Thinking | 20 November 2015
Talking Tax- Issue 13
This week we're talking about..
Rosgoe Pty Ltd v Commissioner of Taxation  FCA 1231
The Federal Court set aside the decision of the Administrative Appeals Tribunal (AAT) determining that the AAT should not have engaged in its own fact-finding exercise and is bound by the facts outlined in the private ruling issued by the Commissioner to the taxpayer on the same matter.
The taxpayer was a discretionary trust (the Trust) with Rosgoe Pty Ltd (Rosgoe) acting as its trustee. Rosgoe purchased two adjacent properties (the Property) with the intention of developing the land and selling it through a joint venture with a property developer. The joint venture never eventuated and instead Rosgoe obtained development approval and sold the Property at a profit.
Rosgoe applied to the Commissioner for a private ruling about the tax treatment of the proceeds of sale. The application included information about the business and asked the Commissioner whether the sale of the Property amounted to the mere realisation of a capital asset with the proceeds being taxable on capital account.
The Commissioner’s private ruling outlined the Commissioner’s understanding of the arrangement and found the sale proceeds were not on capital account. The Commissioner found that Rosgoe was not carrying on a business of property development but purchased the Property with an intention to develop and sell it at a profit such that the proceeds were assessable (even though the profit was not made by the means envisaged).
Rosgoe’s objection to the ruling was denied by the Commissioner leading Rosgoe to appeal to the AAT. The AAT affirmed the Commissioner’s objection decision, but in the process of doing so, made a finding of fact that Rosgoe was carrying on a business of property development (in direct contrast to the Commissioner’s finding).
Rosgoe appealed to the Federal Court, on the basis that the AAT was not permitted to depart from the arrangement identified by the Commissioner in the ruling. The Federal Court agreed with Rosgoe and noted that the function of the AAT is to form its own view about how taxation law applies to the arrangement identified by the Commissioner, not to re-define the arrangement in the way it sees fit. The AAT was not permitted to reconsider the facts upon which the Commissioner based his decision, only the applicability of the taxation law to those facts.
The Federal Court said the AAT ought to have held that the Commissioner’s ruling was in error, and that the arrangement involved the mere realisation of a capital asset. The Federal Court set aside the AAT’s decision and remitted the questions back to the AAT.
This case serves as a pertinent reminder to taxpayers to ensure that the information supplied to the Commissioner in an application for a private ruling is specific, thorough and accurate. The Commissioner will use this information to establish the ‘arrangement’ upon which his decision is based and any future appeal rights will be limited to the facts initially supplied.
Taxpayer Alert TA 2015/4 –Accessing business profits through an interposed partnership with a private company partner
The ATO has expressed concern through Taxpayer Alert 2015/4 about arrangements where individuals are interposing a private company between themselves and a partnership in order to access the partnership profits at the corporate tax rate.
The structure which the ATO is concerned about involves a partnership with a private company partner contributing the vast majority of capital but having little to no management control and an individual partner contributing little capital but having control over the management of the partnership. The partnership usually receives its profits via a discretionary trust or as dividends from a private company. The partnership will then distribute the profits to the partners in proportion to their contributed capital such that the majority is distributed to the private company partner. The profits received by the private company partner are then typically loaned or paid to the individual or an associate of the individual. This allows the individual to access the business profits at the corporate tax rate rather than including it in their assessable income, thereby avoiding paying any top-up income tax up to their marginal tax rate.
The ATO’s concerns include the following:
- the partnership may not meet the general law requirements of a ‘partnership’ such that the partnership may be ineffective at law;
- the partners themselves (and not the partnership) are the true beneficiaries of the trust;
- the private company partner might not have an interest in the income of the partnership under the partnership provisions in Division 5 of Part III of the Income Tax Assessment Act 1936 (Cth);
- the private company may be taken to have paid an unfrankable dividend to the individual if the individual is also a shareholder of the private company; and
- the anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth) might apply to the arrangement.
The ATO additionally noted that similar arrangements involving the use of a corporate limited partnership have come before the Administrative Appeals Tribunal (AAT) on two occasions recently. On both occasions, the ATO was successful with the AAT finding that a number of particular provisions in the income tax law did not operate in the way the taxpayers submitted.
A pilot compliance program is currently underway within the ATO, where a number of cases involving these types of arrangements are being reviewed. The ATO expects taxpayers will be contacted over the coming months.
If you are concerned that you are engaged in an arrangement of this type or similar, contact our experienced team of tax lawyers for advice.
Legislation and government policy
Tax and Superannuation Laws Amendment (2015 Measures No 6) Bill 2015: small business restructure rollovers
In the 2015-16 Budget, the Government announced that a new roll-over would be introduced to allow small businesses to change their legal structure without incurring capital gains tax (CGT) liability. Draft legislation introducing this new roll-over has now been released for comment.
Currently, CGT rollover relief is only available to individual sole traders, partnerships and trusts which convert to a company structure. The new legislation intends to extend rollover relief to transfers of assets from a company to a sole trader, partnership or trust, where the transfer occurs after 1 July 2016.
The roll-over will apply to a “small business entity”, being a business entity with an annual turnover of less than $2 million, or a maximum net asset value of less than $6 million. The calculation of “small business entity” includes the turnover and assets of affiliated and connected entities.
For more information on the small business restructure rollover and how it could benefit your company, read our tax update here - or contact a member of our tax team.
Exemption for private companies from public disclosure of information requirements in doubt
On 12 November 2015, the Tax and Superannuation Laws Amendment (Better Targeting the Income Tax Transparency Laws) Bill 2015 (Act) received Royal Assent.
The Act exempts private companies from having their tax information publicly disclosed by the Commissioner. The public disclosure of tax information regime is mandatory for public companies under section 3C of the Taxation Administration Act and forms part of the income tax transparency laws.
Under the Act, the Commissioner will refrain from publishing the tax information of private companies that:
- are an Australian resident company; and
- are not a wholly-owned subsidiary of a foreign corporate group; and
- do not have more than 50% foreign shareholding.
However, the Senate has attempted to repeal the new Act before it even begins, making the public disclosure of information regime applicable to private and public companies alike. The Senate’s attempt to repeal the new Act came in the form of an amendment to the multinational tax avoidance legislation which the government is currently considering.
The House of Representatives has not agreed to the repeal. Given the House of Representatives passed the exemption for private companies initially, there is doubt as to whether the repeal of the exemption will be successful.
Australia and Germany sign a revised double tax agreement (DTA)
Australia and Germany have entered into an updated DTA which will come into force after both countries have introduced the new provisions into their respective domestic legislation and the ratification instruments have been exchanged.
The new features of the revised DTA include:
- the introduction of a 10 year time limit for transfer pricing adjustments;
- the ability to claim a refund of overpaid withholding tax;
- an exchange of information regime between the Australian and German revenue agencies;
- rules regarding when Germany can apply its own capital tax to capital owned by Australian residents; and
- reduced withholding tax rates on dividends, interest and royalties.
The Australian government has said legislation will be introduced into Parliament as soon as practicable to give effect to the revised DTA.The purpose of the amendments to the DTA include reducing investment and trade barriers between Germany and Australia, preventing double taxation and managing multinational tax avoidance. Taxpayers who have offshore operations in Germany and regularly invest in or trade with Germany, should welcome the changes to the DTA which will make trading cheaper and more accessible.
Free Trade Agreement between Australia and the European Union (EU)
Australia and the EU have agreed to work towards entering into negotiations for an Australian EU Free Trade Agreement (FTA).
Australian Prime Minister Malcolm Turnbull and the EU leaders released a joint statement saying the FTA will support “sustainable growth and investment”.
Both Australia and the EU will now undertake a domestic consultation process before negotiations begin. The government is seeking input from the business community regarding the potential opportunities and impact the FTA would bring, especially regarding any barriers to trade which currently exist and their commercial significance.
G20 encourage OECD to establish Base Erosion of Profit Shifting (BEPS) framework
At a recent Summit in Turkey, G20 leaders urged OECD countries to implement the BEPS project by developing an inclusive framework by early 2016.
G20 have also encouraged developing and non-G20 interested parties to commit to implementing the BEPS project as good progress is being made towards enhancing the transparency of tax systems on an international scale. The transparency will be achieved through information exchange and other measures which the G20 hopes to be in place by the end of 2018.