Thinking | 13 November 2020

Talking Tax – Issue 194

By Andrew O'Bryan and Todd Bromwich

2020-21 Federal Budget snapshot

With Australia in the midst of its first recession in nearly 30 years, all eyes were on the Federal government to see if this year’s Federal Budget contained the measures necessary to pave the way for Australia’s economic recovery.

Some of the key measures contained in the Federal Budget include:

  • temporarily allowing full expensing for investment in capital assets made during the required period;
  • temporarily allowing business to offset their tax losses in the 30 June 2020 - 30 June 2022 income years against the income year ended 30 June 2019 onwards;
  • increasing the small business entity turnover threshold for certain concessions (this does not affect eligibility for the small business CGT concessions); and
  • bringing forward personal income tax cuts from 1 July 2022 to 1 July 2020.

For a complete summary of the measures introduced and our observations regarding their implications, see our comprehensive Federal Budget article here.

The latest in tax residency cases – Gurney and Commissioner of Taxation

In the recent decision of Gurney and Commissioner of Taxation [2020] AATA 3813 the Administrative Appeals Tribunal (Tribunal) determined that the Taxpayer, a UK engineering graduate who came to Australia to seek employment (unsuccessfully), was a resident of Australia for income tax purposes during their stay.

This case, and the recent decisions in Commissioner of Taxation v Addy [2020] FCAFC 135 (discussed in Talking Tax – Issue 177) and MacKinnon and Commissioner of Taxation [2020] AATA 1647, highlight the need for proper up-front consideration of a person’s tax residency, where they move between countries. These matters are dependent on each person’s specific circumstances and are rarely clear-cut.

Background

The Taxpayer was a recent university graduate who previously resided and studied in the UK. The Taxpayer disposed of substantially all of his UK assets and, with his partner, travelled to the Philippines, New Zealand, and then Australia.

The Taxpayer had originally applied for a 476 visa (for skilled graduates) with the intention of permanent skilled work in Melbourne. Due to protracted processing times, this application was withdrawn in favour of an application for a shorter-term 417 working holiday visa, which was granted.

While in Australia, the Taxpayer and his partner enjoyed a brief stint in short-term accommodation, then a 6-month stay in a Southbank apartment and a 3-month stay in a house in Fitzroy.

The Taxpayer applied for work in the engineering field in which he was qualified, but was unsuccessful. After two months, the Taxpayer found long-term employment with the Bayside City Council in a customer service role. The Council later offered him an engineering role, but this was withdrawn when his visa situation was disclosed.

The Taxpayer and his partner returned to the UK in December 2017, initially living with the Taxpayer’s parents before securing other rental accommodation. When back in the UK, the Taxpayer continued to engage in the same types of activities and generally lived the same lifestyle as he did in Melbourne.

Assessment by the Commissioner

The Commissioner asserted that the Taxpayer was not a resident of Australia for income tax purposes and assessed him accordingly.

The Commissioner asserted that the Taxpayer’s intention to reside in Australia was contingent on a future event occurring (obtaining an engineering job) and, as the Taxpayer grossly underestimated how difficult this would be and was in fact unable to secure the desired employment (being the contingent event), the intent could not have been present.

The Commissioner sought to rely on the following:

  • the Taxpayer did not identify himself as a ‘resident’ on his incoming passenger card;
  • the Taxpayer entered Australia on a working holiday visa, which in the Commissioner’s view indicates a clear temporary intent as it is only to be granted to a person who is a genuine visitor whose principal purpose is to spend a holiday in Australia;
  • the Taxpayer kept some belongings at his parents’ home in the UK, and had his mail sent there, which amounted to the Taxpayer maintaining a foreign place of residence; and
  • the Taxpayer’s ‘habits and conduct’ did not reflect the settled way of life of a resident; his living and work arrangements reflected the itinerant nature of his working holiday. He maintained a continuity of association with the UK and did not establish one with Australia.

Decision

The Tribunal held that the Taxpayer was a resident of Australia and remitted the matter to the Commissioner for amendment of the Taxpayer’s assessment.

In reaching this decision, Deputy President O’Loughlin noted:

  • the Taxpayer’s ‘settled way of life’ (beyond work and accommodation) revealed little change as between his time in the UK and in Australia;
  • the fact that the Taxpayer entered Australia on a working holiday visa may be indicative of his intention, but it should not be determinative. The circumstances in which the documents were completed must be considered, which is relevant in this matter;
  • statements made in incoming and outgoing passenger cards are relevant but are not of overwhelming significance in all of the circumstances. Again, these statements must be considered in context – the Taxpayer completed the cards in the belief that citizenship and residence were the same in this context;
  • an individual with no ongoing care or other responsibilities for dependent family members in another country stands in a much different position to those who do. Merely having family members who reside in a foreign country does not add material weight to a suggestion of retained UK residence; and
  • had the Taxpayer’s intended employment arrangements worked out, he would have resided in Australia for a longer period. The Taxpayer had a relationship with a person in Australia with him and intended to make his life in Australia, but was unable to alter his visa and work arrangements.

The Tribunal specifically distinguished this case from the recent Full Federal Court decision in Addy and Tribunal decision in MacKinnon, stating that the facts of these cases ‘stand in stark contrast’. In Addy, the taxpayer’s work and living arrangements, and genuine maintenance of a residence In the UK, were more transitory and consistent with someone on a working holiday. In MacKinnon, the taxpayer arrived with a temporary intention and later decided she wished to stay longer, but never formed a genuine intention to be anything more than a working holidaymaker.

All Deductible Gift Recipients (DGRs) to be registered as charities

Originally announced in the 2017-18 Mid-Year Economic and Fiscal Outlook, draft legislation has now been released to require all non-government DGRs to be registered as a charity, or operated by a registered charity, with the Australian Not-for-profits Commission.

This requirement already applies to 41 of the 52 general DGR categories; the proposed amendments will simply extend it to the remaining 11 categories. The amendments are quite simple, but in our view are very important. There are currently inconsistent governance and reporting requirements across the various DGR categories and this is a step in the right direction.

ATO provides additional guidance on transaction accounts and GST

The Commissioner has recently issued a number of related guidance materials in relation to transaction accounts and Goods and Services Tax (GST).

  •     GST Ruling 2020/1

GSTR 2020/1, released 25 September, provides limited guidance on the application of paragraph 11-15(2)(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which provides that an entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

Specifically, the Ruling provides guidance on how this paragraph applies to acquisitions made in relation to the provision of transaction accounts by financial supply providers that are Authorised Deposit-taking Institutions (ADIs).

Transaction accounts included accounts such as everyday, savings, cheque, deposit or transaction accounts, as well as accounts that have overdraft facilities, online savings and term deposits accounts. These accounts are covered by the Ruling regardless of whether they are provided to consumers or businesses.

  •     Practical Compliance Guideline 2019/8

PCG 2019/8 has been updated with the insertion of a new Schedule 2 that relates to ADIs. PCG 2019/8 ties in with GSTR 2020/1, by setting out the Commissioner’s compliance approach and the relevant risk assessment framework to GST apportionment of acquisitions that relate to certain financial supplies.

  •     GST Determination 2020/1

GSTD 2020/1, released 25 September 2020, provides specific guidance as to the extent to which the supply of a transaction account is GST-free where the account can be used outside of Australia.

Application of ‘purpose tests’ in tax treaties

On 1 October the Commissioner issued PS LA 2020/2, which provides guidance to ATO officers on the application of the following principal or main purpose tests included in Australia’s tax treaties (collectively referred to as ‘purpose tests’):

  • the principal purpose test under paragraph 1 of Article 7 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) as it applies to a Covered Tax Agreement (CTA);
  • a principal purposes test in an Australian tax treaty that is not a CTA; and
  • a main purposes test in an Australian tax treaty that is yet to be or will not be modified by the MLI.

Broadly, PS LA 2020/2 guides ATO officers on what steps need to be taken in applying a purpose test, what questions and documents may be relevant to their application and other relevant background and considerations.

This article was written with the assistance of Bradley White, Law Graduate. 

Contact

Andrew O’Bryan

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

Todd Bromwich

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

Related industries

Related practices

You might be also interested in...

Tax & Superannuation | 7 Oct 2020

Federal Budget 2020-21: what does it mean for you?

This year’s highly anticipated Budget sets in motion key aspects of the economic recovery plan through a mixture of tax cuts, business concessions and bold measures to stimulate spending and investment. Our Tax experts analyse the key announcements and how the Budget may impact your business.

Tax & Superannuation | 13 Oct 2020

Talking Tax – Issue 193

In this issue of Talking Tax, we consider the meaning of an active asset in the decision in Eichmann v Commissioner of Taxation. As well as revisit the meaning of declaration of trust in the case of Benidorm v CCSR as its appeal draws nearer. Plus much more.