Talking Tax – Issue 184
By Anthony Bradica, Todd Bromwich and Bradley White
Federal Court confirms Commissioner’s controversial position in TD 2019/D6
The Federal Court’s decision in Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation [2020] FCA 559 has resulted in a non-resident being taxed on gains distributed to him from an Australian resident trust estate, which relate to non-taxable Australian property (TAP) assets.
This effectively confirms the position adopted by the Commissioner in draft Taxation Determination TD 2019/D6. TD 2019/D6 has been criticised for its overly strict interpretation of the relevant provisions, and is arguably contrary to the generally accepted position that non-residents should not be taxed on capital gains that relate to non-TAP assets.
This is a significant victory for the Commissioner, but it remains to be seen whether the taxpayer will appeal this decision.
Update: The taxpayer has filed a notice of appeal, so watch this space!
In this case, the trustee of an Australian resident discretionary trust realised capital gains on the sale of shares in an Australian private company in three consecutive years and distributed those gains to a non-resident beneficiary. The shares were non-TAP assets - this fact was not in dispute.
The key issue here was whether the capital gains distributed to the beneficiary were capital gains ‘from a CGT event’ that could be disregarded under section 855-10(1) of the 1997 Act, as the beneficiary was a non-resident and the relevant CGT happened in relation to non-TAP assets.
The Court sided with the Commissioner and dismissed the application, determining that section 855-10(1) of the 1997 Act did not apply so as to disregard any of the trust estate’s capital gains in the hands of the trustee or the beneficiary.
In coming to this decision, the Court’s reasoning was as follows:
Taxing the trustee
- The trust’s net capital gain from the relevant CGT events is included in the trust’s assessable income (per section 102-5 of the 1997 Act) and in the calculation of its net income. In this regard, Subdivision 115-C of the 1997 Act will apply and section 115-220 addresses the assessment of trustees under section 98 of the 1936 Act in respect of distributions to a non-resident beneficiary.
- Section 115-220 provides that the trustee must increase the amount in respect of which the trustee is liable to be assessed on under section 98 of the 1936 Act by ‘an amount’ calculated in accordance with section 115-225 of the 1997 Act.
- This amount is equal to the proportion of the capital gains of the trust that are deemed or attributed to a non-resident beneficiary, which is in turn calculated by reference to the beneficiary’s share of the capital gains of the trust pursuant to sections 115-215, 115-225 and 115-227 of the 1997 Act.
- Section 855-10 says that you can disregard a capital gain (or capital loss) from a CGT event if:
- you are a foreign resident or a foreign trust for CGT purposes just before the CGT event happens; and
- the CGT event happens in relation to an asset that is not-TAP.
- However, section 855-10(1) of the 1997 Act did not apply so as to disregard the trust estate’s capital gains as:
- the trust was not a foreign resident or a trustee of a foreign trust; and
- the amount which section 115-220 requires the trustee to be taxed on under section 98 is not a ‘capital gain’ capable of being subject to section 855-10(1). Rather, section 115-220 requires that ‘an amount’ be calculated by reference to the relevant capital gain and added to the assessment of a trustee under section 98.
Taxing the beneficiary
- Subdivision 115-C of the 1997 Act operates to deem or attribute capital gains to a beneficiary for the purposes of taxation.
- Section 115-215 provides that for each capital gain of the trust, the CGT provisions will apply to the beneficiary as if they had personally made a capital gain equal to their attributable gains calculated under section 115-225 by reference to their ‘share’ of the capital gains of the trust.
- The ATO position was, in summary, that Mr Greensill was deemed to have made capital gains as a result of section 115-215 of the ITAA 1997 and that, therefore, those deemed capital gains were not disregarded under section 855-10(1). The Court held that section 855-10(1) of the ITAA 1997 does not apply so as to disregard the capital gains in the hands of the beneficiary, as the amount calculated under section 115-215 and treated as a capital gain of the beneficiary is technically not ‘a capital gain…from a CGT event’. Rather, it is an amount calculated by reference to CGT events which occurred in respect of CGT assets of the trust. The Court took the view that the gains may be attributable to CGT events, and they may have arisen in relation to or in respect of CGT events, but the gains are not from CGT events as this provision requires (which is a higher test).
- The fact that section 855-40 may apply to disregard capital gains a non-resident beneficiary makes in respect of their interest in a fixed trust, but does not extend to non-fixed trusts, supports the Court’s view that section 855-10(1) is not intended to apply here.
But what about the policy of not taxing non-residents on non-TAP gains?!
- The taxpayers’ arguments largely proceeded upon an assumption that there is a policy objective of not taxing foreign beneficiaries of resident trusts in respect of CGT events in relation to CGT assets which are not items of TAP, which influenced their construction of the relevant provisions.
- The Court noted that this is not the correct approach: the purpose is to be derived from what the legislation says, not from an assumption about the desired or desirable operation of the provisions.
The decision here is in line with and confirms the ATO’s position in Draft Taxation Determination TD 2019/D6, much to the chagrin of the many practitioners that made submissions outlining the policy issues with this approach.
Given the amount of money in dispute and the fact that this is a contentious issue, we expect that the taxpayer will likely appeal this decision.
Update: The taxpayer has filed a notice of appeal, so watch this space!
ATO’s Decision Impact Statement for the Burton case: “We were right all along”
The ATO has released a Decision Impact Statement (DIS) regarding the Full Federal Court’s decision in Burton v Commissioner of Taxation [2019] FCAFC 141 (Burton) following the refusal of the High Court in February 2020 to grant the Taxpayer special leave.
In Burton, the Taxpayer sought to claim a foreign income tax offset (FITO) under s 770-10 of the ITAA 1997 in respect of all of the foreign income tax paid by them in respect of a discount capital gain.
The Full Federal Court rejected the Taxpayer’s appeal, finding that, as only 50% of the relevant capital gain was included in the Taxpayer’s assessable income, the Taxpayer could only claim a FITO for 50% of the foreign income tax paid.
The DIS states that the outcome in Burton confirms the correctness of the Commissioner’s view previously expressed in ATO ID 2010/175, which states:
‘Where a resident of Australia pays foreign income tax on the whole of a foreign capital gain which is only partly assessable in Australia, only a proportionate share of the foreign income tax counts towards the foreign income tax offset under subsection 770-10(1).’
The Court’s decision was previously discussed in Talking Tax Issue 169.
Routine investigations are not ‘experimental activities’
In Havilah Resources Ltd and Innovation and Science Australia [2020] AATA 933 the Administrative Appeals Tribunal found that the activities carried on by Havilah Resources Ltd (Havilah) were merely routine investigations that were required to be carried out by Havilah as part of a statutory approvals process.
On that basis, the Tribunal held that none of the activities in question amounted to ‘core R&D activities’.
Havilah is a resource exploration company that controls mining tenements in the north east of South Australia.
The key issue to be determined in this case was whether certain activities carried on by Havilah in the 2013 and 2014 income years amounted to ‘core R&D activities’ as defined under s 355-25(1) of the 1997 Act.
The relevant activities consisted of:
- understanding hydrology of the Maldorky region and developing a process for ground water management;
- securing fine-grained Maldorky tailings;
- hydrogeology of the Portia area basement rock aquifer system;
- hydrogeology of regional palaeochannel aquifer systems;
- cost effective design for confining fine-grained Portia tailings; and
- investigation of gold in tertiary clays at Kalkaroo.
The Tribunal ultimately concluded that none of the activities amounted to core R&D activities. In making this decision, the Tribunal noted the following in particular:
- The Tribunal distinguished between new knowledge gained from routine investigations and that derived from experimental activities. It held that the activities did not involve the necessary hypothesis testing nor were they experimental in nature; rather they were outcomes of routine investigations. It is not enough that the outcomes of the activities could not have been known in advance. Information derived from a routine investigation is not an outcome that can only be determined by applying a systematic progression of work that proceeds from hypothesis and leads to logical conclusions.
- Some activities were undertaken for dual purposes, including that they had to be done as part of a statutory approvals process or for locating, discovering or exploring deposits (which would specifically exclude them from the meaning of core R&D activities). Where a dual purpose exists and one of those purposes is excluded from amounting to a core R&D activity, it will be incapable of amounting to a core R&D activity.
The Tribunal also highlighted the importance of keeping sufficient contemporaneous documentation outlining the hypotheses underpinning the R&D activities being undertaken and a systematic progression of work carried out in a scientific way. A lack of detailed documentation can prove fatal to a R&D claim.
The question of whether the activities amounted to supporting R&D activities under s 355-20 of the 1997 Act was not actively considered by the Tribunal. As there were not core R&&D activities, there could be no supporting R&D activities.
ATO automatic lodgement deferrals - Flexibility provided for those doing it tough
The ATO has recently announced that automatic deferrals would be applied to certain lodgements, regardless of whether taxpayers are actually affected by the COVID-19 pandemic.
Refer to the table below for the relevant lodgements and their updated dates.
| Lodgement type | Original date | Deferred date |
|---|---|---|
| Company 2018-19 income tax returns | 15 May 2020 | 5 June 2020 |
| SMSF 2018-19 annual returns* *Note that previously the ATO advised that a request needed to be lodged in order to obtain a deferral to this date, this no longer applies now that the automatic deferral has been announced. | 15 May 2020 | 30 June 2020 |
| 2018-19 income tax returns for individuals, partnerships and trusts (provided the individuals pay any liabilities by the deferred date) | 15 May 2020 | 5 June 2020 |
| FBT returns lodgement and payment date | 21 May 2020 | 25 June 2020 |
The automatic deferral dates previously announced for bushfire effected entities will continue to apply and can be found here.
The ATO has also stated that tax professionals that do not meet the 85% lodgement program performance benchmark will not be adversely affected. The ATO has said they will be taking a pragmatic approach and working flexibly to provide support to affected tax professionals.
If a client is unable to make a payment by the due date, you can submit an ATO assessed payment deferral application form.
Contact
Anthony Bradica
Partner
Anthony specialises in taxation planning and structuring for corporate clients, including advising on capital raisings and M&A.
Todd Bromwich
Senior Associate
Todd is a taxation lawyer with experience in charity law, general commercial matters, trust law and estate planning.
Related practices
Tax You might be also interested in...
Tax & Superannuation | 14 May 2020
Division 7A newsflash: call for further ATO cash flow assistance
To date, the Australian Taxation Office has provided businesses with cash flow assistance through a range of measures designed to defer tax payments.
We have made submissions through the professional bodies that further assistance would be welcome – in the form of a deferral of the requirement to make the minimum yearly repayment (MYR) on complying Division 7A loans. The ATO appears to be listening.
Tax & Superannuation | 21 May 2020
Mobilising Private and Public Ancillary Fund philanthropic capital during COVID-19: Distribution ‘boost’ for FY20 and 21
Measures have recently been announced to incentivise greater philanthropic spending by ancillary funds as COVID-19 causes donations to slow during a critical time. The COVID-19 pandemic has also been declared a ‘disaster’ for the purposes of setting up disaster relief funds.
In this article we run through how these measures will apply in practice and how they will affect you.