Thinking | 11 October 2019
Talking Tax – Issue 173
Draft bill - Taxation of testamentary trusts
Treasury has moved to implement an integrity measure on the taxation of testamentary trusts which was first announced in the 2018-19 Federal Budget.
Currently, income received by minors from testamentary trusts is taxed at standard adult rates (under section 102AG of Income Tax Assessment Act 1936), instead of the higher tax rates which generally apply to minors.
The Government identified that some taxpayers have been inappropriately obtaining the benefit of this concession, specifically by transferring assets that are unrelated to the deceased estate into testamentary trusts. The Government announced on 8 May 2018, in the 2018-19 Budget, that an integrity measure would be introduced to deal with this ‘mischief’.
Accordingly, Treasury has released for consultation Treasury Laws Amendment (Measures for Consultation) Bill 2019: testamentary trusts (Bill).
The Bill proposes to insert a new subsection 102AG(2AA) into the Income Tax Assessment Act 1936 to restrict the type of assessable income that falls within section 102AG.
Under this new measure, minors will only be taxed at the lower tax rates if they receive income derived by a testamentary trust from property that:
- Was transferred to the trustee of the testamentary trust from the deceased estate to benefit the beneficiary (eg as a result of the Will); or
- Represents the proceeds of the disposal or investment of those assets.
This measure will have retrospective effect from 1 July 2019.
Submissions on the Bill are due by Wednesday, 30 October 2019.
Commercial debt forgiveness - What is love and affection?
Recently released Draft Taxation Determination TD 2019/D9 (Draft TD) clarifies that only a creditor who is a natural person can rely upon the natural love and affection exception to the commercial debt forgiveness rules. A company or an individual acting as the trustee of a trustee cannot claim that a debt has been forgiven for reasons of ‘natural love and affection’: a somewhat ridiculous idea, if you think about it!
This departs from the Commissioner’s earlier position provided in ATO Interpretative Decision 2003/589 (withdrawn on 6 February 2019), which established that a company could rely upon this exception.
The Draft TD is intended to have retrospective effect but the ATO has confirmed it will not devote compliance resources to debts forgiven prior to 6 February 2019, as taxpayers would likely have relied upon the now withdrawn ATO Interpretative Decision 2003/589.
Section 245-40(e) states that the commercial debt forgiveness rules will not apply to a debt forgiveness if the forgiveness is for reasons of natural love and affection. This exception comprises three key elements:
- There must be a forgiveness of a debt;
- There must be natural love and affection; and
- There must be a causal nexus between the debt forgiveness and the natural love and affection.
For the exception to apply, it is crucial that the forgiveness must be for the reason of the natural love and affection felt by the creditor toward the debtor. The Draft TD provides the Commissioner’s view that the natural love and affection must arise from ordinary human interaction between the creditor and another person.
The ATO has therefore concluded that the exception will only apply if the creditor is a natural person. This view is different from the ATO Interpretative Decision 2003/589 (withdrawn on 6 February 2019), which established that a company could forgive a debt for ‘natural love and affection’ under section 245-40(e) of the Act.
The Draft TD is silent on whether the debtor must also be a natural person. In our view, the language of section 245-40(e) of the Income Tax Assessment Act 1997 (Cth) (1997 Act) does not support such a requirement.
Disclosure of taxpayer’s protected information in defamation proceedings against the Commissioner
In Jordan, Commissioner of Taxation v Second Commissioner of Taxation  FCA 1602, Justice White of the Federal Court held that the Commissioner of Taxation, Mr Chris Jordan (Commissioner) was allowed to access the ‘protected information’ of a taxpayer, Sydney accountant Vanda Gould (Taxpayer), for the purpose of defending defamation proceedings brought by the Taxpayer.
In this case, the Court found that the defamation proceedings (and the Commissioner’s defence to those proceedings) would most likely involve matters relating to the Taxpayer’s compliance with taxation laws, and therefore accepted that the information could be disclosed, as the disclosure of would be for the purpose of criminal, civil or administrative proceedings related to a taxation law.
It has been highly publicised that in October 2017, the Taxpayer commenced proceedings against the Commissioner Chris Jordan, claiming that the Commissioner had defamed him in a number of statements made by him personally to the National Press Club. The statements contained reference to the ‘Hua Wang Bank’ and ‘Bywater Investments’ case, where 5 companies that were controlled or managed by the Taxpayer were held to be liable to pay income tax in Australia.
The Taxpayer alleged that the audience would have understood the Commissioner’s words to convey the following defamatory meanings:
- The Taxpayer had engaged in the worst kind of money laundering
- The Taxpayer had engaged in the worst kind of insider trading
- The Taxpayer had engaged in the worst kind of tax fraud
In order to prepare a defence in the proceedings, the Commissioner sought access to certain materials held by the ATO concerning the Taxpayer including ‘protected information’.
‘Protected information’ is information that was obtained under or for the purposes of a taxation law, it relates to the affairs of an entity and identifies or is capable of being used to identify the entity. Subject to certain exceptions, there is a general prohibition on the disclosure of a Taxpayer’s protected information under Subdivision 355-B of Schedule 1 to the Taxation Administration Act 1953 (Cth).
There are a number of exceptions to this general prohibition, including where the information is already publicly available or the disclosure is in the performance of a taxation officer's duties. A disclosure may be made in the performance of a taxation officer's duties in a range of ways, including where the information is disclosed for the purpose of criminal, civil or administrative proceedings (including merits review or judicial review) that are related to a taxation law.
This exception requires two limbs to be satisfied:
- The proceedings must be “related to” a taxation law
- The disclosure by a taxation officer must be made for the purpose of those proceedings
The Commissioner successfully established that a disclosure of the protected information is permissible as it would be used for the purpose of civil proceedings relating to the Taxpayer’s compliance with taxation laws.
This article was written with the assistance of Anne Wong, Law Graduate.
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