Talking Tax – Issue 156

ATO view on Qian v FCT

In its Decision Impact Statement (DIS) regarding the decision of the Administrative Appeals Tribunal (AAT) in Qian and Commissioner of Taxation [2019] AATA 14 (Qian), the ATO clarifies that it does not support the contention that Qian is authority for decisive or predominant weight being given to a worker supplying their own vehicle when assessing whether they are an independent contractor or an employee.

In Qian, the taxpayer worked as a courier for delivery companies on an exclusive basis. The issue before the Administrative Appeals Tribunal (AAT) was whether the taxpayer was an independent contractor or employee for the purposes of his entitlement to GST registration.

The AAT emphasised the need to consider the totality and substance of the relevant relationship. In doing so, the AAT weighed up a multitude of factors, which point towards, and away from, the taxpayer being considered an employee:

Factors pointing towards employee status Factors pointing towards independent contractor status
The taxpayer wore the uniform of the delivery companies The taxpayer supplied, operate and maintained the van used to carry out the deliveries
The taxpayer worked exclusively for one delivery company at a time The payment summaries given to the taxpayer were in regular accounting form
The taxpayer relied on the delivery companies to generate and allocate jobs to him, determine the rates paid and total cost for each job and generate invoices
The taxpayer did not maintain an accounting system for the jobs performed


The AAT ultimately found that the taxpayer was an independent contractor. The AAT set aside the amended assessment decision of the Commissioner as it was based wholly on the Commissioner’s incorrect determination that the taxpayer was not conducting an enterprise.

The ATO notes that the decision was open to the AAT, but that the classification of a worker as an employee or an independent contractor is highly factually dependent.

The ATO notes it is seeking an appropriate test case to clarify the law on the significance of a worker supplying his or her own vehicle when assessing whether a worker is a contactor or an employee.

For assistance in determining your workers’ status as employees or independent contractors, please contact Anthony Bradica.

Targeted integrity rule — ATO releases LCR in accordance with OECD hybrid mismatch rules

The hybrid mismatch rules in Division 832 Income Tax Assessment Act 1997 (Cth) (ITAA 1997) aim to neutralise any tax advantage, usually being a deduction/non-inclusion (D/NI) outcome, arising from the use of hybrid arrangements that exploit differences in the income tax laws of two or more countries.

The targeted integrity rule enables Division 832 to have broader application, preventing offshore multinationals from circumventing the hybrid mismatch rules by routing investment or financing into Australia via an entity located in a no or low tax (10% or less) jurisdiction.

The Draft Law Companion Ruling 2019/D1 (DLCR) released last month contains specific guidance on several interpretative issues relevant to the targeted integrity rule provisions in Subdivision 832-J, including the Commissioner’s views on the meaning of ‘control’ when identifying the ultimate parent entity.

More importantly, the DLCR provides guidance on the matters to be considered when determining the reasonableness of a conclusion with respect to the principal purpose test, particularly regarding when an entity will be seen as carrying ‘substantial commercial activities’.

The targeted integrity rule applies if:

  • an entity (the paying entity) makes a payment to a foreign entity (the interposed foreign entity), either directly or indirectly;
  • the paying entity, the interposed foreign entity and another foreign entity (the ultimate parent entity) are all in the same Division 832 control group;
  • the ultimate parent entity is not controlled by any other entity (other than an entity that is not a member of the Division 832 control group);
  • the paying entity would otherwise be entitled to a deduction in an income year in respect of the payment;
  • the payment is not subject to Australian income tax;
  • the payment is either:
    • subject to a foreign income tax in one or more foreign countries with the highest rate of tax not exceeding 10%, or
    • not subject to foreign income tax; and
  • it is reasonable to conclude (having regard to certain matters) that the entity, or one of the entities that entered into or carried out any part of the scheme, did so for a principal purpose of, or for more than one principal purpose that includes a purpose of:
    • enabling a deduction to be obtained in respect of the payment; and
    • enabling foreign income tax to not be imposed on the payment or to be imposed at a rate not exceeding 10%.

The DLCR sets out the Commissioner’s views on several ambiguities in the current legislative scheme.

Control of the ultimate parent entity

Under the DLCR, the meaning of the word ‘controlled’ will reflect the conditions that cause the entities to be members of the Division 832 control group.

This means that if entities are members of the same control group because they have been grouped for accounting consolidation purposes, that same control criterion will be relevant to identifying the ultimate parent entity. Likewise, if the entities are in the same control group as a result of participation interests one might have in the other, the participation interest control criterion should be relevant to identifying the ultimate parent entity of that control group.

Principal purpose test

A conclusion reached in relation to the principal purpose test (set out above) must be reasonable. In assessing reasonableness, regard must be had to three matters. The DLCR addresses each matter in turn, setting out the Commissioner’s views:

  1. the facts and circumstances that exist in relation to the scheme:

this matter is broad in scope and extends beyond those facts and circumstances that relate directly to the interposed entity. It is broad enough to encompass any actions or arrangements entered into by any of the parties to the scheme contributing to the effective replication of the D/NI outcome;

  1. the source of the funds used by the interposed foreign entity to provide the paying entity with the loan or other debt interest in respect of which the payment of interest is made:
    1. this matter looks to the source of funds from the perspective of the interposed entity and involves an enquiry into the character of the cash flow, servicing costs and foreign tax implications for the interposed entity and the broader Division 832 control group;
    2. it requires the consideration of whether effectively there can be a conversion of a taxable interest payment in the ultimate recipient's hands to a non-taxable return as a result of being routed via the interposed foreign entity;
    3. ‘source’ in this context does not specifically refer to the identity or location of the investor, though these factors may also be relevant; and
  2. whether the interposed foreign entity engages in substantial commercial activities in carrying on a banking, financial or other similar business:
    1. this points to the business in question being one in the nature of borrowing and lending such that any effective replication of the D/NI mismatch would be mitigated (or, at least, limited to the margin);
    2. factors pointing to such a characterisation include:
    3. undertaking spread activities common to banking business;
    4. actual borrowing and lending;
    5. a pooling of funds approach (making it difficult to ascertain the source of funds);
    6. risk management activities consistent with such a business; and
    7. whether the interposed foreign entity is capitalised in a manner and at a level consistent with that of a stand-alone entity engaged in such business.

The consultation period is now closed.

Now that the ATO has clarified its views on certain aspects of the hybrid mismatch targeted integrity rule (albeit in draft form), it is an opportune time for entities that are funded by offshore interests — particularly where that funding originates (directly or indirectly) from non-taxed or low-taxed jurisdictions — to revisit those arrangements in light of the ATO’s views in the DLCR.

For more information, or for assistance in navigating the hybrid mismatch rules, please contact our team.

This article was written with the assistance of Norberto Rodriguez, Lawyer.


Jim Koutsokostas

Jim is a experienced lawyer and Chartered Tax Advisor, providing expert advice on corporate and trust tax matters.

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