22 March 2019
Talking Tax – Issue 153
Home care service provider found to be a non-profit organisation despite commercial dealings with related entities
In KinCare Community Services Limited v Chief Commissioner of State Revenue  NSWSC 182, the Supreme Court of NSW (Court) allowed the taxpayer’s application, finding that KinCare Community Services Limited (KinCare) was a ‘non-profit organisation’ during the relevant period and that certain wages were therefore exempt from payroll tax.
KinCare, a provider of home care services to aged people, people with disabilities and Aboriginal and Torres Strait Islander people, is part of a broader group which includes ‘for profit’ entities (Group).
The primary issue was whether KinCare was a ‘non-profit organisation’ or ‘public benevolent institution’ within the meaning of clause 12 of Schedule 2 of the Payroll Tax Act 2007 (NSW) (Charitable Exemption). The secondary issue was whether wages paid by KinCare were paid to persons engaged in charitable work or work of a public benevolent nature.
The Court applied the two-limb test set out in Grain Growers Ltd v Chief Commissioner of State Revenue  NSWSC 925 to determine whether KinCare met the definition of a ‘non-profit organisation’. Broadly, this required both of the following questions to be answered in the affirmative:
- Does the organisation’s constitution prevent profits from being distributed to members?
- Is the organisation being carried on for the benefit or gain of particular individuals?
The Court found that KinCare was prohibited by its Constitution in making a distribution to its members because of its objects clause and by virtue of section 125 of the Corporations Act 2001 (Cth).
In respect of its related, for-profit entities, the Court noted that KinCare paid a market rate to its related entities for the provision of field staff so that KinCare could give effect to the home care plans it had devised.
It found that despite a level of interdependency between KinCare and the other members of the Group, KinCare only dealt with these “for profit” entities to the extent necessary to provide its charitable services. Therefore, KinCare was not being carried on for the benefit of these related entities and they did not taint KinCare’s status as a ‘non-profit organisation’.
Further, the Court found that KinCare’s field workers were exclusively engaged in work of a charitable nature. Therefore, wages paid to them were exempt from payroll tax.
Additionally, wages were paid to administrative staff, whose time was split into supporting the charitable purposes of the Group and providing administrative services to KinCare’s related entities. At the end of each financial year, an allocation was made based on an apportionment of administrative services provided and a charge levied by KinCare and paid by the related companies for those administrative services.
In this respect, the Charitable Exemption permits a partial exemption from payroll tax for employees engaged in charitable and non-charitable work.
However, because there was insufficient evidence before the Court as to a reasonable method of apportionment of activities of the administrative staff, the Court could not apply a partial exemption to these wages. In particular, the Court stated:
[the] apportionment, conducted in different ways in different years, broadly on a percentage of revenue basis, does not demonstrate on the civil standard the time spent by KinCare’s administrative staff on KinCare’s own work, which I have concluded was the only charitable work of the non-profit organisation that I am satisfied KinCare undertook.
Ultimately, this decision strengthens the position of organisations with charitable objects, as a mere interdependency or dealings with for-profit, related entities do not necessarily disturb the organisation’s non-profit classification.
Nevertheless, this case also provides a warning for employer groups using employees, such as administrative staff, for exempt and non-exempt purposes. Clear and reasonable record keeping that supports an apportionment of the amount of time spent working on the different types of work is necessary in order to qualify for a partial exemption.
New whistleblower regime for tax avoidance matters
The Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2018 (Bill) passed both houses of Parliament and received royal assent on 12 March 2019. It introduces new protections for tax whistleblowers not previously available under the Corporations Act 2001 whistleblower provisions.
The Bill amends the Tax Administration Act 1953 (Cth) to create a regime for the protection of individuals who report information about tax avoidance or other tax misconduct.
Among other things, the Bill:
- broadens the scope of the individuals eligible for protection and the individuals to who a protected disclosure can be made;
- allows for anonymous disclosures to be made;
- makes it an offence for a person to victimise a whistleblower or another person by engaging in conduct that causes detriment, where the conduct is based on a belief or suspicion a person has made, may have made, proposes to make or could make a disclosure that qualifies for protection; and
- provides greater access to remedies including compensation.
Under the new provisions, self-incriminating information provided through a protected disclosure may not be admissible against the whistleblower in criminal proceedings or in proceedings for the imposition of a penalty.
However, this immunity does not prevent the Commissioner from issuing an amended assessment or imposing an administrative penalty. The Commissioner will treat the disclosure as a voluntary disclosure on the part of the whistleblower as to their personal tax affairs.
Insurance settlement payout not income, not CGT exempt
In JSLG and Commissioner of Taxation (Taxation)  AATA 336, the Administrative Appeals Tribunal (Tribunal) set aside the Commissioner’s decision to treat a lump sum paid to JSLG (Taxpayer) by his insurers to settle claims against them as fully assessable in the relevant income year.
The Tribunal held that the lump sum amount in question ($803,000) was not paid exclusively to settle a claim relating to non-payment of income protection benefits (IP Claim). However, it was precisely because the mixed payment constituted a ‘single undissected payment’ that it was not exempt from CGT on the basis of being paid as compensation for injury.
The Taxpayer commenced proceedings against two companies for non-payment of policy benefits and, among other things, ‘inconvenience, mental anguish, personal insecurity and distress’ (Personal Harm Claim). These companies agreed to pay the Taxpayer $1,100,000 under a release agreement (Agreement). Pursuant to the Agreement, $803,000 was not expressly paid in relation to a specific claim. Instead, the Taxpayer agreed to release and discharge the companies from all actions and claims which he had or might have against them.
The Taxpayer argued that the $803,000 could not be assessable income because it was a ‘single undissected lump sum’ comprising amounts not only for the release of the IP Claim but also for all other possible claims, including the Personal Harm Claim. As a mixed payment, it was, therefore, capital in nature.
The Taxpayer also argued that the $803,000 was not only capital in nature, but that it was also exempt from CGT because it related ‘directly to compensation or damages for a wrong, injury or illness’ under s 118-37(1)(a) of the Income Tax Assessment Act 1997 (Cth).
In arriving at its decision, the Tribunal relied on Sommer v Federal Commissioner of Taxation (2002) 51 ATR 102 (Sommer), where Merkel J stated that:
The true nature and proper characterisation of the settlement amount is to be determined by having regard to the policy, the applicant’s claims under the policy, the terms of settlement which, inter alia, settled those claims and the rights the applicant will be surrendering upon the cancellation of the policy.
In this case, the relevant evidence as per Sommer was held to be the release agreement and the Statement of Claim. These documents revealed that the insurers were unmistakably seeking to release themselves from all present and future claims, including the Personal Harm Claim, and not only the IP Claim. The $803,000 was therefore not exclusively attributed to the IP Claim.
This meant that the $803,000:
(a) constituted a single undissected lump sum; and
(b) as a mixed payment, was, therefore, capital in nature.
Unfortunately for the Taxpayer, the fact that the $803,000 was characterised as a ‘single undissected lump sum’ paid in the settlement of all other claims meant that it was not possible to dissect the amount which was attributable to the Personal Harm Claim. It could not therefore be said that the payment (or any part therefore) directly related to compensation for injury.
Ultimately, the case is a win for the taxpayer as the amount, although not CGT exempt, was not assessed as income. Practically, the case draws attention to the need for careful drafting when preparing or considering agreements in the context of settling disputes, as the tax treatment of any settlement payout will depend upon whether the payment is made in respect of one or more claims as well the nature of those claims.
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