Talking Tax – Issue 197

By Adam Dimac

In this issue of Talking Tax, we consider the Full Federal Court case of Commissioner of Taxation v Apted, where it was found that the Commissioner could not narrow the scope of a discretionary power through the publication of extrinsic guidance material.

We also consider whether an automatic overpayment of a tax refund by the ATO is recoverable in Commissioner of Taxation v Auctus Resources Pty Ltd, and whether land rented to a third party by the Melbourne University was subject to land tax in University of Melbourne v Commissioner of State Revenue (Vic).

Lastly, we provide updates on the ATO’s new independent audit review program and its new data-matching program with the Department of Home Affairs.

Case law

JobKeeper applicant saved by Federal Court having been granted additional time to reactivate ABN

In Commissioner of Taxation v Apted [2021] FCAFC 45 (24 March 2021), the Full Federal Court found in favour of the taxpayer, holding that the AAT did not err in exercising a discretion which would allow the JobKeeper applicant (Mr Apted) to hold an ABN after 12 March 2020 for the purpose of qualifying for the JobKeeper scheme.

Importantly, the Court held that the Commissioner of Taxation (Commissioner) could not alter the nature of a discretionary power by issuing public guidance as to when the discretion may be exercised.

It remains to be seen whether this decision will have a broader impact for the Commissioner in respect of public guidance purporting to dictate when a discretionary power afforded by statute will be exercised (such as those relating to the remission of administrative penalties and interest).

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On 28 August 2018, Mr Apted cancelled his ABN registration because he had planned to retire. However, during the second half of 2019 he changed his mind and recommenced business activities without an ABN.

On 31 March 2020, Mr Apted applied to have his ABN reinstated and, subsequently on 20 April 2020, lodged an application for JobKeeper payments.

It was agreed by both parties that Mr Apted was otherwise eligible for the JobKeeper scheme. However, Mr Apted’s application was rejected by the Commissioner on the basis that Mr Apted did not have an ABN on 12 March 2020 (which was required by statute).

Relevantly, s 11(6) of the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) (CERP) stipulates that:

An entity is not entitled to a jobkeeper payment under this section unless the entity had an ABN on 12 March 2020 (or a later time allowed by the Commissioner)….

On 10 June 2020, Mr Apted amended his ABN registration, so that it was effective from 1 July 2019, and objected to the Commissioner’s decision not to grant the JobKeeper scheme on the basis that he did have an ABN on 12 March 2020.

Issues in dispute

The issues in dispute were whether the:

1. ’12 March 2020 deadline’ was a point in time test, or could be met by retrospectively amending the date of effect of an ABN registration (Point-In-Time Issue);
2. exercise of the ‘later time’ discretion fell within the Administrative Appeals Tribunal’s (AAT) jurisdiction (Jurisdiction Issue); and
3. AAT erred in exercising the ‘later time’ discretion in favour of Mr Apted (Discretion Issue).

Full Federal Court’s decision

The Full Federal Court found in favour of the Commissioner in respect of the Point-In-Time Issue. Relevantly, the Court held that the test was whether the Australian Business Register (ABR) displayed an entity as having an effective ABN at the relevant point in time the ABR was inspected (in this case being 12 March 2020), and that the test was not based on the date of effect of an ABN registration.

The Court found in favour of Mr Apted in respect of the Jurisdiction Issue, holding that exercise of the ‘later time’ discretion fell within the AAT’s jurisdiction.

More importantly, the Court found in favour of Mr Apted in respect of the Discretion Issue, noting that:

1. the Commissioner’s position that the ‘later time’ discretion was exercised by the AAT without proper regard to the limited circumstances in which the discretion fell to be exercised did not give primary effect to the statutory language;
2. the Commissioner cannot alter the nature of the discretion as enacted by issuing guidance as to when the discretion might be exercised; and
3. contrary to the Commissioner’s position, the matters taken into account by the AAT in deciding to exercise the ‘later time’ discretion were relevant.

In obiter, the Court also noted that the JobKeeper scheme was intended to benefit taxpayers in Mr Apted’s general circumstances, and that the only matter which disentitled him was the lack of ABN registration on 12 March 2020.

Overpayment of tax refund is recoverable

The Full Federal Court in Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39 (19 March 2021) unanimously held that a tax refund arising from an automatic research and development (R&D) tax offset paid by mistake was recoverable under s 8AAZN of the Tax Administration Act 1953 (Cth) (Administration Act).

This case highlights the importance of interpreting legislation literally, affording primacy to the natural and ordinary meaning of words.

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In 2013, the Respondent, Auctus Resources Pty Ltd self-assessed that it was entitled to an R&D tax offset refund of $2,269,336.05. At that time, the ascertainment of an R&D tax offset refund was not part of a formal assessment process and was paid automatically.

At trial, it was agreed that the Respondent was not entitled to the tax offset refund. The only issue in dispute was the construction of s 8AAZN(3) of the Administration Act, which states:

“administrative overpayment” means an amount that the Commissioner has paid to a person by mistake, being an amount to which the person is not entitled.

At first instance, the primary judge held that:

1. the refund was not paid by mistake because it was paid automatically; and
2. s 8AAZN was not intended to apply in relation to an incorrect claim made in returns about a deduction, assessable income or tax offset refund.

On appeal, the Full Federal Court conducted a broader objective assessment, stating that the fact that the payment was affected through an automated process was irrelevant.

The Court found that the critical issue was that the payment was made on a misunderstanding that the taxpayer was entitled to the refund. Further, the Full Federal Court rejected the primary judge’s narrow application of the scope of s 8AAZN of the Administration Act, emphasising that the provision should be read literally, with primacy being afforded to the natural and ordinary meaning of the words.

On this method of statutory interpretation, s 8AAZN of the Administration Act was found to be sufficiently broad enough to encompass an automatic payment of a mistaken tax offset refund.

ATO independent audit review program extended to small business

Following a successful pilot program, the ATO has now formally introduced an independent audit review program for small businesses, under which the taxpayer will be provided with an opportunity to resolve issues in dispute before proceeding to the objection process.

This program is similar in many respects to independent review programs which have been available to larger taxpayers for some time.

The finalisation of an audit will ordinarily lead the crystallisation of a tax debt for a taxpayer, notwithstanding any subsequent objection or dispute, which can cause a myriad of commercial issues. Adding a further layer of review before the objection process is a welcome introduction for small business taxpayers, and it is expected that many will take up the opportunity if it is available.

Who is eligible?

Small business taxpayers with a turnover less than $10 million may be eligible to access the independent review panel in relation to disputes concerning:

• income tax;
• GST;
• excise;
• luxury car tax;
• wine equalisation tax; and
• fuel credits.

A full list of eligibility criteria, including circumstances in which an independent review will not be available, is set out on the ATO’s website.

How to access the independent audit review

When an audit is close to finalisation, taxpayers will be contacted by their ATO audit case officer to confirm that they are eligible for an independent review. The final audit letter issued by the ATO audit team (often referred to as an audit position paper) will be accompanied by a written offer for independent review.

A request for an independent review must then be made within 14 days of the final audit letter.

What to expect at the independent review

An independent officer who has not previously been involved in the audit matter will review the audit material, including the ATO audit position and taxpayer’s position. A case conference will then be arranged (generally within three weeks of the review request) between the taxpayer and the audit team in order to confirm agreed facts, and narrow the issues in dispute.

After the case conference, the ATO independent reviewer will provide written recommendations on each issue in dispute, and the audit team will finalise the audit in line with those recommendations.

No new facts, materials and evidence will be considered, however the independent reviewer may request additional material to understand an issue in dispute.

Participation in the independent review process does not affect a taxpayer’s objection rights under Part IVC of the Taxation Administration Act 1953.

Melbourne University accommodated with charity defence in land tax appeal win

The Supreme Court of Victoria in University of Melbourne v Commissioner of State Revenue (Vic) [2021] VSC 156 has decided in favour of the University of Melbourne, holding that the University was not subject to land tax on land that it rented to a third-party company for student accommodation.

In its decision, the Supreme Court applied a broad statutory interpretation to the relevant provisions, and held that the lease to the third party and the subsequent use of the property for profit (by the third party) did not prevent the relevant charitable exemption from applying.

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The University of Melbourne leased some of its land to CLV (Melbourne) Pty Ltd (CLVM) pursuant to a lease which commenced on 7 April 2016, for a term of 38 years, at a peppercorn rent of $1 per annum.

Under the lease, the land was permitted to be used for the provision of student accommodation. The University also entered into a project deed with CLVM, which set out the University’s objectives and policies regarding how the rental accommodations were to be provided. Under the deed, the University retained the power to monitor, audit and test CLVM’s compliance with the project deed (namely the University’s objectives and policies).

On 15 February 2019, the Commissioner issued an Assessment Notice with respect to that land, to which the University objected on the basis that the land is exempt from land tax pursuant to the then s 74(1)(a) of the Taxation Administration Act 1997 (Vic) (Tax Administration Act).

Section 74(1)(a) of the Tax Administration Act states that:

(1)        Land is exempt land if the Commissioner determines that –

            (g)        it is used by a charitable institution exclusively for charitable purposes; or

                      (h)        it is –

                         (i)        owned by a charitable institution; and

                (ii)      vacant; and

                (iii)    declared by its owner to be held for future use for charitable purposes.

(2)        If the Commissioner is satisfied that only a part of land is used by a charitable institution exclusively for charitable purposes –

            (a)        land tax is assessable on the remaining part of the land, unless another exemption applies to that part; and

            (b)        section 22 applies, if necessary, for that purpose.

(3) To obtain an exemption from land tax under this section, the owner of the land must –

            (a)        apply to the Commissioner for the exemption; and

            (b)        give the Commissioner any information the Commissioner requests for the purpose of enabling the Commissioner to determine whether the land is exempt under this section.

It was not in dispute that the land was used to provide student accommodation, nor that the University was a charitable institution. The Commissioner also accepted that the provision of student accommodation by a University was a charitable purpose.

The Supreme Court’s decision

Whether the exemption applied turned on the scope and meaning of the words ‘used’ and ‘exclusively’ in the statute.

Firstly, the University submitted that the word ‘used’ should be given a wide connotation which included the grant of a lease by the University to CLVM. Conversely, the Commissioner argued that the word ‘use’ is limited to an ‘active physical used of land by the lessee, CLVM‘.

Secondly, the University argued that the word ‘exclusively’ referred to the purposes of the charitable institution; that is, the land must be exclusively used for the University’s charitable purpose. The Commissioner argued that ‘exclusively’ attaches itself to the charitable institution, so that the University must be the exclusive user of the land.

In its decision, the Supreme Court relied on the High Court decision of Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 (Ryde). That case was concerned with whether Macquarie University was exempt from paying Council rates pursuant to s 132(1)(fii) of the Local Government Act 1919 (NSW), despite renting some of its land to various shops and banks. The relevant provision read:

(1) All land in a municipality or shire (whether the property of the Crown or not) shall be rateable except –

…

(fii) land which is vested in the Macquarie University, or in a college thereof, and is used or occupied by the University or college, as the case may be, solely for the purposes thereof
…

The majority of the High Court in Ryde held that the word ‘solely’ related to the charitable purpose of the University rather than the University itself. The Supreme Court, in the same vein, held that the positioning of the word ‘exclusively’ immediately preceding the phrase ‘for charitable purpose’ supported the arguments that ‘exclusively’ referred to the charitable purpose and not the institution.

Further, the Supreme Court found that a broad interpretation of the word ‘used’ is most consistent with the legislative history and intention of the statute. The Court held that ‘used’ is not synonymous with ‘occupied’, meaning that leasing the land (by Melbourne University) constituted ‘use’.

Finally, the Supreme Court rejected the Commissioner’s arguments that the lease was not for a charitable purpose because CLVM provided student accommodation for profit. Justice Osborne remarked ‘because of my conclusion that the land is used by the University (by leasing the land) and that the reference to “exclusively” is referrable to the University’s purpose‘, the fact that CLVM obtained a profit is irrelevant.

The ATO teams up with the Department of Home Affairs in new data-matching program

The ATO will now access data from the Department of Home Affairs on the movements of passengers from 2016-17 to 2022-23 financial years, in an attempt to ensure greater compliance with taxation and superannuation laws.

The data collected will include:

• full name;
• personal identifier;
• date of birth;
• gender;
• arrival date;
• departure date;
• passport; and
• migration status type.

The ATO has flagged that it estimates it will obtain approximately 670,000 records under this program, and that it intends on using the data to identify ineligible tax and superannuation claims and develop administrative strategies to improve voluntary compliance.