Talking Tax – Issue 20

Case law

Pre-1998 loan considered in MNAV test calculation – Breakwell & Anor v Federal Commissioner of Taxation

The Federal Court has affirmed a decision of the AAT, holding that a pre-1998 loan was not statute barred from being a debt that could be considered in the maximum net asset value (MNAV) test. As a consequence, the Commissioner’s amended assessments denying the small business concessions were upheld.

The taxpayers were beneficiaries of a family trust which was a beneficiary of a unit trust, which operated a financial broking business. The business was sold, giving rise to a capital gain. The unit trust claimed the small business 15 year exemption in relation to the entire capital gain. All assets and liabilities in the MNAV test were agreed upon by the taxpayers and the Commissioner, except pre-1998 and post-1998 loans to the taxpayers from the family trust.

The taxpayers claimed that the pre-1998 loan was of no value because section 35(a) of the Limitation of Actions Act 1936 (SA) (LAA) barred the debt’s legal enforcement. This section provides that any actions founded on any simple contract, express or implied, must be commenced within six years after the cause of action accrued. However, Justice White held that:

  • provisions such as section 35(a) of the LAA did not prevent a cause of action founded on a contract. Rather, it barred any remedy, as a defence to be used by a respondent against such a claim; and
  • in any event, there was no limitation period in an action by a trustee to recover trust property,

therefore, the pre-1998 loan did have to be brought into the MNAV test calculation.

Loan payments from overseas companies to Australian resident companies held to be loans not sham transactions – Normandy Finance and Investment Asia Pty Ltd & Anor v Federal Commissioner of Taxation

At issue were a number of loans made by non-resident companies to Australian resident taxpayer companies that the Commissioner categorised as ‘sham borrowings’ with no obligation of repayment.

Justice Edmonds founds that most of the loans were not shams as they were intended by both parties to be subject to a repayment obligation. Edmonds J said at paragraph 63, that loan instruments may contain terms that have an element of pretence, but if these terms do not impugn the intentions of the parties to enter into a transaction with specific rights and obligations, the transaction will not be a sham, even if the pretended terms are.

Therefore the Federal Court set aside the objection decisions and remitted the assessments to the Commissioner to consider in accordance with the Court’s reasoning.

VCAT holds that specific property transfer from parents to child is dutiable – Kloester v Commissioner of State Revenue

A husband and wife (Taxpayers) were transferred a property by the husband’s parents and the SRO assessed duty on the transfer. They referred the Commissioner’s decision to disallow their objection to the assessment to VCAT. The Taxpayers claimed that the transfer was duty exempt under sections 34 and 36 of the Duties Act 2000 (Vic), because the parents were apparent purchaser trustees and the Taxpayers were the real purchasers, and the exemption applied for a transfer made from a trustee to a beneficiary of a trust other than a discretionary trust, unit trust scheme or superannuation fund.

The Taxpayers did present evidence of maintenance payments relating to the property and claimed that they had made mortgage repayments to the parents. Aside from a general disappointment in the evidence presented by the Taxpayers, VCAT emphasised that:

  • payments made to the parents that were claimed to be mortgage repayments made by the Taxpayers were mainly made from corporate entities and not on a regular basis;
  • there was no evidence that the Taxpayers paid any part of the purchase price of the property;
  • the payment of mortgage payments alone was not a determining factor of beneficial entitlement; and
  • there was insufficient evidence of the parents’ intentions in purchasing the property for the benefit of the Applicants.

As a consequence, VCAT was not satisfied that the criteria necessary to satisfy the duty exemption had been established, therefore the decision of the Commissioner was affirmed and the Taxpayers’ objections dismissed.

ATO updates

Australian private company information to be released in March

As previously reported, as part of the recently passed Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, the Commissioner of Taxation must now publicly disclose income details for all Australian resident private companies with a total income of $200 million or above.

The ATO have announced that this information will be published in March of this year, and that reporting will start for the 2013-2014 financial year onwards.

If you have received a letter from the ATO regarding this disclosure and require assistance, please contact us.

ATO to examine trust compliance with anti-avoidance rules

The ATO has announced that it is closely examining selected trusts’ compliance for situations where trustees are breaching anti-avoidance rules by using tax-exempt entities to shelter the trust’s net income. The review will focus on sections 100AA and 100AB of the 1936 Act.

Section 100AA requires that if a trustee does not notify an exempt entity of a present entitlement to share of the net income of the trust, or pay the entity the entitlement, within two months after the end of the income year, the trustee is liable to be taxed at the top marginal rate. The trustees run the same liability risk under section 100AB if an exempt entity is made presently entitled to a share of the trust’s net income that is disproportionate to its entitlement share.

Charities’ Annual Information Statement is due

The Australian Charities and Not-for-profits Commission (ACNC) has warned 19,000 charities that have not yet completed their 2015 Annual Information Statement (Statement) to fulfil this core obligation or serious consequences may result.

For charities that use a standard 1 July to 30 June reporting period, the Statements are due on 31 January. Failing to submit two Statements can result in a charity potentially losing its charitable status and a number of Commonwealth charity tax concessions. The ACNC reports that there are 3,200 charities at ‘immediate risk’ of losing their charity status for failing to submit the Statements.

Registered charities should check their Statement due date on the ACNC charity register.

If you would like more information or assistance with this, please contact our Public and Private Philanthropy team.

Legislation and government policy

Tax and Super Acts - drafting issues fixed

The Federal Treasury has today released an exposure draft of legislation for consultation that aims to make a ‘number of miscellaneous amendments to the taxation, superannuation and other laws’ that ‘include style and formatting changes, the repeal of redundant provisions, the correction of anomalous outcomes and corrections to previous amending Acts’.

The proposed amendments include:

  • a rewriting of the offshore information notice rules in the 1936 Act and the Taxation Administration Act 1953 (Cth) (TAA);
  • updating of the terminology in the TAA, 1997 Act, 1936 Act and the GST Act 1999 to improve clarity of law;
  • amendments to ensure that life insurance companies are entitled to an exploration development incentive tax offset when in accordance with policy intent in the 1997 Act; and
  • removal of the requirement that an interposed entity own no more than five shares in a company to qualify for rollover relief under Division 615 of the 1997 Act.

Submissions on the draft legislation close on 12 February 2016.


Michael Parker

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

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