Thinking | 19 March 2021

Talking Tax – Issue 195

By Michael Parker and Todd Bromwich 

In this issue of Talking Tax, we consider the case of San Remo Heights Pty Ltd v Commissioner of Taxation [2020] AATA 4023 and its slightly confusing message. We also provide an around-the-grounds update on the latest and greatest ATO administrative guidance.

San Remo Heights Pty Ltd v Commissioner of Taxation [2020] AATA 4023 – required to show you planned not to have a plan?

In the recent decision of San Remo Heights Pty Ltd and Commissioner of Taxation [2020] AATA 4023, the Administrative Appeals Tribunal (Tribunal) affirmed that taxpayers hold the burden of proving that a supply of goods was not made in the course or furtherance of an enterprise being carried on.

Here, the Taxpayers didn’t maintain adequate records and therefore couldn’t discharge their burden of proof. However, it seems as if the Taxpayer was ‘damned if they do and damned if they don’t’. If they were able to provide detailed plans outlining the purpose for which the lots were sold, this in itself could have been viewed as a distinct enterprise, which would also attract liability!

Background

San Remo Heights Pty Ltd (Taxpayer) operated a sheep grazing business in San Remo and held several commercial and residential rental properties across Victoria.

In 1962, the Taxpayer purchased a large parcel of land in San Remo. There was no evidence to show the purpose of the acquisition, it was not used for rental purposes and the land did not neighbour the Taxpayer’s existing grazing land. The Taxpayer also did not claim any income tax deductions, input tax credits or capital allowances regarding the Land.

The Taxpayer subdivided the land three times in 1987 and 2000 to create twelve new lots, which were sold in various years between 1987 and 2019. This dispute related to two lots sold in 2018 (Relevant Lots).

Issues in dispute

The Commissioner assessed the Taxpayer’s quarterly GST liability and determined that the sales of the Relevant Lots were taxable supplies and GST was payable, on the basis that the Taxpayer’s enterprise encompassed the acquisition, subdivision and sale of land. Alternatively, the Commissioner asserted that the Taxpayer failed to prove that the sales of the Relevant Lots were not in the course or furtherance of its grazing and property rental enterprises.

The Taxpayer on the other hand, maintained that the purpose of selling the Relevant Lots was to repay money owed to the estates of two deceased relatives, who held shares in the Taxpayer, and to simplify the Taxpayer’s ongoing affairs. It submitted that there was no evidence of business plans for property development or sale, nor evidence to suggest that there was systematic, organised or businesslike land development or sales amounting to an enterprise.

Decision

The Tribunal held that the sales of the Relevant Lots were not in the course or furtherance of the Taxpayer’s grazing or property rental enterprises. However, the Taxpayer failed to adduce any evidence to establish that the acquisition, subdivision and sale of land did not constitute a separate enterprise. In the absence of contrary evidence, the sales of the Relevant Lots were found to be in the course or furtherance of this enterprise.

In reaching this decision, the Tribunal noted that:

  • the Taxpayer did not adduce any evidence to suggest that it obtained the land for any purpose other than commercial purposes;
  • while the motivation for the sales of the Relevant Lots was to satisfy debts to the deceased estates, this did not exclude the land from having been acquired for the commercial purpose of financial gain;
  • long periods of inactivity do not prevent activities from being business activities, and the Taxpayer did not adduce any evidence to show that its inactivity was for a purpose other than commercial considerations; and
  • the Taxpayer did not adduce any evidence to show that its reasoning in undertaking repeated subdivisions of the land and subsequent sales was not for a commercial purpose.

It is worth noting that the Taxpayer sought to rely on previous findings that the subdivision and sale of property was not ‘an adventure or concern in the nature of trade’ within the context of income and capital dispositions. However, this has no bearing on whether such a sale was a taxable supply, as the sale of a capital asset can be a taxable supply within the A New Tax System (Goods and Services Tax) Act 1999 (Cth). This case serves as a reminder that income tax cases should not be relied on in GST matters where, despite using similar phrases, the principles may have different meanings.

The case also highlights the difficulties that often arise for private groups when seeking to discharge their burden of proof in taxation matters; there is often a lack of contemporaneous written evidence, such as minutes of meetings, to support the taxpayer’s position on key factual matters such as purpose.

Payments made to terminate employee incentive schemes held to not be deductible

The Federal Court in Clough Limited v FCT [2021] FCA 108 has held that a $15 million payment in consideration for the cancellation of entitlements under an employee option plan and incentive scheme was not deductible under s 8-1 of the Income Tax Assessment Act 1997 (1997 Act).

The facts

The Taxpayer is an engineering and construction company in the oil and gas sector. The business was heavily reliant on the experience and expertise of its staff. Retaining and incentivising key experienced staff was central to maintaining the value of the business in a competitive industry.

The Taxpayer set up an employee option plan and employee incentive scheme intended to retain employees in order to increase and maintain the Taxpayer’s revenue and profitability.

At the time this issue arose, the Taxpayer was listed on the ASX. The majority (60%) shareholder of the Taxpayer sought to acquire the remaining (40%) shares in the Taxpayer and delist it from the ASX. This would require the Taxpayer to convert or cancel the entitlements under the option plan and employee incentive scheme.

The Taxpayer paid approximately $15 million to its employees in consideration for the cancellation of their accrued rights under the option plan and incentive scheme.

The Taxpayer argued that these payments were deductible under section 8-1 of the 1997 Act as they were incurred for the purpose of gaining or producing assessable income or necessarily incurred by it in carrying on business for the purpose of producing assessable income (the ‘positive limbs’ of section 8-1), given the centrality of the Taxpayer’s employees to its income generation.

The Court’s decision

The Court found that the sum was not paid to reward or retain the Taxpayer’s employees and was not done with a view to the Taxpayer gaining or producing income. Rather, it was paid in order to fulfil an obligation that arose upon the change in control of the Taxpayer to pay out the entitlements that had accrued under the option plan and incentive scheme, in order to bring these schemes to an end.

Accordingly, the Court held that the positive limbs of section 8-1 were not satisfied and the sum was not deductible.

The Court acknowledged that the option plan and the incentive scheme could allow options to be issued that would not vest until a date up to three years in the future and, therefore, where options had issued but had not yet vested, the option plan and incentive scheme assisted the Taxpayer to produce income by securing the greater likelihood of retaining employees.

However, the Court held that the fact the schemes had that effect while they were in place did not mean that a payment to bring the rights conferred by the schemes to an end had the same character or object. Nor did it mean that a cash payment to terminate the entitlements under the schemes on the basis that a change in control may mean that such the payment was required to be made was an outgoing incurred by the Taxpayer in producing assessable income or in carrying on its business.

Update on High Court Special Leave Applications

Commissioner of Taxation v Addy [2020] FCAFC 135

The Taxpayer has been granted special leave to appeal the Full Federal Court’s decision that the ‘backpacker tax’ did apply to a British national who was a tax resident of Australia.

Huang v DCT [2020] FCAFC 141

The Commissioner has been granted special leave to appeal the Full Federal Court’s decision to set aside a freezing order of overseas assets on the grounds that there was no realistic possibility that the orders would be enforceable in China or Hong Kong.

Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118

Dental Corporation Pty Ltd was unsuccessful in its application for special leave to appeal the Full Federal Court’s decision that a dentist working under a services agreement was an ‘employee’ within the meaning of that term in section 12(3) of the Superannuation Guarantee (Administration) Act 1992 as a person working under a contract that is wholly or principally for their labour.

Chief Commissioner of State Revenue v Downer EDI Engineering Pty Ltd [2020] NSWCA 126

The NSW Chief Commissioner of State Revenue was unsuccessful in his application for special leave to appeal the NSW Court of Appeal’s decision that payments by a company to third party subcontractors engaged by the taxpayer to install Foxtel equipment were not subject to payroll tax.

ATO rulings and guidelines

Allocation of professional firm profits – Draft Practical Compliance Guideline PCG 2021/D2

This long-awaited draft Practical Compliance Guideline sets out the ATO’s intended compliance approach and application of compliance resources in relation to the allocation of profits by professional firms.

For an in-depth analysis of this draft guideline, ‘Some things stay the same, but the numbers have changed: Draft PCG 2021/D2 - Allocation of professional firm profits’.

When are employees’ transport expenses deductible? – Taxation Determination TD 2021/1

This Taxation Determination sets out the principles surrounding the deductibility of transport expenses and provides 12 common examples. As a general rule, transport expenses incurred for ordinary travel between home and a regular place of work are not deductible. However, transport expenses incurred travelling between different work locations are generally deductible.

Property investment companies and ‘carrying on a business’ – Taxation Determination TD 2021/2

This Taxation Determination provides the ATO’s view that where a company’s sole activity is renting out an investment property, it is not eligible to access the small business CGT concessions in Division 152 of the 1997 Act in relation to that property. This is because an asset whose main purpose is to derive rent is expressly excluded from those concessions regardless of whether it was used by the company in the course of carrying on a business in a general sense.

Deductions for accommodation, food and drink expenses, travel allowances and living-away-from-home allowances – Draft Taxation Ruling TR 2021/D1

This draft Taxation Ruling explains when an employee can deduct accommodation and food and drink expenses under section 8-1 of the 1997 Act, the Fringe Benefits Tax implications of a reimbursement or upfront payment by an employer, and how to distinguish between a travel allowance and a living away from home allowance (and the differences between them).

Fringe benefits: LAFHA – reasonable amounts for food and drink expenses – Taxation Determination TD 2021/3

This Taxation Determination sets out the amounts that the ATO considers ‘reasonable’ under section 31G of the Fringe Benefits Tax Assessment Act 1986 for food and drink expenses incurred by employees receiving a living away from home allowance. Where the total of food and drink expenses for an employee does not exceed the amount the Commissioner considers reasonable, those expenses do not need to be substantiated.

Fringe benefits: cents per kilometre rate for motor vehicles other than cars – Taxation Determination TD 2021/4

This Taxation Determination provides the rates to be applied on a cents/km basis for calculating the taxable value of a fringe benefit arising from the private use of a motor vehicle other than a car. The rates to be applied for the fringe benefits tax year commencing 1 April 2021 are:

Engine capacity Rate per kilometre
0 - 2500cc 56 cents
Over 2500cc 67 cents
Motorcycles 17 cents

Contact

Michael Parker

Michael is a tax lawyer who specialises in tax disputes, capital gains tax, business sales and acquisitions and restructuring.

Todd Bromwich

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

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