Thinking | 28 August 2020

Talking Tax – Issue 190

By Michael Parker, Jacinta Bolzonello and Todd Bromwich

Federal Court again confirms Commissioner’s position in TD 2019/D6

As reported in Talking Tax Issue 184, in handing down his decision in Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation [2020] FCA 559, Justice Thawley of the Federal Court affirmed the position adopted by the Commissioner in draft Taxation Determination TD 2019/D6.

That is, a foreign beneficiary presently (or specifically) entitled to a capital gain made by an Australian non-fixed trust in relation to an asset that is not ‘taxable Australian property’ (TAP) is assessable on the capital gain, even though the beneficiary wouldn’t be taxed on that gain if they made it directly or through a fixed trust.

In yet another win for the Commissioner, this position has also now been affirmed by Justice Steward of the Federal Court in his decision in N & M Martin Holdings Pty Ltd v Commissioner of Taxation [2020] FCA 1186.

Background

In the 2013 and 2014 income years, the trustee of an Australian resident trust estate sold a number of assets that were not ‘taxable Australian property’ (TAP) CGT assets for the purposes of Division 855 of the Income Tax Assessment Act 1997 (Cth.) (the 1997 Act) (namely, shares in an ASX-listed company).

The trustee resolved to distribute 99.27% and 100% of the capital gains realised on the sale of the shares in these respective years to a non-resident beneficiary of the trust.

Following an audit, the Commissioner:

  • assessed the beneficiary on the capital gains pursuant to section 115-215(3) of the 1997 Act; and
  • assessed the trustee on the same capital gains pursuant to section 98 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) and section 115-220 of the 1997 Act (with the beneficiary being entitled to a tax offset for any tax paid by the trustee in this regard).

The beneficiary argued that the capital gains should be disregarded under section 855-10 of the 1997 Act as he was a non-resident at all relevant times and the shares were not TAP assets.

Also in issue was the Commissioner’s decision to decline to remit the Shortfall Interest Charge imposed on the beneficiary’s assessments.

Taxation of non-TAP gains

As Thawley J’s decision in Greensill was handed down prior to this case and ruled on the same issues, the parties accepted that Steward J would be bound to follow that decision unless it was ‘plainly wrong’.

Steward J conceded that the taxpayers’ ‘submissions have much to commend them, and might be favoured by an appellate court’, but ultimately sided with the Commissioner on this issue. His Honour held that the trustee and beneficiary were unable to prove that the decision in Greensill was plainly wrong and he was therefore bound to follow it in the present case.

As noted below and in the N & M Martin judgement, the Greensill decision has been appealed to the Full Federal Court. The taxpayers will likely be guided by the outcome of that appeal in deciding whether to pursue an appeal of this decision.

Our detailed article on the Greensill case can be found here.

Remission of SIC

Steward J held that the Commissioner asked the wrong question in determining whether it was appropriate to remit the SIC imposed on the beneficiary.

The Commissioner determined that there were ‘no special circumstances that make it fair and reasonable to reduce the SIC’. However, this is the test for whether to remit General Interest Charge under section 8AAG of the Taxation Administration Act 1953, not the test for the remission of SIC.

In determining whether to remit SIC, the Commissioner must determine whether he ‘considers it fair and reasonable to do so’, which is a lesser test. The matter was remitted to the Commissioner for re-determination in accordance with the correct test.

Appeal update: taxpayer appeals Greensill decision

As expected, the Taxpayer has appealed the Federal Court’s decision in Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation [2020] FCA 559.

This decision is covered in detail in Talking Tax Issue 184 and traverses the same issues addressed in the decision in N & M Martin Holdings Pty Ltd v Commissioner of Taxation [2020] FCA 1186.

While many practitioners and taxpayers will be wishing the Taxpayer every success in their appeal, the N & M Martin decision means we now have both Steward and Thawley JJ taking a stance consistent with the Commissioner’s position in TD 2019/D6, so success in the Full Federal Court may be hard to come by.

However, Steward J acknowledges in N & M Martin that '[the Applicants’] submissions have much to commend them, and might be favoured by an appellate court' so it's not over yet!

Arrangements at the centre of avoiding interest withholding tax

On 14 August 2020 the Australian Taxation Office (ATO) announced in its taxpayer alert TA 2020/3 that it will be reviewing arrangements which are designed to use offshore related entities to avoid withholding tax liabilities.

The ATO intends on engaging with taxpayers who have entered into or who are considering entering into these arrangements. These taxpayers will be subject to increased scrutiny, and their refunds may be withheld until assurance is obtained concerning the relevant structures.

The ATO has stated that it will focus on reviewing arrangements that typically contain the following features:

  • an Australian resident flow-through trust with one or more non-resident investors;
  • the non-resident investor holds its interest in the resident trust through an interposed offshore entity (usually one where there is no tax treaty with Australia);
  • the interposed beneficiary is financed in part or in whole by (usually, related-party) debt;
  • the interest rate on the debt is at a significant premium to referrable third-party debt, or the lending entity's cost of funds (and the arrangement would usually fall outside the 'green zone' referred to in PCG 2017/4[1]);
  • the resident trust derives Australian-sourced income and makes distributions to the interposed beneficiary;
  • the interposed beneficiary deducts the interest expense against the Australian income it receives from the trust;
  • the effective tax rate on Australian-sourced income is minimal or zero; and
  • the beneficiary is resident of a low- or no-tax jurisdiction and/or a non-treaty jurisdiction.

Steps to be taken

The ATO encourages taxpayers who have entered into, or are contemplating entering into, an arrangement of this type to:

  • seek independent professional advice;
  • review the arrangements, and
  • contact the ATO.

A practical guide to the ‘arm's length debt test’

The Australian Taxation Office (ATO) released ruling TR 2020/4 on 12 August 2020 (the Ruling), which deals with the key technical aspects of the arm's length debt test (the Test) contained in the thin capitalisation rules in Division 820 of the 1997 Act.

The ATO stated in a release that the Test is used to establish an entity’s maximum allowable debt amount for thin capitalisation purposes. The Test particularly focuses on identifying the hypothetical amount of debt an entity would reasonably be expected to have, and what independent commercial lenders would reasonably be expected to lend them.

The purpose of the Ruling is to provide guidance on the key technical issues that may arise in determining an entity's arm's length debt amount.

The ATO has also released an accompanying Practical Compliance Guideline PCG 2020/7 which provides taxpayers with a detailed practical administrative approach to applying the arm’s length debt test, as well as setting out a risk assessment framework that will guide the ATO’s compliance approach.

Landlords can breathe a little longer with further COVID land tax relief

On 20 August 2020, in response to the coronavirus pandemic and as part of its commercial and residential tenancy relief schemes, the Victorian Government has announced further land tax relief for landlords.

The Victorian Government has increased the land tax relief from 25% to 50% and an extension of deferral of payment of the remaining tax has been extended to 31 March 2021. This applies to landlords of residential and commercial properties who provide eligible tenants with a 50% or more outright rent waiver for at least three months.

A 25% land tax relief, and a deferral of payment of the remaining tax to 31 March 2021, is available to owner-occupiers of commercial properties. They can obtain this if they would be eligible under the Commercial Tenancy Relief Scheme as if they were a tenant.

Commercial landlords who apply for coronavirus land tax relief must provide rent relief that complies with the requirements of the Commercial Tenancy Relief Scheme.

This edition of Talking Tax was written with the assistance of Teresa-Fara De Dominicis, Graduate Lawyer.

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