Thinking | 21 May 2018

Talking Tax – Issue 119

ATO updates

Still waiting for guidance

The ATO has updated its online guidance on ‘Assessing the Risk: Allocation of profits within professional firms guidelines’ and ‘Everett Assignments’ (Guidelines), following the initial suspension of the Guidelines in December 2017.

When it first suspended the Guidelines, the ATO noted that it was aware that they were being misinterpreted in relation to arrangements that went beyond their scope. The only specific examples given by the ATO at the time were the use of related party financing and self-managed super funds. Following this, there was the 2018 Budget announcement that partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership, will no longer be able to access the small business CGT concessions in relation to those rights.  This may reduce future ‘Everett Assignments’ if the small business CGT concessions are not available.

The ATO has now set out a number of specific concerns following its review, which are listed below:

  • Lack of any meaningful commercial purpose regarding arrangements including, but not limited to
    • disposal of an equity interest through multiple assignments
    • the creation of new discretionary entitlements such as Dividend Access Shares
    • utilising amortisation leading to differences between tax and accounting income.
  • Disregard for CGT consequences and inappropriate use of CGT concessions.
  • Assignments where profit sharing is not directly proportionate to the equity interest held.
  • The creation of artificial debt deductions.
  • Undertaking an assignment to dispose of an equity interest to a self-managed super fund.
  • Assignments where the arrangement is not on all fours with the principles of Everett and Galland.

Since the suspension of the Guidelines, the ATO has been consulting with industry with a view to publishing draft guidance and ‘providing certainty prior to 30 June 2018’.

Submission in relation to this process can be made by email.

The current ATO website notes that:

  • those who have entered into arrangements before 14 December which comply with the Guidelines and do not exhibit high risk factors can rely on those Guidelines and
  • arrangements entered into prior to 14 December exhibiting any of the high risk factors may be subject to review.

Given the wide application of the original guidelines in practice, it is hoped that the ATO’s final guidance provides a sensible response to the issues that its review has revealed; rather than a knee jerk reaction which will punish many for the transgressions of a few.

Meaning of ‘directly in connection with’

On 2 May 2018, the ATO released Draft Tax Determination TD 2018/D1 ‘schemes that limit a taxable presence in Australia under section 177DA of the Income Tax Assessment Act 1936 - meaning of 'directly in connection with'’ (Draft Determination). This Draft Determination is in relation to the Multinational Anti-Avoidance Laws (MAAL) which aim to prevent large multinational groups entering tax avoidance schemes.

Section 177DA of the Income Tax Assessment Act 1936 is the operative provision which addresses multinational groups that enter an arrangement to avoid a taxable presence in Australia.  Broadly, the requirements of section 177DA(1)(a) are that:

  • a foreign entity (specifically a significant global entity) makes a supply to an Australian customer
  • there are activities undertaken in Australia by an Australian associate of the foreign supplier that are ‘directly in connection with’ the supply and
  • the foreign entity derives income which, in whole or in part, is not attributed to a permanent establishment in Australia.

The Draft Determination provides guidance around the term ‘directly in connection with’ in the context of section 177DA.

The Draft Determination confirms that the phrase ‘directly in connection with’ is intended to be construed broadly (which is not surprising given the MAAL rules are intended to be strict in addressing global tax avoidance). Whether or not an activity is ‘directly in connection with’ a supply will ultimately depend on the facts and circumstances.

Some points noted by the Draft Determination include:

  • The test does not require a temporal connection (ie the activities can be in connection with a future supply).
  • It is not necessary for every activity of the Australian entity to be connected with the supply to an Australian customer.
  • The test may be satisfied even where the foreign entity uses an independent distributor if the Australian entity is still contributing to the foreign entity making supplies in Australia.

The Draft Determination provides various examples to assist taxpayers in determining when they may breach the rules of section 177DA. The ATO is receiving comments on the Draft Determination until 1 June 2018.  Once finalised, the Draft Determination is expected to apply retrospectively.

Deferral requests during peak lodgement periods

The Commissioner has released some short guidance on deferral requests during peak lodgement periods.  During these periods, deferral requests may take the full 28 day processing time.

With the tax return lodgement date of 15 May 2018 for some entities having just passed, the guidance notes that these returns can be lodged up until 5 June 2018, provided any liability is paid by this date.

The due date for 2017 self-managed super fund annual returns has been extended to 30 June 2018.

Excluded Classes of Transactions and Entities for Third Party Reports on Shares and Units Determination 2018

The Legislative Instrument, Excluded Classes of Transactions and Entities for Third Party Reports on Shares and Units Determination 2018, was registered on 9 April 2018 and replaces a previous instrument registered on 5 May 2016.

It relieves entities to which the instrument applies from having to provide information to the ATO under the third party reporting regime in Subdivision 396-B of Schedule 2 of the Taxation Administration Act 1953 (Act). The types of affected entity are companies listed on an Australian financial market, trustees of a unit trust and trustees of other trusts holding shares or units, in relation to transactions that are not reported in an income tax return.

A number of classes of entities that are excluded from transactions are listed in the Legislative Instrument. Some types of transactions exempted include:

  • transactions relating to shares listed on Australian financial markets
  • trustees of a unit trust with less than 10 beneficiaries and a market value of assets of less than $5 million
  • trustees of trusts other than unit trusts, where the trustee is not required to hold an Australian Financial Services Licence and the total market value of the assets held by the trustee in all trusts is less than $5 million
  • trustees of trusts, other than unit trusts, that enter into transactions where another entity will include information about the transaction in a report given to the Commissioner, and that report identifies that the entity is absolutely entitled to the shares or units as a beneficiary of the trust and
  • transactions in relation to employee share schemes where any entity is required to provide information to the ATO in respect to a transaction pursuant to Division 392 of Schedule 1 of the Act.

If you would like any assistance with the application of these rules to your client’s circumstances, please contact us.

Improved online experience with the Tax Practitioners Board

This announcement from the Tax Practitioners Board (TPB) confirms a number of enhancements to improve the online experience of registered tax practitioners with the TPB. These key enhancements are as follows:

  • notification of changes in registration requirements made easier
  • more flexible searching on the TPB register and
  • online qualifications tool to provide instant results.

Case law

Dominant use of lands as primary production

In the case of Moore v Chief Commissioner of State Revenue [2018] NSWCATAD 88 the primary question for the Tribunal was whether the dominant use of the land by Mr Moore (Taxpayer) was for the purpose primary production. The land was being used to cultivate mung beans, alfalfa and snow peas for sale.  The Taxpayer also used the land to package sprouts, which was a requirement of the relevant packaging licence held by the Taxpayer.

The Chief Commissioner of State Revenue took issue with the extent of primary production use of the land, based on other uses of the land, including general warehousing. The Chief Commissioner also submitted that the packaging of sprouts by the Taxpayer constituted secondary production (and therefore not primary production).

It was held by the Tribunal that on a broad holistic test, the cultivation activities were the dominant use of the land. Further, the Tribunal rejected the contention that the packaging of sprouts was secondary production on the basis that there was no change to the sprout product by packaging.

This decision shows that when it comes to determining the question of dominant use of land, a common sense approach should be applied, taking into account the connected and ancillary uses which form part of the leading use.

Senior Member R Hamilton SC referred to all the relevant factors pertaining to the use of the land and whether the dominant use was primary production. However, he commented that it is not a useful approach to question the use of land by breaking down the various uses into smaller and smaller parts.

The Senior Member considered evidence led by the taxpayers indicating that the husband and wife worked full-time in the business together with the particular uses of the land as follows:

  • Lot 1, being approximately 500sqm, provided access from the public road to Lot 2. It contained a storage shed which was rented to an arms’ length tenant who used the balance of the land for parking and deliveries. Lot 1 contained a shipping container for disposing of rubbish.
  • Lot 2, being approximately 620sqm, housed a larger warehouse/shed which contained two levels used to prepare, sprout and store seeds in low light conditions. The shed contained a packing area, cool room, office space and amenities. Lot 2 also provided forklift storage, dumpster rubbish, pallet storage and space for parking a delivery vehicle and car. The land contained two greenhouses for growing sprouts. However, one of these greenhouses was damaged in a storm and facilities were moved to operate in one greenhouse during the relevant year. Separately, a small area of the land was used for seed roasting.

Legislation and government policy

Action underway against tax evaders

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, confirmed the current Government’s commitment to combating and punishing tax avoiding activities conducted through tax evasion schemes.

Some key highlights of the announcement are:

  • the identification of more than 100 Australians with links to Swiss banking relationship managers who are considered to be ‘high risk’
  • the identification of 578 Australians holding unnamed numbered accounts with a Swiss bank and
  • working with AUSTRAC, the ATO identified over 100 taxpayers who have had 5,000 cross-border transactions worth over $900 million in the past 10 years.

The ATO is currently investigating the systems taxpayers are using to conceal and transfer wealth anonymously in order to evade their tax obligations in Australia.

These statistics highlight the Government’s approach in investigating tax avoidance activities through its multi-agency approach and international partnerships.

Contact

Andrew O’Bryan

Andrew specialises in taxation law. He is a CPA Australia Fellow and Chairman of its Taxation Centre of Excellence.

Adam Dimac

Adam is an experienced tax lawyer, advising on a range of matters, including Division 7A, CGT and corporate restructuring.

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