Thinking | 15 June 2018

Talking Tax – Issue 122

Case law

Decleah Investments Pty Ltd and Prince Removal and Storage Pty Ltd as Trustees for the PRS Unit Trust v FCT [2018] FCA 717

On 22 May 2018, Justice Steward of the Federal Court set aside the decision of the Administration Appeals Tribunal (Tribunal) in Decleah Investments Pty Ltd and Anor as Trustee for the PRS Unit Trust and Commissioner of Taxation [2017] AATA 2418 on the basis that the Tribunal had erred in law by not properly considering key evidence submitted. This included evidence given by the Commissioner’s valuer in respect of whether the taxpayer’s valuation had been made in a manner contrary to professional standards. This case emphasises the importance of using valuers that are well informed and qualified to make valuations that comply with tax related provisions such as those set out under the GST margin scheme provisions.

By way of background, the GST margin scheme allows for the calculation of the GST payable on supplies of real property on the basis of 1/11 of the “margin” (specific rules being set out under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth)(GST Act) on the sale of real property. An important valuation in this calculation is the 1 July 2000 valuation.

The Taxpayer was a developer who had calculated and applied the margin scheme in selling lots of land and had obtained its own margin scheme valuations in respect of the land as at 1 July 2000. The Commissioner issued assessments (for GST) in respect of the relevant land, with one of the key matters of contention being in relation to the margin scheme valuation used by the Taxpayer.

Before the Tribunal, the Commissioner obtained and provided his own valuation.

The Tribunal rejected the applicant’s valuation, increased the amount of GST payable by the Taxpayer, set aside the Commissioner’s decision to reduce the originally imposed penalties (from 50% to 25%) and effectively reinstated a penalty of 50% for recklessness.

On appeal, his Honour set aside the Tribunal’s decision that the professional valuations obtained by the taxpayer were not ‘approved valuations’ for the purposes of the margin scheme and under which the Tribunal had increased the taxpayer’s GST liability.

In reaching this decision, Justice Steward made a number of observations including, that:

  • there was conflicting evidence provided by valuers in respect of the professional standards which were identified by the Commissioner’s valuer
  • the Tribunal misunderstood the legislative scheme and the issue for determination was in fact whether the taxpayer’s valuation was made in a manner not contrary to professional standards
  • the fact that the Commissioner’s valuer has formed the view that the applicant’s valuation was not made in a manner contrary to professional standards was a decisive matter (and was one which was not considered by the Tribunal) and
  • the Tribunal erred by not giving the parties the opportunity to make submissions about a relevant textbook on valuations, both with respect to its content and the potential expertise of its author.

His Honour also observed that, whilst the conflicts in the evidence were not capable of resolution by him (instead, it was appropriate that the proceeding be remitted back to the Tribunal to be heard in accordance with law), on the evidence, he would have been unable to accept that the Taxpayer’s valuation was so absurd or irrational that it would lead him to decide that it was made in a manner contrary to professional standards.

This case emphasises the importance of ensuring that valuers are instructed and informed in a manner that enables them to provide valuations that are compliant with the GST Act. Further, the process and standards on which valuer views are formed must be clearly and succinctly documented so that valuers can appropriately explain their methodology in the event that it is contested or compared to other valuer’s opinions.

Legislation and government policy

New Point of Consumption Tax in Victoria, the ACT, Queensland and NSW

The Victorian Treasurer has announced that the Victorian Government will introduce, with effect from 1 January 2019, a Point of Consumption Tax (PoCT) of 8% that will apply to the net revenue of wagering and betting operators, including online operators. Other jurisdictions have followed suit with similar announcements.

The Victorian tax, which was first proposed in the 2017-18 State Budget, proposes levelling the playing field for all betting operators regardless of the jurisdiction in which they are licensed by imposing a tax based on the customer’s location.

The Treasurer said the Victorian Government will continue to work with other states and territories to extend a common PoCT model, although Victoria has taken a markedly softer approach than other jurisdictions (having a rate of 8%, comparatively lower than the others).

In the recent Budget handed down by the Australian Capital Territory Government, a similar PoCT has been proposed to take effect from 1 January 2019 at the rate of 15% for bets placed in the ACT or placed by ACT residents.

Similarly, the latest Queensland Budget announced a PoCT applying to Queensland residents and bets made within state at the rate of 15%.

These PoCTs will, if passed, join the existing South Australian PoCT which has applied at the rate of 15% since 1 July 2017.

Earlier this week, the NSW Treasurer announced that the state would take the middle road and introduce a PoCT at the rate of 10%.

Like most taxes, the devil is in the detail: all of the recently introduced PoCTs have diverging tax-free revenue thresholds ranging from $150,000 to $1 million between the various jurisdictions. It will be interesting to see how well the jurisdictions co-ordinate to administer their respective regimes without unduly penalising the betting consumer.

Budget announcements in Queensland and the Australian Capital Territory

Queensland State Budget

Further to the recently released Queensland Budget 2018-19, on 12 June 2018, the Revenue Legislation Amendment Bill 2018 (Qld) was introduced into parliament to give effect to announcements made during the budget.

Specifically, the Bill proposes to amend the:

  • Duties Act 2001 by increasing the rate of additional foreign acquirer duty from 3 per cent to 7 per cent from 1 July 2018 in respect of transfer duty, landholder duty and corporate trustee duty.
  • Land Tax Act 2010 by prescribing new rates of land tax for landholdings of individuals, companies, trustees and absentee owners in a variety of brackets (based on taxable value).
  • Land Tax Regulation 2010 by prescribing primary production activities under new section 2A for the purpose of the primary production exemption under section 53 of the Land Tax Act 2010, including relevant activities, such as agriculture, dairy farming or pasturage.
  • Payroll Tax Act 1971 to ensure that the 50% payroll tax rebate for wages paid or payable to apprentices and trainees will be extended for a further 12 months ending on 30 June 2019.
  • Taxation Administration Act 2001 to prescribe the days on which service is effected by way of new information systems, including to prescribe that if notice is given by email or text message that the date the email is sent or the text message is sent is the date notice if taken to be given to the taxpayer.

ACT Budget

The 2018/19 Budget for the Australian Capital Territory was handed down by the State Government last week and there are a lot of winners, including:

  • First home buyers and commercial property owners: The ACT Government is committed to phasing out transfer duty on property transactions, starting with the abolishment of duty for first-home buyers (with a household income below $160,000) and commercial property transactions under $1.5m from 1 July 2018.
  • Seniors: The income threshold on the General Rates Aged Deferral Scheme will be removed, meaning that ACT residents over 65 and with at least 75 per cent equity in their home can defer rate payments until after their home is sold.

Tax integrity measures

Measures introduced to address hybrid mismatch arrangements in cross-border businesses

The Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Bill 2018 (Bill) introduces a new division, Division 832, and amends other sections of the Income Tax Assessment Act 1997 (1997 Act) to implement part of the recommendations made in the OECD Action 2 Report on hybrid mismatches, taking into account the recommendations made by the Board of Taxation and having regard to input received during public consultation.

The new rules aim to neutralise the effect of hybrid mismatch arrangements that exploit differences between the tax treatment of entities and instruments across different countries.

Broadly, a hybrid mismatch will arise where the arrangement results in a business receiving a deduction in two countries for the same payment (deduction/deduction), or when a business receives a deduction in one country but the corresponding income is not included as assessable income in the receipient country (deduction/non-inclusion).

To neutralise the effect of the hybrid mismatch, Australia has adopted a two-tier response system. The primary response will disallow an Australian tax deduction; the secondary response will include an amount in an entity’s Australian assessable income.

There are 6 types of mismatches captured by the legislation:

  • hybrid financial instrument mismatches
  • hybrid payer mismatches
  • reverse hybrid mismatches
  • branch hybrid mismatches
  • deducting hybrid mismatches and
  • imported hybrid mismatches.

If a hybrid mismatch is not captured by the above categories, the targeted integrity rule may operate to neutralise the effect of the mismatch.

The hybrid mismatch rules will apply to income years starting on or after 1 January 2019. The imported mismatch rule will apply to income years starting on or after 1 January 2020, unless the importing payment is made under a structured arrangement. Broadly, a structured arrangement will exist where either the hybrid mismatch is priced into the terms of the scheme, or it is reasonable to conclude that the hybrid mismatch is a design feature of the scheme.

This Bill also amends the Income Tax Assessment Act 1936 to implement part of the OECD hybrid mismatch rules by limiting the scope of the exemption for foreign branch income and preventing a deduction from arising for payments made by an Australian branch of a foreign bank to its head office in some circumstances.

Proposed changes to the superannuation system

The Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 (Bill) was introduced in the House of Representatives on 24 May 2018 proposing various changes to the superannuation system including to:

  • ensure compliance with the payment of mandatory employee entitlements
  • prevent inadvertent breaches of the concessional contributions cap and
  • clarify the rules around the valuation of super fund balances and non-arm’s length income.

Under the Bill (and as indicated by the Explanatory Memorandum):

  • Schedule 1 provides for a one-off 12-month amnesty to encourage employers to self-correct historical superannuation guarantee non-compliance.
  • Schedule 2 amends the Superannuation Guarantee (Administration) Act 1992 (Cth) to allow individuals to avoid unintentionally breaching their concessional contributions cap when they receive superannuation contributions from multiple employers. Under this measure, an employee may apply to the Commissioner for an employer shortfall exemption certificate which prevents the employer from having a superannuation guarantee shortfall if they do not make superannuation guarantee contributions for a period. This effectively allows the employee to opt out of the superannuation guarantee regime in respect of an employer, and negotiate with the employer to receive additional cash or non-cash remuneration.
  • Schedule 3 clarifies the non-arm’s length income rules for superannuation entities to ensure that they apply in situations where a superannuation fund enters into schemes involving non-arm’s length expenditure incurred in gaining or producing income. The result of such a scheme would be to inflate the superannuation fund’s earnings, which is the type of arrangement that the rules are designed to target.
  • Schedule 4 amends the total superannuation balance rules to ensure that, in certain circumstances involving limited recourse borrowing arrangements, the total value of a superannuation fund’s assets is taken into account in working out individual members’ total superannuation balances. As a result of the change, an individual member’s total superannuation balance may be increased by the share of the outstanding balance of a limited recourse borrowing arrangement, commenced after 1 July 2018, related to the assets that support their superannuation interests. However, this only applies to members who have satisfied a condition of release with a nil cashing restriction, or those whose interests are supported by assets that are subject to a limited recourse borrowing arrangement between the superannuation fund and its associate.

Improving the Integrity of Stapled Structures

On 17 May 2018, Treasury released the first stage of exposure draft legislation and explanatory material giving effect to the measures announced on 27 March 2018 to address risks to the corporate tax base posed by stapled structures and similar arrangements. These measures propose to limit access to concessions currently available to foreign investors for passive income.

This exposure draft legislation proposes to amend the Income Tax Assessment Act 1997, Income Tax Assessment Act 1936 and Tax Administration Act 1952 to improve the integrity of the income tax law by:

  • increasing the managed investment trust (MIT) withholding rate on income attributable to trading business;
  • modifying the thin capitalisation rules to prevent double gearing structures;
  • limiting the withholding tax exemption for superannuation funds for foreign residents to limit access to tax concessions for foreign investors; and
  • codifying and limiting the scope of the sovereign immunity tax exemption.

Please refer to our detailed coverage of the measures (as proposed) in the April 2018 issue.

Immediate deduction of low-cost depreciating assets regime extended under the Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018

The Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018 amends the tax law to grant a further extension to the period during which small business entities can access the immediate deduction for depreciating assets, amounts included in the second element of a depreciating asset’s cost and general small business pools, where the amount is less than $20,000.

The Bill extends the expanded accelerated depreciation rules (by 12 months) to 30 June 2019.

Contact

Michael Parker

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

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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