Thinking | 16 July 2020

Talking Tax – Issue 187

By Jim Koutsokostas and Rachel Law

ATO communications: do you really understand your rights?

On 30 June 2020, Ms Karen Payne, the Inspector-General of Taxation and Taxation Ombudsman (IGTO), announced that a new investigation will be launched into effective communication of taxpayer rights to review, complain and appeal decisions made and actions taken by the Australian Taxation Office (ATO).

The purpose of this investigation is to reveal how effectively the ATO communicates appropriate information to taxpayers (and their tax agents).

The Taxpayers’ Charter states that the ATO will ‘outline [the taxpayer’s] options if [they] want a decision or action reviewed including, legal review rights and the formal complaint process’.  However, it has become apparent through the taxation complaints service, that information on rights of appeal and opportunities to raise complaints vary across different types of ATO-issued correspondence.

The IGTO will therefore focus their investigation on written communications of ATO on decisions made and will prioritise ATO communications which concern debt decisions, as well as individuals and small business taxpayers who are unlikely to have significant financial resources to appeal taxation decisions. It will also confirm ATO communications around access to the AAT Small Business Taxation Division (SBT Division).

All taxpayers, tax practitioners and professional bodies are being invited to provide observations, comments and suggestions to this review.

Fringe benefits tax: ride sourcing, the new 'taxi travel'

The Treasury Laws Amendment (2019 Measures No. 3) Bill 2019, that amends the definition of ‘taxi’ in the Fringe Benefits Tax Assessment Act 1986, has passed both houses of Parliament and received Royal Assent on 22 June 2020.

The amended definition extends the fringe benefits tax (FBT) taxi travel exemption.  This ensures that travel by Uber and other ride-sourcing services is on the same footing as traditional taxi services.

The amendment benefits employers in that it allows for greater flexibility in providing basic travel to employees where previously they may have prevented or discouraged employees from using ride-sourcing platforms in favour of traditional taxis.

Next steps

The changes apply retrospectively from 1 April 2019.  The 2020 FBT return instructions have been updated to help employers who may need to amend their FBT return.

Employers that have already lodged their FBT returns for the 2019/20 year should review their returns and may claim a refund of any FBT paid on the basis that ride sourcing services did not qualify for the FBT exemptions previously available only to traditional taxis.  For employers that are yet to lodge their 2019/20 FBT returns, they should lodge these on the basis of the amended law.

The lead-up

Prior to the amendment, ‘taxi’ was defined as ‘a motor vehicle licenced to operate as a taxi’, which meant that the FBT exemption did not extend to ride-sourcing services provided in vehicles that were not licensed to operate as a taxi.

In Uber B.V. v Commissioner of Taxation [2017] FCA, the Federal Court held that this definition of ‘taxi travel’ extended to travel involving the transportation of passengers for a fare by way of a car or other motor vehicle and was not limited to State or Territory licensed taxis. 

The change

The amendment means that employers will now be eligible for an FBT exemption for travel provided to their employees if it is a single trip to or from the employee’s workplace:

  • on or after 1 April 2019; and
  • in a licenced taxi or other vehicle involving the transport of passengers for a fare – other than a limousine – such as a ride-sourcing vehicle.

Travel by an employee in a ride-sourcing vehicle on or after 1 April 2019 is also exempt if it is as a result of sickness of, or injury to, the employee, and the whole or part of the journey is directly between:

  • the employee’s place of work
  • the employee’s place of residence
  • any other place that it is necessary, or appropriate, for the employee to go as a result of the sickness or injury.

For more information on the FBT taxi travel exemption, see ato.gov.au/FBTtaxi.

The ATO’s view on Greig v Commissioner of Taxation

The ATO has recently released its decision impact statement in relation to the Full Federal Court’s (FCAFC) decision in Greig v Commissioner of Taxation [2020] FCAFC 25.

The Commissioner's view is that this decision does not disturb the Commissioner's understanding of the Myer Emporium principle.  The Commissioner has stated that it will review existing public advice and guidance on the application of the Myer Emporium principle to ensure it reflects the FCAFC’s application of the principles in this case.

Brief summary of Greig v Commissioner of Taxation

The FCAFC overturned the Federal Court’s decision to disallow Mr Greig (Taxpayer) from claiming deductions for over $11 million in losses that occurred throughout his share trading activities and over $500,000 in associated legal costs.

The FCAFC agreed with the Taxpayer’s submission that because the shares were purchased with the intention of making a profit from their sale, the transaction amounted to a ‘business operation or commercial transaction’ and the loss incurred in respect of the shares was of a revenue nature and deductible under section 8-1 of the Income Tax Assessment Act 1997 (Act).

Summary of the facts

The case related to the Taxpayer's acquisitions of shares in the former ASX-listed company, Nexus Energy Limited (Nexus).  The Taxpayer acquired these shares over 64 transactions between approximately 2012 and 2014 with an intention of making a profit from their sale prior to his retirement.  The taxpayer also invested millions of dollars in the share market using both professional advice and his own business knowledge and experience.

The taxpayer argued at first instance that:

  • his 64 trades in Nexus shares amounted to carrying on a business of trading just in the shares of this one company; and
  • he was engaged in an isolated profit-making transaction of the kind captured by the Myer Emporium principle.

A profit or loss from an isolated transaction will generally be on revenue account where the:

  • intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and
  • transaction was entered into, and the profit or loss was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

At first instance, Thawley J rejected both arguments.  Thawley J held that the Myer Emporium principle required that shares were acquired in a ‘business operation or commercial transaction’ and this part of the test was not satisfied.

On appeal, the majority agreed with the Taxpayer that Thawley J erred by not accepting that the Taxpayer acquired the shares in a business operation or commercial transaction, so as to engage the principle in Myer Emporium.

The Taxpayer's share losses and legal fees were therefore deductible under paragraph 8-1(1)(a) of the Act.

Business operation or commercial transaction - the issue at hand

The first limb of the Myer Emporium principle was satisfied as it was not in dispute that the Taxpayer acquired his Nexus shares with a profit-making purpose.

The second limb required the Taxpayer to have purchased the Nexus shares in a 'business operation or commercial transaction'. 

The FCAFC concluded that the taxpayer's acquisition of Nexus shares had the character of a business operation or commercial transaction stating at 248:

He engaged professional help; he researched and monitored the value of his shares; he used his own business knowledge as a managing director to acquire more shares; he pursued a plan to exploit the unrealised value of [one of the company’s assets]; and he took steps to defend the value of his investment in court. His activities … were entirely commercial and business-like. The evidence demonstrates “system and organization” in relation to the acquisition of Nexus shares … [the] share trading was not a hobby; it was not a pastime; it was not private gambling or gaming. And it was more than a “mere” realisation of an asset.

The ATO’s view

The Commissioner stated that he does not believe that this case has changed the Myer Emporium principle.  In particular, he does not believe that it upsets the Commissioner's understanding of the factors that will be relevant in determining whether an acquisition of shares is made in carrying out a 'business operation or commercial transaction'.

The FCAFC had regard to the Taxpayer's extensive business knowledge and experience, the significant commercial steps that the taxpayer took to increase the value of his Nexus shares and the scale and periodicity of his overall share-trading activities. The Commissioner is of the view that it was reasonably open to the FCAFC on the facts of this case to conclude that the Taxpayer acquired his Nexus shares in a business operation or commercial transaction. 

The Commissioner stated that this decision is not inconsistent with the existing advice and guidance in Taxation Ruling TR 92/3 (whether profits on isolated transactions are income) (TR 92/3) and Taxation Ruling TR 92/4 (whether losses on isolated transactions are deductible) (TR 92/4).  

The Commissioner has accepted that the activities of agents acting on behalf of a Taxpayer were relevant facts which ought to be considered in characterising the nature of a transaction.

Implications for impacted advice or guidance

The ATO has indicated that it will review TR 92/3 and TR 92/4 to ensure that the Commissioner's advice and guidance reflects the view of the FCAFC.

However, it seems that the Commissioner's preliminary view is that this case does not represent any radical departure from the ATO's explanation of the Myer Emporium principle in previous existing advice and guidance.

Fraudulent entitlement schemes on the ATO’s radar

JobKeeper, early release of superannuation, and boosting cash flow for employers are examples of schemes which the ATO has placed on its radar, as some of these schemes have been designed to take advantage of the Government’s COVID-19 stimulus package.

The ATO has set up a confidential tip-off line for the public to bring forward concerns of any wrongdoing.  It will use its data sources such as Single Touch Payroll, income tax returns and information from super funds to assess and identify any suspicious behaviour.

The ATO’s Deputy Commissioner, Will Day said that the ATO has ‘received intelligence about a number of dodgy schemes, including the withdrawal of money from superannuation and re-contributing it to get a tax deduction. Not only is this not in the spirit of the measure (which is designed to assist those experiencing hardship), severe penalties can be applied to tax avoidance schemes or those found to be breaking the law.’

The ATO has said it will not tolerate illegal behaviour or development of these fraudulent schemes, designed to deliberately exploit these measures, seek to avoid tax or prey on vulnerable Australians.

Mr Day stated further that the ATO will be conducting checks ‘….so if you've received a benefit as part of the COVID-19 stimulus measures and we discover you are ineligible, you can expect to hear from us. If you think this may apply to you, you should contact us or speak to your tax professional’.

Should you fraudulently receive a benefit as part of the COVID-19 stimulus measure you may receive a penalty.  These penalties include financial penalties, prosecution, and imprisonment for the most serious cases.

Mr Day also cautioned the community to protect their identities and be vigilant of scammers.

What’s on the ATO’s radar?

JobKeeper

The ATO is focused on ensuring that:

  • entities meet the eligibility requirements in relation to business income;
  • entities are claiming for eligible employees;
  • eligible business participants are correctly making claims; and
  • entities are not manipulating their turnover in order to satisfy the decline in turnover test.

For further details on the types of JobKeeper schemes that the ATO regards as high-risk and likely to attract its attention, please see this article (https://hallandwilcox.com.au/thinking/has-receiving-a-jobkeeper-payment-put-you-in-the-commissioners-crosshairs/).

Early release of superannuation

The ATO’s attention will be on the following behaviour:

  • applying when there is no change to your regular salary, wage, or employment information;
  • artificially arranging your affairs to meet the eligibility criteria;
  • making false statements or fraudulent attempts to meet the eligibility criteria; and
  • withdrawing and re-contributing super for a tax advantage – this could not only trigger anti-avoidance rules but also result in additional taxes and impact your eligibility for a super co-contribution.

Boosting cash flow for employers

The ATO will be focused on employers who have entered a scheme which is designed to:

  • artificially restructure businesses to gain access to the cash flow boost;
  • artificially changing the character of payments to salary or wages to maximise the cash flow boost;
  • inflating reported withholding amounts to maximise the cash flow boost;
  • resurrecting dormant entities or phoenixing; and
  • making false statements or fraudulent attempts to create an entitlement.

Contact

Jim Koutsokostas

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

Rachel Law

Taxation lawyer Rachel Law, specialises in direct taxes and tax disputes. She is experienced in domestic and international laws.

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