18 December 2015
Talking Tax – Issue 17
Chevron appeal to the Full Federal Court
Chevron Australia Holdings Pty Ltd has appealed the decision of the Federal Court in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4)  FCA 1092 to the Full Federal Court.
For details of the Federal Court decision, please see Talking Tax – Issue 12.
Commissioner of Taxation v Australian Building Systems – Liquidators’ retention obligation arises after assessment is made
Last week’s High Court decision in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq)  HCA 48 confirms that liquidators do not need to retain funds to discharge a tax liability unless an assessment has been made.
Specifically, this means that when selling an asset, receivers, liquidators and administrators have no obligation under section 254 of the Income Tax Assessment Act 1936 (1936 Act), to retain any amount that may be required to pay a capital gains tax (CGT) liability on the disposal of an asset, until a notice of assessment has been issued or a deemed assessment has been made.
The liquidators sold a property owned by the taxpayer, and the Commissioner asserted that the liquidators were required to retain an amount from the sale proceeds to pay any CGT liability from the time that the gain crystallised.
Both the Federal Court and the Full Federal Court rejected the Commissioner’s interpretation of section 254. French CJ, Keifel J and Gageler J (Gordon J and Keane J dissenting) dismissed the Commissioner’s appeal, holding that it would be impractical for the agent or trustee to ‘be burdened with a continuing obligation to retain sufficient money to pay at any time the amount of tax that would be payable upon a notional assessment made at that time’.
For further details on this case, please see our recent update.
ATO focus on offshore procurement hub arrangements
The ATO has released a taxpayer alert indicating its concern about particular arrangements used by multi-national enterprises (MNE). Specifically, the focus is on structures that involve two related offshore entities, a procurement hub and a services hub.
The arrangements the ATO is focussing on generally have the following features:
Briefly, under the Controlled Foreign Companies Rules, Australian resident companies are attributed for taxation purposes, any ‘tainted income’ of any foreign companies that they control. The ATO is concerned that some MNEs may be using the division of the procurement role between the two separate offshore entities to minimise tainted income of the Procurement Hub. This is because the Procurement Hub is likely to be failing the ‘active income test’ – having too much tainted income – by deriving less than 95% of its income from genuine business activities The arrangements described above are particularly problematic where there is little or no commercial justification for the separation of the procurement process into two separate offshore companies.
The ATO has also warned that the transfer pricing of the arrangement may be examined and that the general anti-avoidance provisions in Part IVA of the 1936 Act may apply.
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.
Tax avoiding R&D arrangements – ATO decides that Full Federal Court’s application of the law in FCT v Desalination Technology is uncontroversial
Last year, the Full Federal Court unanimously found that a taxpayer who had structured R&D activities through several separate entities had not ‘incurred’ the R&D expenditure for the purposes of claiming the relevant R&D tax offset. The taxpayer was issued with monthly invoices for R&D work completed, with the majority of the invoiced amount being debited to an inter-company loan account between the taxpayer and an associated entity. The taxpayer was only obliged to pay the amount debited to the inter-company loan account on two conditions: the receipt of funds from investors, and the taxpayer considering it prudent to make a payment to the entity.
In his Decision Impact Statement, the Commissioner affirmed that for an amount to be incurred, the taxpayer must be definitely committed to the payment. This was not the situation in the above case, where the taxpayer was invoiced by the associate and the loan account debited as payment of the amount was contingent.
The Commissioner agreed with the Court that the invoiced amounts were neither incurred by the taxpayer nor definitely committed to by the taxpayer, and warned that he may seek to apply Part IVA anti-avoidance provisions to similar circumstances in the future.
ATO guidelines on new multinational anti-avoidance laws’
The ATO has released a Law Companion Guideline that aims to assist taxpayers with the application of the recently enacted multinational anti-avoidance law (MAAL). Briefly, the MAAL amends the anti-avoidance provisions in Part IVA of the 1936 Act, to introduce section 177DA which cancels a significant global entity’s tax benefit if it obtains such a benefit in connection with a scheme that:
- involves the avoidance of the attribution of income to an Australian permanent establishment; or
- was carried out for a purpose of obtaining a tax benefit.
The key points outlined in the Guidelines include:
- The ATO’s desire to engage early with taxpayers that may be affected by the MAAL.
- Discussion on the key provisions of the MAAL.
- Examples of situations in which the MAAL may apply.
- Questions to assist taxpayers in determining whether they may have structures that could be at risk of falling within the MAAL.
ATO focus for large businesses in 2015/16
The ATO has announced its areas of focus for the 2015/16 year for large businesses with an annual turnover above $250 million.
The ATO will be working with large businesses in relation to:
- tax governance;
- providing transparency to the community; and
- early engagement and cooperation in relation to tax disputes.
Specifically, the types of transactions and issues which the ATO will focus on include:
- GST in relation to property transactions, integrity of business systems, financial supplies, cross-border transactions and compliance with the new GST rules for 2017;
- excise, wine equalisation and luxury car taxes;
- international profit shifting including thin capitalisation, related party financing arrangements and offshore hubs;
- trust schemes which aim to minimise tax;
- restructuring events;
- the use of complex structures by wealthy individuals and their private groups;
- R&D claims;
- bank branch attribution;
- deductions for exploration expenses; and
- privatisation and public infrastructure transactions.
If you are exposed to any of these areas of tax and are concerned about the ATO’s focus for the coming year, contact one of our experienced tax lawyers for advice.
Legislation and government policy
China – Australia FTA operational before the end of the year
The Minister for Trade and Investment, Andrew Robb, has announced that the benefits of the China Australia Free Trade Agreement (ChAFTA) are going to be realised from next week. Some key outcomes of the ChAFTA include:
- two rounds of annual tariff cuts with the first round of tariff cuts occurring on 20 December 2015 followed by a second round on 1 January 2016;
- the National Farmers’ Federation estimates that Australia’s agriculture sector is set to save around $300 million from the early implementation of the ChAFTA; and
- Australian services suppliers and investors will have the significant benefits of new and improved levels of access in China from 20 December 2015.
The Government considers the ChAFTA, described by Mr Robb as ‘the most favourable trade deal that China has done with any developed economy’, will immediately improve Australia’s competitive position which should result in growth and job creation.
Federal Government and ATO respond to House of Representatives Standing Committee report on tax disputes
On 4 June 2014, the House of Representatives Standing Committee on Tax and Revenue (Committee) began its inquiry into disputes between taxpayers and the ATO. The Committee’s report was tabled on 26 March this year with 20 recommendations, 15 for the ATO and five for the Government. The ATO and the Government have released their responses to the recommendations. The ATO’s responses can be found in here. A brief summary of the Government’s responses are outlined below.
|Committee recommendation||Government Response|
|Amend the tax laws and the ATO consider other administrative means by which interest charges would not act as leverage against a taxpayer during a tax dispute.||
|Introduce legislation to place the burden of proof on the ATO in relation to allegations of fraud and evasion after a certain period has elapsed. The change should be harmonised with the record keeping requirements. These periods could be extended, subject to concerns of regulatory costs on business and individuals.||
|Introduce legislation to require judicial approval for the Commissioner of Taxation to issue a departure prohibition order (DPO).||
|Review the Small Taxation Claims Tribunal and determine whether it should continue. If so, there should be a one-off increase to the $5,000 limit to take account of inflation since 1997 and a system introduced so the threshold increases incrementally in future to keep pace with inflation.||
|Establish a new position of Second Commissioner – Appeals, reporting to the Commissioner of Taxation to head up the new Appeals area within the Australian Taxation Office.||
Tax transparency paper inviting submissions
Last week the Board of Taxation released a consultation paper outlining a proposed voluntary tax transparency code (TTC). The TTC forms a part of the Government’s commitment to increasing the transparency of large businesses’ tax affairs. The Board is aiming to finalise the TTC by May 2016, with the focus on providing information to ‘interested users’ such as the media, analysts and shareholders, and the ‘person in the street’.
The proposed TTC aims to set a minimum standard that will ‘evolve over time in response to changes in the legal and commercial environment, and changes in corporate governance practices’. The TTC outlines two forms of disclosure, with large business (aggregated Australian turnover of AUD $500 million or more) encouraged to adopt both Part A and B, and ‘medium businesses’ (aggregated Australian turnover of AUD $100 million – $500 million) just Part A. The two parts are summarised in the table below.
The ATO is currently required to disclose the total income, taxable income and income tax payable of certain companies with Australian revenue of AUD $100 million or more. Moreover, as reported last week, new laws recently passed mean that Commissioner will additionally have to disclose the tax affairs of Australian resident private companies with a total income of $200 million or more.
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