Thinking | 14 September 2018
Talking Tax – Issue 133
Federal Court refuses to remit case to AAT for review on new grounds of objection
In Wu v FCT  FCA 1339, the Federal Court rejected an application of the Taxpayer to remit the case back to the Administrative Appeals Tribunal (AAT) for the purposes of considering whether the Commissioner of Taxation had correctly assessed the Taxpayer in relation to deposits received in the Taxpayer’s account (which the Taxpayer contended were savings he had accumulated from overseas).
In his appeal to the Federal Court, the Taxpayer contended that he was a temporary resident and that the Tribunal had failed to consider whether section 768-910 of the Income Tax Assessment Act 1997 (1997 Act) applied to render the disputed deposits non-assessable non-exempt income. Whilst it was acknowledged by all parties that section 768-910 had been overlooked, the Court refused to grant leave to the Taxpayer on the grounds that the failure by the Taxpayer to raise issues invoking section 768-910 did not result in an error of law on the Tribunal’s part.
By way of background, the Taxpayer was a businessman who arrived in Australia in 2005. He was granted a permanent visa in February 2009. He was assessed for the 2009-2012 income years on certain deposits made into his bank accounts. The assessments were largely upheld by the AAT in Wu and FCT  AATA 78. The Taxpayer was granted leave to appeal to the Federal Court to raise a new argument not considered by the AAT. Namely, that he was a temporary resident for income tax purposes until he was granted a permanent visa and, therefore, any deposits made while he was a temporary resident would be non-assessable non-exempt income under section 768-910 of the 1997 Act.
New grounds of objection
The Court noted that it had the power to allow new grounds of objection under section 14ZZO of the Taxation Administration Act 1953 where the taxpayer appealed to the Court against an objection decision, which was not the case here. In this case, the Taxpayer sought to have the case remitted to the AAT on a new ground of objection that was not raised in the original hearing. The Court noted that it generally does not have the power to give an applicant leave to rely on new grounds of objection.
In reaching the above conclusion, the Court held that the grounds which expressly invoke section 768-910 of the 1997 Act were overlooked from the inception of the proceedings. That is, neither the Commissioner nor the Taxpayer had considered the issue that the Taxpayer was a temporary resident until he was granted a permanent visa. To remit the issue back for re-hearing would effectively be giving the applicant leave to rely on new grounds of objection. The Court’s power to grant leave is confined to the grounds stated in the taxation objection to which the decision relates.
No error of law
The Court also noted that, generally, the AAT does not err in law when it fails to deal with areas of law where the parties themselves did not address the matter. Further, the Court formed the view that the failure to consider the Taxpayer’s status as a temporary resident was more accurately characterised as a mixed error of fact and law (per Commissioner of Taxation v Glennan (1999) 90 FCR 538) rather than a pure error of law.
However, the Court noted that, where an applicant’s claim is apparent on the face of the material before the Tribunal, even if not explicitly argued by the applicant, the Tribunal will have made an error if it fails to consider the matter. Whether something is apparent to the Tribunal is a question of fact and, in this case, the Court found that the new arguments sought to be enlivened under section 768-910 were not apparent on the face of the materials before the Tribunal. While the applicant blamed his legal representatives for this oversight, the Court did not accept this as an excuse.
The Court noted that a matter may be raised for the first time on appeal from a tribunal where:
- the matter is a pure question of law
- the matter goes to a misapprehension that was shared by the parties before the Tribunal and therefore by the Tribunal itself or
- the matter goes to a condition precedent to the availability of a power, the exercise of which will have a serious impact on the individual.
This case serves as a reminder of the importance of stating all grounds in the originating application in the AAT and further, that parties wishing to appeal AAT decisions must clearly indicate that the issue was addressed by the AAT in reaching its decision (and must clearly articulate an error of law on the AAT’s part in reaching that decision). All the issues which an applicant intends to rely on in an application to the Court must be raised in the Tribunal and blaming legal counsel for a failure to address a relevant matter is clearly not a compelling argument in itself.
ATO invites small business owners to comment on fringe benefits tax
On 3 September 2018, the ATO announced that the Board of Taxation would be considering the costs employers face in relation to their fringe benefits tax obligations and would be making recommendations on how these costs could be reduced.
As part of the announcement, the Board of Taxation has requested employers to participate in focus groups, online surveys and case study interviews between August and October to help them understand the time and money employers spend to meet their fringe benefits tax obligations. Interested employers can email firstname.lastname@example.org.
Data analytics used to scrutinise tax refunds
On 4 September 2018, the ATO announced that a record number of tax returns have been finalised in the first two months of “Tax Time” due to prefilling of data by the ATO and the correction of mistakes using analytics and data-matching, with over $11.9 billion being refunded to taxpayers and more than $53 million in errors being detected and corrected before refunds were issued.
The announcement comes as a reminder that the ATO is leveraging off technology to detect abnormalities in claims across a variety of taxpayer categories and further outlines the potential penalties which can be applied depending on a taxpayer’s level culpability.
Allocation of franking credit guidelines
On 5 September 2018, the ATO updated the guidance available on its website in relation to the allocation of franking credits, including the following areas:
- Corporate tax rate for imputation purposes
- Calculating the maximum franking credit
- Distributions issued using an incorrect tax rate
- The franking percentage
The ATO website provides broad guidance, including the following.
Corporate tax rate for imputation purposes
For the 2017-18 income year, the corporate tax rate for imputation purposes is 27.5% if either of the following applies:
- the company’s aggregated turnover in the 2016-17 income year was less than $25 million and 80% or less of its assessable income was base rate entity passive income or
- the entity didn’t exist in the previous income year
Calculating the maximum franking credit
The maximum franking credit that can be allocated to a frankable distribution paid by a corporate tax entity is based on its applicable corporate tax rate for imputation purposes. From the 2016-17 income year onwards, the maximum franking credit is calculated using the following formula:
Amount of the frankable distribution × (1 ÷ Applicable gross-up rate)
The 'applicable gross-up rate' is the entity's corporate tax gross-up rate for the income year in which the distribution is being made.
Distributions issued using an incorrect tax rate
A taxpayer may have issued its 2016-17 or 2017-18 distribution statements using an incorrect corporate tax rate for imputation purposes where:
- based on Draft Taxation Ruling 2017/D7, the taxpayer considers itself as carrying on a business and is a small business entity eligible for the lower company tax rate (2016–17 distributions); or
- more than 80% of the taxpayer’s assessable income is base rate entity passive income, making the Taxpayer ineligible for the lower company tax rate (2017–18 distributions).
If a distribution issued using an incorrect tax rate has been made, taxpayers must notify shareholders of the correct dividend and franking credit amounts. The correct amounts must also be reflected in the franking account.
The franking percentage
The ATO notes that the extent to which an entity has allocated franking credits to a frankable distribution (the franking percentage) is calculated by dividing the franking credit allocated to the distribution by the maximum franking credit that may be allocated to the distribution. This is expressed as a percentage of the frankable distribution rather than the whole of the distribution.
Legislation and government policy
If Labor party is elected we may see a ‘Second Commissioner’ of Taxation to handle Appeals
On 31 August 2018, Shadow Treasurer Chris Bowen announced that, if elected, Labor would legislate to establish a new position of Second Commissioner - Appeals, reporting to the Commissioner and heading up a new Appeals area within the ATO.The announcement refers to genuine concerns that have been raised about engagement with small businesses about tax disputes, including the lack of a perceived and real structural separation within the Tax Office between officials who make tax assessments and those who handle disputes and appeals.
Under the announcement, Labor has proposed that the Second Commissioner would:
- be separate from the original ATO decision-makers
- head the Appeals Group
- manage tax disputes for all taxpayers and
- facilitate the use of Alternative Dispute Resolution through the compliance and dispute resolution process.
Further, the Shadow Treasurer announced, under the proposals, that the ATO would establish a framework for the development of communication protocols between the Appeals Group and other areas of the ATO to ensure that the Appeals Group is independent.
The announcement may be a welcome change for small businesses involved in disputes who are seeking genuinely independent reviews and appeals.
South Australia Budget 2018/19 and budget measures Bill introduced
On 4 September 2018, South Australian Treasurer, Mr Rob Lucas, introduced in the House of Assembly the Statutes Amendment and Repeal (Budget Measures) Bill 2018 (SA), which included measures relating to payroll tax, land tax, stamp duty, third party reporting and a suite of other measures.
Relevant to revenue law, the Bill makes the following amendments:
The Payroll Tax Act 2009 (SA) will be amended to:
- remedy deficiencies in the owner-driver exemption within the contractor provisions and
- reflect changes to the federal income tax legislation relating to motor vehicle allowances for the purpose of determining the exempt component of a motor vehicle allowance paid to an employee.
The Land Tax Act 1936 (SA) will be amended to:
- increase the tax-free threshold from $369,000 to $450,000 from the 2020/21 financial year (land tax calculated on 30 June 2020) and
- reduce the marginal tax rate from 3.7% to 2.9% for land holdings valued between the existing top land tax threshold (currently $1.231m and $5m).
The Stamp Duties Act 1923 (SA) will be amended to:
- expand the current stamp duty exemption for family farm transfers to include transfers involving companies limited to the family group and
- introduce a stamp duty exemption for multi-peril crop insurance policies from 1 January 2018.
Third Party reporting
The provisions on third party reporting in the Taxation Administration Act 1996 (SA) and the Stamp Duties Act 1923 (SA) will be amended to facilitate RevenueSA collecting additional data, relating to real property transfers, on behalf of the Australian Government for foreign ownership and taxation reporting purposes.
BEPS Action 14 peer review reports (Round 4) released
On 30 August 2018, the OECD released the fourth round of BEPS Action 14 peer review reports on improving tax dispute resolution mechanisms, including a report on Australia. Each report assesses a country’s efforts to implement the Action 14 minimum standard as agreed under the OECD/G20 Base erosion and profit sharing (BEPS) project.
The peer review report makes a number of observations for Australia including:
- the country has a relatively large tax treaty network with around 50 tax treaties
- there is an established Mutual Agreement Procedure (MAP) programme and Australia has significant experience with resolving MAP cases, notwithstanding it has a small MAP inventory with a modest number of new cases submitted each year, and less than 45 cases pending as at 31 December 2017
- part of the Action 14 minimum standard has been met to date with resolution of certain compliance deficiencies already being considered and
- areas for specific improvement to satisfy the remaining minimum standard elements have been noted in the report.
The report further acknowledges that Australia has signed the Multilateral Instrument through which a number of treaties will be modified to fulfil these requirements and it is expected that other treaties may be updated (on a case by case basis) to facilitate compliance.
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