Thinking | 21 October 2021

Talking Tax – Issue 199

By Frank Hinoporos and Todd Bromwich

In this issue of Talking Tax, we examine the Full Federal Court’s decision in the Greensill appeal and when a settlement payment will be an employment termination payment, as considered in the Stark case.

We also provide an update on the latest ATO guidance on undeclared foreign income disguised as gifts or loans, expenses associated with holding vacant land, the application of the NALI/NALE rules, and the 2020-21 highlights for the Tax Avoidance Taskforce.

Case law

Appeal update: another win for the Commissioner in Greensill and N&M Martin

The Full Federal Court has dismissed the Taxpayers' appeal in Peter Greensill Family Co Pty Ltd (Trustee) v Commissioner of Taxation [2021] FCAFC 99 affirming the Federal Court’s decision at first instance and the Commissioner’s preliminary views in TD 2019/D6 and TD 2019/D7.

The Court held that, while a foreign tax resident may be exempt from Capital Gains Tax (CGT) on capital gains relating to non-taxable Australian property assets (TAP) under section 855-10 of the Income Tax Assessment Act 1997, that is not the case where the gains are realised by a discretionary trust and distributed to them.

The Taxpayers, and many practitioners, argue that this construction of the relevant provisions is inconsistent with the accepted policy objectives of Parliament. Specifically, that Australia should not be asserting a right to tax non-residents on income that does not have an Australian source.

This may be the case but, as the Full Federal Court confirmed, neither policy nor a desire to avoid an anomalous result are grounds for departing from the ordinary rules of statutory interpretation. The Court, in its decision, reminded the Taxpayers that ‘a court is not justified in using an anomaly as a reason for rejecting what otherwise seems the correct construction where on all other tests of construction, it is the correct construction’.

The Taxpayers are seeking special leave to appeal to the High Court. Given the High Court has, in a number of recent decisions (including the decision in WorkPac Pty Ltd v Rossato, an employment law case), shown a propensity toward strict legal interpretation, and with the Full Federal Court generally considered the ‘final’ court of appeal in tax matters other than the most exceptional, our prediction is the special leave application has limited prospects of success.

AAT holds that settlement sum is an employment termination payment

The AAT in Stark and Commissioner of Taxation (Taxation) [2021] AATA 2583 (29 July 2021) has decided that a litigation settlement sum paid in relation to alleged loss of earnings is an employment termination payment (ETP) for tax purposes.

ATO updates

TA 2021/2: disguising undeclared foreign income as gifts or loans

The ATO has issued taxpayer alert TA 2021/2 to highlight its concerns in relation to arrangements they believe are designed to intentionally disguise taxable income as funds received as a gift or a loan from related overseas entities.

This alert is a timely reminder that Australian tax residents are taxed on their worldwide income, not just income from Australian sources, and taxpayers have the burden of proof in tax disputes. If you receive payments from overseas sources it is crucial that you have appropriate documentation to establish the nature and source of the payments.

TR 2021/D5: deductions for costs of holding vacant land

The ATO has released draft taxation ruling TR 2021/D5 explaining the Commissioner’s view of the application of section 26-102 of the 1997 Act. This section, which has effect from 1 July 2019, limits deductions that may be claimed in relation to holding vacant land.

LCR 2021/2: expenditure incurred under a non-arm’s length arrangement

The ATO has issued Law Companion Ruling LCR 2021/2 to clarify how the recent amendments to the non-arm’s length income (NALI) rules apply.

The key items to note are that:

  • items of expenditure incurred to derive income under an arrangement whereby parties are not acting at arm’s length arrangement, that are less than what would be expected in an arm’s length arrangement (or where there is no expenditure where there ordinarily would be) will be non-arm’s length expenditure (NALE).
  • NALE incurred in relation to specific items of income may cause that income to be NALI, taxed at the highest marginal rate. NALE incurred in relation to a capital asset may cause any capital gain realised on the disposal of that asset to be NALI.
  • NALE of a general nature, such as audit and accountancy fees, may cause all income of the fund to be NALI for that year.

Tax Avoidance Taskforce highlights 2020-21

The ATO has published its Tax Avoidance Taskforce highlights for the 2020-21 year.

In our practice, we have observed an increased focus by the ATO on compliance and assurance programs for private business and high net-wealth taxpayers, with a focus on issues involving trusts (trust resolutions and compliance, section 100A), aggressive tax planning (including pre-transaction restructuring involving CGT rollover relief) and the application of the small business CGT concessions. We expect this to continue over the coming months and years.

This article was written with the assistance of Gabrielle Terliatan, Paralegal.

Contact

Frank Hinoporos

Frank Hinoporos the Hall & Wilcox Tax team. He advises on direct taxes, international structuring and taxation disputes.

Todd Bromwich

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

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