Thinking | 24 January 2020

Talking Tax – Issue 180

Urgent reminder: NSW surcharge purchaser duty and surcharge land tax for discretionary trusts

The State Revenue Legislation Further Amendment Bill 2019 (NSW) (Bill) proposes that a trustee of a discretionary trust with interests in NSW residential land will be deemed to be a foreign trustee for NSW surcharge purchaser duty and NSW surcharge land tax, unless the terms of the trust expressly exclude a foreign person from being a beneficiary.  These changes will apply retrospectively.

Taxpayers are strongly encouraged to review their discretionary trust deeds immediately and, if necessary, seek advice about varying the terms to comply with the requirements under the Bill.

In Talking Tax Issue 177, we flagged the fact that the NSW government had recently introduced the State Revenue Legislation Further Amendment Bill 2019 (NSW), which proposed to make amendments to the Duties Act 1997 (NSW), the Land Tax Act 1956 (NSW) and the Land Tax Management Act 1956 (NSW).  The Bill, if passed as anticipated, will impact clients that directly (and potentially also indirectly, such as through interests held in companies or unit trusts) hold NSW ‘residential property’ in their discretionary family trusts.

The Bill provides that a trustee of a discretionary trust that holds NSW residential property will be deemed a foreign trustee if the terms of the trust do not explicitly prevent a foreign person from ever being or becoming a beneficiary (any exclusionary terms must be irrevocable).  Effectively, it is proposed that a discretionary trust that does not exclude foreign persons as beneficiaries will be liable to foreign person surcharge purchaser duty and surcharge land tax even if the trust has never distributed to a foreign person and intends to never distribute to a foreign person.

Since most standard discretionary trust deeds include a broad class of discretionary beneficiaries for tax planning, the class may include a foreign person, so this is likely to be an issue.

The Bill also contains transitional provisions that have retrospective effect to the time the surcharges were introduced in 2016/17, so if a trustee incurred the surcharge purchaser duty and surcharge land tax, they can claim a refund of the surcharge.  For this to apply, the trust must (based on the current form of the Bill) be varied before 31 December 2019.  The NSW Government has indicated this deadline will be extended but we may not know the new deadline until the NSW Parliament reconvenes in February 2020.

We strongly encourage taxpayers and their advisers to urgently review their discretionary trust deeds where the trust holds a direct or indirect interest in NSW ‘residential property’ and, if necessary, seek advice about varying the terms to comply with the requirements under the Bill to prevent their trusts being subject to the surcharges.  Though this is also relevant for other jurisdictions, the limited timeframe (which is to be confirmed) is important for NSW.

Please contact Jim Koutsokostas if you would like to discuss the terms of your discretionary trust deed or if you have queries relating to the foreign person surcharge purchaser duty and surcharge land tax regimes.

Are labour costs for constructing or creating capital assets deductible?

On 21 November 2019, the ATO issued Draft Taxation Ruling TR 2019/D6 (Draft Ruling) outlining the Commissioner’s view of when certain labour costs are capital expenses and therefore not deductible under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (1997 Act).

Broadly, the Commissioner takes the view that labour costs are capital expenditure and therefore not deductible under section 8-1 where they are incurred specifically for constructing or creating capital assets (tangible or intangible).

In light of this Draft Ruling, employers are encouraged to carefully ascertain the nature of their labour costs to avoid claiming any incorrect deductions under section 8-1 of the 1997 Act.  In particular, this Draft Ruling could significantly impact the building and construction industry, mining and other infrastructure projects.

While the Draft Ruling is open for comment until 14 February 2020, we don’t expect that there will be a significant shift in the Commissioner’s view.  If you think this ruling may impact your clients, or you, please contact us for more information and to discuss its application.

For more information, see our article ‘Wages: Deductible or a capital expense?’ that provides a full technical update on the Draft Ruling and the relevant legal principles.

Tax relief for bushfire victims and tax deductibility of donations

The federal, Victorian and New South Wales governments have announced a range of tax relief measures for people affected by the bushfires, similar to those introduced following the 2009 Black Saturday bushfires.  A summary of these measures are below.

For further information and a discussion of the tax deductibility of donations made in Australia or abroad, read our detailed article ‘Tax relief for bushfire victims and tax deductibility of donations’.

Victorian tax relief

  • If your property was destroyed or substantially damaged, you may seek ‘ex gratia’ relief (ie a waiver of your debt) of your 2020 land tax bill in relation to those properties.
  • Your land tax bill will also be waived if you own an eligible property that is being used to provide free accommodation for those directly impacted by the bushfires.
  • If your property was destroyed and you decide not to rebuild in your community, you can apply to have your stamp duty bill reduced by up to $55,000 when buying a home elsewhere.
  • If you lost motor vehicles in the fires and you replace them, you can seek to have the motor vehicle duty on up to two vehicles reduced by up to $2,100.
  • The Victorian State Revenue Office has temporarily suspended the issuing of land tax assessments in affected areas.

These measures will be available immediately (as they do not require a legislative change) and an application is required.  They will likely not apply automatically.

New South Wales tax relief

  • Lodgment dates and payment deadlines for NSW taxes, duties, grants and royalties may be extended. This may include time limits for lodging objections.
  • Interest may not be charged on taxes, duties and royalties that are due and payable and arrangements can be made for payment of debts by instalments.
  • The collection of fines and debts payable by people in bushfire affected areas will be temporarily halted and payment deadlines may be extended.
  • If your motor vehicle was written off in a declared natural disaster, you may apply for a refund of motor vehicle duty paid on a replacement vehicle.
  • Wages may be exempt from payroll tax if they are paid to an employee while they are absent from work and unable to perform work duties as they are carrying out emergency operations related to the bushfires.

Again, these measures should be available immediately but may not be applied automatically. 

South Australian tax relief

  • If you were directly impacted by the bushfires, you may seek ‘ex gratia’ relief for your 2019-20 and 2020-21 land tax liabilities, and a refund of your 2019-20 land tax liability, depending on the damage to your property.
  • If your property was destroyed and you purchase a replacement property, you may have access to stamp duty relief of up to $48,830. Duty relief will be capped at $48,830, and the balance of the duty will be payable for replacement properties valued above $1 million.
  • If your registered motor vehicles were destroyed in the bushfires, you can apply for a refund of the unexpired registration and other components of the registration (such as the CTP premium, Lifetime Support Scheme Levy and Emergency Services Levy).
  • If you purchase a replacement motor vehicle, you can apply to have the duty reduced by up to $1,940 for a passenger vehicle or $1,470 for a commercial vehicle. The Registrar of motor vehicles may also waive the Administration Fee on the registration of replacement motor vehicles.
  • If your driver’s licence was lost or destroyed as a result of the bushfires, Service SA may waive the Administration Fee for replacement drivers licences. Fees may also be waived when purchasing replacement copies of births, deaths and marriages certificates if these were lost or destroyed in the bushfires.
  • Collection of Emergency Services Levy debts will be placed on hold.

Again, these measures should be available immediately but may not be applied automatically. 

Federal tax relief

  • Deferrals for tax lodgments and the payment of tax debts will be granted automatically to persons living in postcodes identified as being impacted by the bushfires (read the announcement for a full list of affected postcodes). This is not a waiver of the tax debts, it is simply a deferral of these obligations to a later time.
  • The ATO’s Emergency Support line is also available for those impacted by the bushfires, regardless of whether they reside in one of the unlisted postcodes.
  • Australian Government Disaster Recovery payments made to individuals and businesses impacted by the bushfires and payments made by the Government to Rural Fire Service Volunteers will be tax exempt.

Legislation will be required to give effect to these changes, so there may be some delay in their implementation.  A Bill to give effect to these proposals is to be introduced at the next sitting of Parliament in February 2020.

GST fraud: Property flipper jailed

The ATO recently reported that a Victorian woman was sentenced to two years and ten months in jail for GST fraud of $1.73 million.  This is an important reminder that flipping properties for profit can count as running a business, which may require you to register for GST, lodge business activity statements (BAS) and report on the property sales.

The taxpayer in question had purchased, developed and sold ten luxury properties in Toorak, Portsea and Caulfield North between 2005 and 2011 and made a total profit of more than $4.4 million.

Although she claimed that the properties were for personal use, it was determined that she was carrying on a business.  The taxpayer had set up a property development company to purchase, renovate and sell the houses.  As a result, she was convicted of 10 offences of dishonestly causing a loss to the Commonwealth contrary to section 135.1(5) of the Criminal Code Act 1995 (Cth).

Whether you are carrying on a business of property development is a fact driven question that will be determined by your personal circumstances.  If you are unsure whether you are at risk in this regard, please contact us to discuss.

Termination of tax agent’s registration: Failure to lodge own returns

In Madz and Tax Practitioners Board [2019] AATA 4773, the Administrative Appeals Tribunal (AAT) upheld the Tax Practitioners Board’s (TPB) decision to terminate a tax agent’s registration.  The tax agent had failed to lodge his personal income tax returns for the 2017 and 2018 income years and BAS for the months ending 30 April 2017.

The tax agent’s failure to personally comply with taxation laws in a timely, responsible and reasonable manner constituted a breach of sections 30-10(2) and 30-10(14) of the Code of Professional Conduct (Code) contained in the Tax Agents Services Act 2009 (Cth).  A breach of the Code allows the TPB to impose administrative sanctions on tax agents, including the suspension or termination of their registration.

The AAT placed significant weight on the fact that the tax agent did not appear to treat his tax obligations with sufficient seriousness or to demonstrate appropriate respect and willingness to co-operate with the TPB.  The non-compliance was further exacerbated as he had also failed to comply with an Outstanding Lodgment Order issued by the TPB.

The AAT concluded that the TPB’s decision to terminate the tax agent’s registration was appropriate.  However, the AAT reduced the period for which he is prohibited to apply for registration as a tax agent from 18 months to 12 months.

Land tax until the cows come home: the Settler’s Rise case

In Settler’s Rise Pty Ltd ATF Maison Dieu Road Trust v Chief Commissioner of State Revenue [2019] NSWCATAD 238 (Settler’s Rise), the New South Wales Civil and Administrative Tribunal (Tribunal) found that the applicant could not rely on the primary production exemption from land tax despite undertaking primary production activities.

This decision was reached on the basis that the activities did not have a ‘significant and substantial commercial purpose or character’ as required by s 10AA(2)(a) of the Land Tax Management Act 1956 (NSW) (NSW Act).

Broadly, to qualify for a primary production exemption in New South Wales, land that is ‘rural’ only needs to be ‘used for primary production’.  This is defined to mean that the dominant use of the land is (broadly) the cultivation of crops for the purpose of selling the produce or the maintenance of animals for the purpose of selling them or their bodily produce or their natural increase, and other similar activities.  Importantly, this requires the ‘dominant’ use of land to be farming activities with a purpose of sale but it does not necessarily require that those activities be carried on in a business-like manner.  A tougher test applies for land that is not rural because the use of the land for primary production must:

  • have a ‘significant and substantial commercial purpose or character’; and
  • be ‘engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made)’.

In this case, the Tribunal was required to determine, regarding the 2015 to 2017 land tax years, whether the land in question was used for primary production and whether that use had a significant and substantial commercial purpose or character.  No single factor was determinative.  Rather, an evaluative judgment should be made comparing ‘the extent to which each factor tends to support, or to run counter to, the case … for exemption’: Settler’s Rise, [70]-[71].

The applicant had an oral agistment agreement (that was later recorded) for land use with Mr Ernst, who conducted a cattle farming and stud breeding operation on an adjoining parcel of land that he owned.  The land in question was not rural land because it was zoned as ‘R1 – General Residential’.  Accordingly, the use of the land had to satisfy the tougher ‘two limb’ test in s 10AA(2) of the NSW Act, as outlined above. 

The Tribunal formed the view that the use of land did not generate a profit that contributed in a real and not trifling way to Mr Ernst’s income and could ‘not reasonably have been expected to do so’ when assessed at any time during the 2015 to 2017 land tax years: Settler’s Rise, [86].  These financial factors heavily outweighed the positive factors; namely that Mr Ernst approached his activities in a ‘serious way’ and had a high quality herd of an appropriate size for the land: Settler’s Rise, [73]-[75].  As the Tribunal made a negative determination on s 10AA(2)(a), no finding on s 10AA(2)(b) was necessary. 

Does this have relevance beyond New South Wales?

The primary production land tax exemptions in other jurisdictions also draw distinctions between ‘rural’ land (for which the ‘easier’ test applies) and land that is not ‘rural’ (for which the ‘tougher’ test applies).  For example, a tougher test applies under s 67 of the Land Tax Act 2005 (Vic) (Victorian Act) for land ‘wholly or partly in greater Melbourne’ that is ‘wholly or partly in an urban zone’.  For a primary production exemption to be available for such land in Victoria, the land must be used ‘solely or primarily’ for the ‘business’ of primary production (which is a similar test to the ‘tougher’ NSW test outlined above).  There are also requirements and restrictions regarding the type of owner that owns the land and the particular people or entities in the farming activities and the carrying on of the primary production business (such as requiring certain individuals to be ‘normally engaged in a substantially full-time capacity’).

Settler’s Rise is, therefore, also relevant (and may be persuasive but not technically binding) for primary producers outside of New South Wales.

We have recently seen a substantial increase in investigations regarding primary production exemptions to land tax – especially for land that has been bumped from the ‘easier’ test to the ‘tougher’ test.  This occurs when land has changed from being ‘rural’ to ‘non-rural’ or from being wholly outside of an ‘urban zone’ to ‘wholly or partly in an urban zone’ (particularly where the land becomes subject to a ‘precinct structure plan’). 

Primary producers should be acutely aware of the impact that such changes can have on their land tax treatment and ensure their activities satisfy the necessary requirements.  Based on the vast body of case law in this area, it is important that the relevant activities are both documented appropriately (and in a timely manner) and actually carried on as intended.

If you think your land may be eligible for a land tax exemption, or you would like to discuss further, please contact Jim Koutsokostas.

New Bills received Royal Assent: Changes are now in effect

The State Taxation Acts Further Amendment Bill 2019 (Vic) received Royal Assent on 19 November 2019, meaning that the changes have now come into effect.  See Talking Tax Issue 176 for a full update on the notable changes relating to:

  • vacant residential land tax;
  • insurance duty;
  • primary production land exemption; and
  • the young farmers duty concession.

The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 (Vic) received Royal Assent on 12 December 2019 and its measures will come into effect as of 1 January 2020.  The key change is that foreign residents will be ineligible for the main residence CGT exemption if they are selling their former home at a time when they are not an Australian ‘tax resident’.  See Talking Tax Issue 176 and Issue 177 for further details of these changes and the ATO’s administrative approach to them.

This article was written with the assistance of Graduate Lawyers Tamara Charlwood and Anne Wong. 

Contact

Todd Bromwich

Todd is a taxation lawyer with experience in charity law, general commercial matters, trust law and estate planning.

Andrew O’Bryan

Andrew specialises in taxation law. He is a CPA Australia Fellow and Chairman of its Taxation Centre of Excellence.

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The federal, Victorian, New South Wales and South Australian governments have now announced a raft of tax relief measures to ease the pressure on individuals, families and businesses affected by the 2019/20 Australian bushfires.
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Tax | 20 Jan 2020

Wages: Deductible or a capital expense?

The dividing line between capital and revenue expenditure has long been murky, despite approximately 50 years of guiding principles, and in late 2019 Draft Taxation Ruling 2019/D6 was released.

The Commissioner’s view is now clear: labour costs incurred for constructing or creating tangible and intangible capital assets are capital in nature. Noting the retrospective application of the draft ruling, it will be very important to consider the tax treatment of labour costs related to capital or of a capital nature for the income years which are still within the limited amendment periods.