Thinking | 25 September 2020

Talking Tax – Issue 192

By Anthony Bradica and Joshua Haddad

To include or not to include, that is the question

The Australian Taxation Office (ATO) published Taxation Determination 2020/7 (the Determination) on 26 August 2020. The Determination provides guidance as to whether capital gains should be included in calculating the foreign income tax offset (FITO) limit under subparagraph 770-75(4)(a)(ii) of the Income Tax Assessment Act 1997 (the Act).

The Determination confirms the ATO’s view that untaxed capital gains are not captured in the calculation of the FITO limit.

The reasons for the ATO’s decision

The FITO provisions broadly aim to prevent double taxation in respect of foreign income by allowing a tax offset for certain foreign income tax paid.

The FITO limit is intended to restrict the foreign income tax eligible for a credit. The Act provides that certain income should be disregarded by a taxpayer when calculating their FITO limit. In the calculation assumptions contained in section 770-75, assessable income does not include:

  • any amount included in the taxpayer’s assessable income, representing an amount in respect of which the taxpayer paid foreign income tax, which counts towards the tax offset for the year; and
  • other amounts of ordinary income or statutory income from non-Australian sources.

The Commissioner's view in the Determination is broadly that:

  • the taxpayer's net capital gain is statutory income that does not have a source – therefore decreasing the FITO limit where foreign capital gains are derived; and
  • generally, the provisions do not allow the disaggregation of a net capital gain in order to identify specific foreign sourced capital gains (except in prescribed circumstances).

Going forward

The Determination applies both before and after its date of issue, however, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Determination.

No more deductions when it comes to vacant land

Before 1 July 2019, taxpayers that held vacant land were allowed a tax deduction if the land was used for income producing purposes or if they were carrying on a business.

However, on 28 October 2019 the Bill introducing the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Act 2019 (the Act) received Royal Assent, which changed the deductions allowed for by the Commissioner. Under the Act, deductions that relate to holding vacant land are disallowed if the land is not available for rent or used in carrying on a business.

Is the land vacant or not?

The Australian Taxation Office (ATO) has provided guidance on what constitutes vacant land. Land will be considered vacant if it:

  • did not contain a substantial and permanent structure; or
  • contains a substantial and permanent structure and the structure is a residential premise which was constructed or substantially renovated while the entity held the land and the premises are either:
    • not yet lawfully able to be occupied; and
    • lawfully able to be occupied but not yet rented or made available for rent.

Who is affected by the changes?

The Act disallows tax deductions for vacant land held by individuals, non-listed trusts, and self-managed superannuation funds. The changes will also affect owners of residential rental properties, where the property is not rented or not available for rent.

Deductions that will be disallowed under the new law will include:

  • interest on borrowed funds;
  • land tax;
  • rates; and
  • repairs and maintenance.

Vacant land held by a corporate entity, managed investment trust, public superannuation funds and public unit trusts will continue to be still eligible to claim a tax deduction for expenses on vacant land after 1 July 2019.

Deductions will be apportioned in the event that the costs associated with land which is both vacant and in use in some way.

Was there or wasn’t there? – Carter v Commissioner of Taxation [2020] FCAFC 150

The Full Federal Court on 10 September 2020 allowed an appeal against an unreported Administrative Appeals Tribunal (AAT) decision in The Trustee for the Whitby Trust and FCT [2019] AATA 5637.

Key facts in the first instance

The Taxpayers were issued with assessments in respect of distributions from the Trust for the 2011 to 2014 years. The Taxpayers contended that they had disclaimed the default distributions made by operation of clause 3.7 of the Trust Deed (Deed).

The Commissioner accepted the taxpayers’ assertions and withdrew all of the assessments with the exception of the 2014 income year.

The Taxpayers’ challenged the 2014 assessments two grounds:

  • 100% of the income had been validly appointed to the Bernguard Trust at a meeting on 30 June 2014 such that they could not take in default under clause 3.7 of the Deed; and
  • that even if there were no valid appointment of income to the Bernguard Trust, the Taxpayers each disclaimed the distribution either by the second disclaimers or by the third disclaimers.

The AAT did not agree with the Taxpayers’ assertions and found the 2014 income assessments to be valid.

The appeal

The Taxpayers (three of the four) appealed the AAT’s decision to the Federal Court. The issues heard before the Court was whether:

  • there was a valid distribution of 100% of the trust income. If there had been a valid distribution, the assessments issued to the Taxpayers in respect of the 2014 income year was excessive because none of the taxpayers could have received a distribution of net income as a default beneficiary; and
  • the second and third disclaimers were effective. The Commissioner considered the disclaimers were ineffective because they only purported to disclaim in relation to the 2014 year, and said that any disclaimer was nevertheless irrelevant because it could not operate retrospectively.

The Federal Court’s decision

The Court:

    • held the AAT’s decision that there was no distribution to the Bernguard Trust in the 2014 year;
    • overturned the AAT’s decision that the Taxpayers had not validly disclaimed their entitlement to the income of the Trust for 2014 and held that they had executed three disclaimers. The first disclaimer (in 2014) related to the 2011 to 2013 income years which the Commissioner had accepted. The second (which had been executed shortly after the first disclaimer) and third disclaimers (in 2015 and 2016 respectively) related to the 2014 year;
    • found that, based on the evidence before the Court, there was only one conclusion reasonably open, which was that the Taxpayers’ conduct was consistently directed to reject any right to any income from the Trust. Accordingly, the third disclaimer was effective to disclaim the default distributions in the 2014 year.
    
    		

    GST win for casino operators

    Justice Davies of the Federal Court handed down judgement in the case of Crown Melbourne Limited v Commissioner of Taxation [2020] FCA 1295 on 10 September 2020.

    Davies J held that commissions and rebates paid by Crown Melbourne and Burswood Nominees (Taxpayers) under agreements with junket tour operators should be taken into account in working out the taxpayers’ global goods and services tax (GST) amounts for the purposes of the special GST rules set out in Division 126 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) governing gambling supplies.

    The key facts

    The Taxpayers entered into Junket Program Agreements (Agreements) with junket tour operators who arrange for a group of players to attend a casino together for a set period of time, playing on special gambling terms (Terms) and receiving VIP treatment.

    The Agreements contained the terms and conditions governing the junket, which was negotiated and signed each time a junket took place. Negotiations on the special gambling terms and VIP treatment occurred prior to the commencement of the junket.

    The Terms included:

    • turnover commission (Commission) calculated on the volume of wagers multiplied by an agreed rate; and
    • win and loss rebates (Rebates) which were calculated on the actual wins and losses on the gambling that took place, reduced by multiplying the win or loss by an agreed rate.

    The Taxpayers applied the Commission and Rebates amounts in calculating their global GST amounts under section 126-10 of the Act when lodging their business activity statements for the relevant tax periods.

    The Commissioner, thereafter, issued GST assessments that excluded the amounts of Commission and Rebates from the calculation of the taxpayers’ global GST amounts. The Commissioner determined that these amounts did not come within Division 126 of the Act either as ‘consideration’ for or in connection with the gambling supplies or ‘monetary prizes’ that the taxpayers were liable to pay on the outcome of gambling events.

    The issues at hand

    The Commissioner the payment of the Commissions and Rebates was in consideration for the services provided by the junket tour operators under the Promotion Agreement.

    The Taxpayers argued that:

    • the Agreements had no contractual force of themselves and merely described some of the ‘optional terms’ that may become contractual rights and obligations if a gambling option was selected and the nominated junket players chose to gamble at the Taxpayers establishment;
    • the amounts of Commission and/or Rebates were an inseverable and integral part of the agreed consideration for the taxpayers’ gambling supplies to the junket players.

    The Court’s decision

    Davies J agreed with the Taxpayers argument that the Commissions and Rebates were not separate and distinct amounts to be disintegrated from the collective win/loss results.

    Her Honour held that the supplies relevant for Division 126 of the Act purposes were the gambling supplies provided by the taxpayers under the junket arrangements and not the services provided by the junket tour operators in arranging the junkets.

    Davies J considered that the Commission and Rebates either formed part of the consideration for the Taxpayers’ gambling supplies or the monetary prize which the Taxpayers were liable to pay on the outcome of the gambling (depending on whether it was a net win to the casino or a net loss to the casino).

    Accordingly, the Commission and Rebates should be taken into account in calculating the global GST amounts.

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

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    Anthony Bradica

    Anthony is a highly regarded tax practitioner with over 20 years’ experience. He has particular expertise in taxation planning...

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