Court allowed an appeal from a decision of the Federal Court. In the Federal Court, the Taxpayer was allowed to benefit from CGT marriage breakdown rollover relief and was assessed in respect of the gains made on the transfer of shares in a company to an entity controlled by his former spouse, which occurred pursuant to an order of the Family Court.
In this case, the Family Court made an order that a trust controlled by the Taxpayer was to transfer its shares in a publicly listed company to the former spouse of the Taxpayer. The Taxpayer’s former spouse then requested that the shares be transferred to a trust controlled by her. The transfer of shares was made to this trust.
Under section 126-5 of the ITAA 1997, CGT relief is provided if a CGT event occurs involving an individual and their spouse or former spouse, and the CGT event occurs pursuant to (among other things) an order of the Family Court. A key consideration was the fact that the transferee was not the Taxpayer’s former spouse, but rather an entity controlled by her.
At trial, Justice McKerracher of the Federal Court held that the Taxpayer was entitled to apply the CGT rollover in respect of the transfer. He determined that the transfer had occurred pursuant to an order of the Family Court and that equitable ownership of the shares had been transferred, thereby triggering CGT event A1. Importantly, his Honour found that the effect of the order of the Family Court was such that, as at the date of the order being made, beneficial ownership of the shares was vested in the Taxpayer’s former spouse while legal title remained with the trust controlled by the Taxpayer.
In the alternative, his Honour held that because the Taxpayer’s former spouse directed of the shares be transferred to the trust and they were applied for her benefit, section 103-10 ITAA 1997 had the effect of deeming the shares to be received personally by the Taxpayer’s former spouse, for the purposes of the CGT provisions in the ITAA 1997.
The Full Federal Court in a majority decision overturned the decision of the Federal Court, deciding that the Taxpayer was not entitled to apply the marriage breakdown CGT rollover relief (Logan J dissenting).
The Court held that the change in ownership of the shares occurred either upon the execution of the share transfer form or the registration of the share transfer in favour of the trust controlled by the Taxpayer’s former spouse. The Court noted that orders of a Family Court do not have the power to effect a change of ownership in assets and therefore CGT event A1 cannot arise as a result of Family Court orders directing that a transfer of shares be made.
As a result of this finding, the relevant transfer of beneficial ownership of the shares occurred between the trusts controlled by the Taxpayer and his former spouse. The Court held that section 126-15(1) of the ITAA 1997 is quite clear in its wording and, on a literal construction where only a spouse or former spouse is transferee, the section does not contemplate the transferee being an entity controlled by a spouse or former spouse. Consequently, the Taxpayer was not entitled to apply for the marriage breakdown CGT rollover relief.
Transcripts of Commissioner’s High Court appeal in Thomas case
While the High Court has reserved its decision, the transcript reflects the complicated and yet strained interaction between trust and tax law.
The case involved the purported streaming of franking credits in a manner that was different to that which the net income of the trust was resolved to be distributed. That is, in the relevant years:
- approximately 90% of the franking credits and foreign income, and 1% of the remaining net income of the trust was purportedly distributed to an individual beneficiary and
- the balance of the net income of the trust was purportedly distributed to a corporate beneficiary.
This strategy resulted in the corporate beneficiary having a nil tax liability, and the individual beneficiary receiving cash refunds from the franking credits allocated to him.
In the Supreme Court of Queensland (Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor  QSC 417), the Taxpayer successfully obtained a declaration that franking credits could form part of the income of a trust estate. It was on this basis that the Taxpayer was able to differentially stream franking credits.
The Commissioner successfully appealed the Supreme Court of Queensland decision in the Federal Court (Thomas v FCT  FCA 968). Broadly, Justice Greenwood found that:
- neither the Commissioner nor the Federal Court was bound by the orders made by the Supreme Court of Queensland and
- a discretionary trust could not distribute franking credits differently from the manner in which the net income of the trust was distributed.
In the Full Federal Court (Thomas v FCT  FCAFC 57), the Taxpayer succeeded in his appeal and the matter was remitted to the Commissioner for reassessment.
While the Full Federal Court found it difficult to embrace the interpretation made by the Supreme Court of Queensland of the relevant distribution resolutions, it ultimately found that the Supreme Court of Queensland orders were binding on the Commissioner to the extent they determined the rights of the beneficiaries and trustee.
In the High Court transcript, Justice Gleeson notes that the trust deed did not purport to treat franking credits as a species of income, but that this is one of the areas where the proceedings in the Supreme Court of Queensland went wrong - “…the notion that the deed authorised the treatment of franking credits as a species of income is not only wrong under Division 207 but it is wrong even on the deed itself.”
ACN 068 691 092 Pty Ltd v Commissioner Of State Taxation (No 2)  SASC 26
In ACN 068 691 092 Pty Ltd v Commissioner Of State Taxation (No 2)  SASC 26, application for costs was made following the dismissal of an appeal by a taxpayer against assessments issued by the Commissioner of State Taxation (Commissioner) for land tax on an aggregated basis. The Appellant (taxpayer) contended that the Commissioner took unnecessary steps in the action which increased its costs and should only be able to recover 40% of its costs.
Blue J held that there was no reason to make a partial costs order and ordered that the Appellant pay the Commissioner’s costs having regard to the issues determined at trial in favour of the Commissioner. A partial costs order is only to be made where the costs of the unnecessary steps comprised a very substantial proportion of the costs incurred in the action.
Decision Impact Statement - Panayi v Deputy Commissioner of Taxation
The Commissioner has released a decision impact statement about the Supreme Court of NSW, Court of Appeal case, Panayi v Deputy Commissioner of Taxation  NSWCA 93.
The case concerned the application of the lockdown director penalties provisions as introduced by the Tax Laws Amendment Act 2012 (Cth). In that case, the issue was whether the primary judge erred in applying the amended form of section 269-30 of Schedule 1 to the Taxation Administration Act 1953. The Court of Appeal held that an amendment that prospectively alters a person’s unexercised opportunity to have a liability remitted, does not engage the common law presumption that statutes do not have retrospective operation.
The Commissioner confirmed that the case accords with the ATO’s view of the lockdown director penalty provisions.
Legislation and government policy
Victorian 2018/19 Budget Update
The Victorian Budget was presented by the Victorian Treasurer, Tim Pallas on Tuesday, 1 May 2018. The primary focus of the Budget was on funding transport, health and education in high growth areas and regional Victoria and to create more jobs for Victorians. The Budget provided:
- a $10 million extension to the Premier’s Jobs and Investment Fund
- $13.5 million for the small and medium enterprise sector and
- $16.1 million to grow agricultural exports.
Revenue announcements are aimed that promoting investment in jobs growth as follows:
- From 1 July 2018, the payroll tax free threshold will be increased from $625,000 to $650,000 for all businesses in Victoria
- The payroll tax rate for businesses based in regional Victoria, and with payrolls that comprise at least 85% of Victorian wages associated with regional employees will be reduced from 3.65% to 2.425%– half the metropolitan rate and the lowest payroll tax rate in Australia.
- This Budget aligns the young farmer duty exemption with the threshold for the first home buyer duty exemption. The exemption will be available for farmland purchases valued up to $600,000. A concession from duty will also apply for farmland purchases valued from $600,001 to $750,000. This applies to transfers occurring on or after 1 July 2018.
- Australian Defence Force personnel will be exempt from residency requirements for the first home buyer exemption and concession on all transfers.
Northern Territory 2018/19 Budget Update
The Northern Territory Budget was presented by the Northern Territory Treasurer, Nicole Manison on Tuesday, 1 May 2018. The Budget included several changes in tax revenue policy, the key of which were:
- A vacant property levy, commencing 1 July 2019, on unoccupied commercial land in the Darwin CBD, at a rate of 1% of unimproved value for buildings which are 50% or more vacant, and 2% for an undeveloped vacant property. This contrasts with Victoria's vacant residential land tax, which only applies to residential property and is 1% of capital improved value.
- Deferral of community gaming machine tax increases on hotels that were to commence 1 July 2018.
Private company benefits – Division 7A dividends
While Division 7A of the ITAA 1936 has been around for some time, the ATO has recently seen fit to remind taxpayers about its operation and effect.
Specifically, the ATO has noted that:
- it can apply when a private company provides a payment or benefit to a shareholder or associate through another entity or
- if a trust has allocated income to a private company but has not actually paid it, and the trust has provided a payment or benefit to the company’s shareholder or their associate.
Furthermore, the ATO noted that a Division 7A deemed dividend is generally unfranked and it doesn’t apply to amounts that are assessable to the shareholder or their associate under other parts of the income tax law, such as normal dividends or director’s fees.
This recent update could be interpreted as a reminder that Division 7A is under the ATO’s spotlight or perhaps an indication that long awaited changes to Division 7A are imminent.
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