Talking Tax – Issue 131
Sufficient evidence of a credible acquisition required for input tax credits
In Sunlea Enterprises Pty Ltd As Trustee for Drummond Cove Unit Trust and FCT  AATA 2792, the Administrative Appeals Tribunal (AAT) decided that the trustee of a unit trust was not entitled to input tax credits as there was insufficient evidence of a creditable acquisition and the relevant invoices did not comply with the requirements of a tax invoice for GST purposes. This case illustrates the importance of proper documentation to ensure that you are able to substantiate and claim the relevant tax credits.
In 2004, the trustee of the Drummond Cove Unit Trust (Trustee) became the registered proprietor of approximately 220 hectares of vacant land in Western Australia (Land).
In 2005, the Trustee, Sandpiper Asset Pty Ltd (Sandpiper) and a third company entered into a Heads of Agreement to create a joint venture to develop and sell the Land. A formal project management agreement setting out the terms was intended but never actually made. The joint venture fell through and in the course of the project, Sandpiper issued 17 invoices to the Trustee, two of which were disputed. The disputed invoices were for ’unrecouped project costs‘, with the first for over $12m, including $1.092m GST, and the second for $19m, including $1.727m GST.
The Trustee claimed the GST of various invoices issued as input tax credits. The Trustee argued that payment of the invoices were made by way of set-off against Sandpiper’s loan accounts in their books despite there being no formal loan agreement.
The AAT decided that there was insufficient evidence of a creditable acquisition by the Trustee. Although GSTD 2004/4 contemplates that a payment by way of set-off can constitute consideration, there was insufficient evidence of consideration because there was no agreement or evidence of Sandpiper’s entitlement to the payment. The disputed invoices were not expressed in terms of a supply, but rather, as a reimbursement or indemnity as a bare trustee or agent, which are transactions that do not attract GST. The invoices also did not comply with the requirements of a tax invoice under sections 29-70(1) of the A New Tax System (Goods and Services Tax) Act 1999 as they did not sufficiently identify what was supplied.
Real connection: when supplies of real property are connected with Australia
On 22 August 2018, the ATO issued GST Ruling GSTR 2018/1 (Ruling) which sets out the ATO’s view on when supplies of real property are connected with the indirect tax zone (Australia) under subsection 9-25(4) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This Ruling replaces GSTD 2004/3 (GST: is a supply of rights to accommodation a supply of real property for the purposes of the GST Act?).
The Ruling states that a supply of real property is connected with Australia if the real property, or the land to which the real property relates, is in Australia. The relevant test is the location of the physical land, not the location of any interest or right over the land. Further, the Ruling states that the supply of a right to accommodation in Australia constitutes the supply of real property connected with Australia. This means that it is irrelevant whether a supplier provides actual accommodation to the recipient, so long as the right to accommodation is provided.For the supplier to be liable for GST on a supply of real property, one of the requirements is that the supply must be connected with Australia.
The Ruling provides the following examples of supplies of real property that are connected with Australia:
- selling land situated in Australia
- granting, assigning or surrendering a lease or licence of land situated in Australia
- a personal right to call for or be granted any interest or right over land in Australia
- granting a put or call option over land situated in Australia
- a licence to occupy land in Australia or
- granting contractual rights to occupy or stay at accommodation in Australia.
The final example includes a stay in a hotel or similar style of accommodation on presentation of a voucher or travel document. For example, a tour operator, whether a resident or non-resident, granting a traveller the right to stay in a hotel located in Australia makes a supply of real property connected with Australia even if the hotel is operated by a different entity.
Commissioner’s discretion to extend two year period for disposing of an inherited dwelling
On 22 August 2018, the ATO issued Draft Practical Compliance Guideline PCG 2018/D6 (Draft Guideline) on the Commissioner’s discretion to extend the two year period for disposing of a dwelling inherited from a deceased estate in order to qualify for the CGT main residence exemption.
If an individual disposes of an interest in a dwelling that:
- it originally received as a beneficiary or trustee of the deceased’s estate
- it disposes of it within two years of the deceased’s death
- the dwelling was the main residence of the deceased and
- any capital gain or loss made on the disposal is disregarded.
The Commissioner, at his discretion, can allow a longer period than 2 years. The Draft Guideline sets out the factors the Commissioner considers in deciding whether to exercise the discretion. It also outlines a safe harbour compliance approach that allows taxpayers to manage their tax affairs as though the Commissioner has exercised the discretion for a period not exceeding 12 months.
Generally, the Commissioner will allow a longer period where the dwelling could not be sold within the two year period mentioned above due to circumstances outside the individual’s control that existed for a significant portion of the first two years. Ultimately, each decision will be decided on a case-by-case basis.
Section 118-195 of the Income Tax Assessment Act 1936 disregards certain capital gains and capital losses arising from a CGT event happening to a dwelling that was a deceased person’s main residence and not being used to produce assessable income just before they died or was acquired by the deceased before 20 September 1985.
The executor or a beneficiary (Taxpayer) of the deceased estate must satisfy the following five conditions to qualify for the additional 12 month safe harbour:
- During the initial two year period after the interest in the dwelling passes to the Taxpayer, over 12 months are spent addressing one or more of the following circumstances:
- the ownership of the dwelling or a challenge to the will
- a life or other equitable interest given in the will which delays the disposal
- administration of the estate which is delayed due to the complexity of the deceased estate or
- settlement of the contract of sale of the dwelling which is delayed or falls through for reasons outside of the Taxpayer’s control.
- The dwelling must be listed for sale as soon as practically possible after the above circumstances are resolved and the sale is actively managed to completion.
- The sale must be settled within six months of the listing.
- The following factors, which are adverse to the exercise of the Commissioner’s discretion, are immaterial to the delay in disposing of the Taxpayer’s interest in the dwelling:
- waiting for the property market to pick up
- delays due to refurbishment to improve the sale price
- inconvenience on the part of the Taxpayer to organise the sale or
- unexplained periods of inactivity by the executor in attending to the administration of the estate.
- The Taxpayer needs no more than a 12 month extension to the two year period for disposal.
If a Taxpayer decides to use the safe harbour but is subsequently subject to an ATO compliance check, the ATO will seek to ensure the Taxpayer satisfies the above factors, including checking the additional period is no longer than 12 months. It will be important for the Taxpayer to keep records to support a position that the above conditions are satisfied. The ATO will not make a determination on whether the Commissioner’s discretion would have been exercised.
Guideline on personal liability of a legal personal representative in distribution of assets of a deceased estate
On 22 August 2018, the ATO issued Practical Compliance Guideline PCG 2018/4 (Guideline) on the personal liability of a legal personal representative (LPR) where assets of a deceased estate are distributed with notice of a claim by the ATO. The Guideline is intended to enable LPRs of smaller and less complex estates to finalise those estates without concern that they may be personally liable for outstanding tax liabilities of the deceased estate (including amended assessments).
The LPR can pay the deceased’s outstanding tax liabilities out of the assets of the deceased estate. However, LPRs may be personally liable to pay those liabilities if they distribute estate assets with notice of an ATO claim.
The Guideline explains when an LPR will and will not be treated by the ATO as having notice of an ATO claim.
An LPR will be treated by the ATO as having notice of:
- any amounts that the deceased owed to the ATO at the date of their death
- any liabilities arising from the assessment of income tax returns that the deceased had lodged but that had not been issued at time of death
- any liabilities arising in respect of outstanding income tax returns that the deceased did not lodge but that the LPR is required by law to lodge and
- any liabilities arising from an ATO review or examination of the affairs of the deceased estate.
Importantly, an LPR will be treated as not having notice of any further ATO claim relating to returns the LPR lodged (or advised the ATO were not necessary) provided that:
- the LPR acted reasonably in lodging all of the deceased’s outstanding returns (or advised the ATO were not necessary) and
- the ATO has not given notice that it intends to examine the deceased’s affairs within six months from the lodgement (or advice of non-lodgment) of the last outstanding returns by the LPR.
An LPR will also be treated as not having notice of an ATO claim if it becomes aware of a material irregularity in an income tax return lodged by the deceased and brings it to the ATO’s attention in writing and the ATO does not, within six months, issue an amended assessment or indicate that it intends to review the matter. The Guideline is limited in its application to smaller and less complex estates. It only applies to executors who have obtained probate and administrators who have obtained letters of administration in circumstances where:
- the deceased did not carry on a business, was not assessable on a share of the net income of a discretionary trust and was not a self-managed superannuation fund member in the 4 years prior to death
- the estate assets consist only of cash, personal assets, public company shares or other interests in widely held entities, death benefit superannuation and Australian real property and
- the total market value of the estate assets at the date of death was under $5m and none of the assets are intended to pass to a foreign resident, tax exempt entity or complying superannuation entity.
Legislation and government policy
Bill attempting to progressively extend the corporate tax rate defeated in the Senate
On 22 August 2018, the Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017 (Bill) was defeated in the Senate by a vote of 36 to 30. The Bill proposed to progressively extend the lower 27.5% corporate tax rate to all corporate tax entities, regardless of turnover, by the 2023-24 income year.
This means that it is unlikely there will be attempted cuts to the company tax rate for larger companies in the next term of Parliament and the Government will consider alternative options to support Australian business competitiveness.
Bill to limit access to lower company tax rate for passive income entities
On 23 August 2018, the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018 (Bill) was passed by the Senate and now awaits Royal Assent. The Bill ensures that, with effect from the 2017-18 income year, a company will not qualify for the lower 27.5% corporate tax rate if more than 80% of its assessable income is passive income (such as interest, dividends and royalties).
Guidance on what is ‘base rate entity passive income’ (BREPI) has been provided in Draft Law Companion Ruling LCR 2018/D7. BREPI includes corporate distributions, non-share dividends, interest (with some exceptions), royalties, rent, a gain on a qualifying security and a net capital gain. It also provides guidance on how to work out franking credits to be attached to dividends.
Government consults on Deductible Gift Recipient reforms
On 22 August 2018, the Minister for Revenue released a consultation paper seeking views on the proposed design for key components of the Government’s package of Deductible Gift Recipient (DGR) reforms. The reforms seek to enhance the role of the Australian Charities and Not-for-profits Commission (ACNC), strengthen governance arrangements and reduce administrative complexity.
DGRs to register as charities
It is proposed that, from 1 July 2019, non-government DGRs will be required to be a registered charity or operated by a registered charity. The reform will only impact a limited number of DGRs as the majority of non-government DGRs are already required to be a registered charity or be operated by a registered charity.
As 11 of the 51 general categories of DGRs under the Income Tax Assessment Act 1997 currently do not have to have charity registration, this leads to inconsistent governance and reporting requirements. Making charity registration a prerequisite for DGR status will improve the consistency of regulation and oversight.
These DGRs would then become subject to ACNC requirements such as reporting obligations and governance standards.
It is proposed that transitional arrangements will be available to assist affected DGRs that are endorsed as at 30 June 2019 to register as a charity and comply with charity obligations. Eligible DGRs will have a 12 month period commencing 1 July 2019 and ending 30 June 2020 to register as a charity with the ACNC or apply for an exemption from the Commission of Taxation. Failure to do so would mean the Commission of Taxation could revoke the entity’s DGR status.
During the 12 month transitional period, non-government DGRs eligible for transition will not need to be a registered charity to retain their DGR status. The reporting requirements during this period will also remain unchanged. After this period, DGRs that have accessed transitional arrangements and registered as a charity will be required to comply with ACNC regulation.
Review of Australian Charities and Not-for-profits Commission
On 22 August 2018, the report Strengthening for Purpose: Australian Charities and Not-for-profits Commission Legislative Review 2018 was released by a review panel who were asked to review the current charities and not-for-profit legislation.
The review panel made a number of recommendations including:
- that the law be amended to provide that certain not-for-profits with annual revenue of $5m or more must be registered with the ACNC under the Australian Charities and Not-for-profits Commission Act 2012 to be exempt from income tax and to access Commonwealth tax concessions
- the Australian Consumer Law should be amended to clarify its application to charitable and not-for-profit fundraising and a mandatory Code of Conduct be developed. Responsibility for the incorporation and all aspects of the regulation of companies which are registered entities should be transferred from ASIC to ACNC, except for criminal offences and
- the development of a single national scheme for charities and not-for-profits.
By way of background, on 20 December 2017, the Hon Michael Sukkar MP commissioned the Review of the ACNC legislation. The purpose was to formulate and make recommendations on appropriate reforms to ensure that the regulatory environment established by the Australian Charities and Not-for-profits Commission Act 2012 and Australian Charities and Not-for-profits Commission (Consequential and Transitional) Act 2012 (ACNC Acts) continues to remain contemporary. This includes ensuring that the ACNC Acts deliver on their policy objectives and that they do not impair the work of the ACNC Commissioner to deliver against the objects of the ACNC Acts.
The final report makes 30 recommendations and has four parts:
- Objects, functions and powers of the ACNC
- The regulatory framework which deals with governance, reporting, basic religious charities, secrecy, advocacy, criminal misconduct and going beyond charities to include other not-for-profit entities
- Red tape reduction which deals with fundraising, making the ACNC a one stop shop and the need for a national scheme and
- Additional amendments including a call for review of the interaction between the Corporations Act and ACNC Acts.
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