Talking Tax – Issue 200
Our double century!
We have hit 200 issues of Talking Tax!
We launched Talking Tax as a way of sharing our thinking on the latest tax developments on a regular basis. We value the opportunity to have a continuing conversation with our valued clients and referrers. We thank you for your positive feedback about Talking Tax and your ongoing support.
Tax Records podcast launch
We are excited to launch our Tax Records podcast, where we will bring you our latest tax thinking. In our first episode, Partner Frank Hinoporos and Senior Associate Todd Bromwich delve into the tax implications of the Pandora Papers. Why are the papers a big deal? How will the ATO potentially use the information? What do you do if you or your client was named in the papers? Future episodes will look at the ATO’s compliance focus on offshore dealings for private groups, including TA 2021/2, payroll tax and the state revenue authority focus areas, and the tax issues surrounding cryptocurrencies and NFTs.
In this edition, we discuss some of the latest cases, including the Supreme Court of NSW decision in Australian Karting Association Ltd v Karting (NSW) Incorporated, the Full Federal Court decision in CUB Australia Holding Limited v Commissioner of Taxation and the NSW Civil and Administrative Appeal Tribunal decision in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue.
We provide an overview of the latest ATO updates including the Legal Professional Privilege Protocol and draft taxation determination on the meaning of genuine disposal for employee share schemes.
We also cover developments that have occurred since the release of the Pandora Papers, and the extension of the application dates for Director Identification Numbers and deductible gift recipient criteria.
The ‘karting’ battle – are credits to a loan account trust distributions?
The Supreme Court of NSW case of Australian Karting Association Ltd v Karting (NSW) Incorporated  NSWSC 1075 concerned a dispute between the Australian Karting Association Ltd (Karting Australia) and Karting (NSW) Incorporated (Karting NSW).
The dispute related, in part, to the AKA Track Development Fund Trust (Trust). The Trust was established for the purpose of receiving money collected by its beneficiaries, the State karting associations (including Karting NSW), on which it earned interest.
From time to time, Karting Australia also advanced funds to the State karting associations (including Karting NSW) for the benefit of particular karting clubs within the corresponding State or Territory. These loans were the subject of written loan agreements.
One of the key issues in dispute was whether amounts credited to the loan account for Karting NSW by the trustee of AKA Track Development Fund Trust (Trust) each year amounted to distributions from the trust to Karting NSW in its capacity as a beneficiary.
The Supreme Court ultimately concluded that the answer to this question was yes, notwithstanding that the trustee had never formally resolved to make distributions to its beneficiaries in the amounts that were credited to their loan accounts, and stated that:
each year, at the time the accounts were signed on behalf of the trustee and declarations made that they fairly represented the trust’s financial affairs, Karting NSW (and all other beneficiaries with loan accounts to the trust) had an action for money had and received in the amount recorded as being the balance of the loan account in its favour.
Importantly, the manner in which the Trust’s financial accounts were prepared was vital to the findings of the Supreme Court. The Supreme Court noted that its conclusion was consistent with the fact that the balance sheet of the Trust for each year showed net assets of $1, and that the total liabilities of the Trust included the amounts in the loan accounts to each beneficiary.
Interestingly, in response to an argument that Karting NSW had not proved that Karting Australia had resolved to make the distributions each year to Karting NSW, the Supreme Court stated:
Latitude is given to companies in being found to have made resolutions notwithstanding that no formal meeting has taken place and no resolution has been documented: MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 140 FLR 247 at 266 (Powell JA). The intention of the directors of a company may be determined by reference to what they say or do: H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd  1 QB 159 (H L Bolton (Engineering)) at 170-173 (Denning LJ, Hodson and Morris LJJ agreeing).
The case highlights the complexities and nuances involved in the law of trusts, and the extent to which financial accounts will be taken into account in determining the decisions of directors of a corporate trustee.
However, for tax purposes, this case should be approached with caution. The burden of proof will still rest with a taxpayer to prove that a trust distribution was made (usually before 30 June). In many cases, the ATO will not accept financial accounts prepared after 30 June as proof of a distribution made before that date.
CUB losses appeal over section 353 notices
The Full Federal Court has unanimously held that a notice to produce documents for the purpose of obtaining information to allow the Commissioner to determine whether or not to challenge a taxpayer’s claim for legal professional privilege was valid in CUB Australia Holding Pty Ltd v Commissioner of Taxation  FCAFC 171.
Payroll tax net widens for medical and healthcare practices
The NSW Civil and Administrative Tribunal (NCAT) in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue (Thomas Case) held that payments from service entities to medical practitioners were subject to payroll tax.
The decision largely follows a similar decision in the Optical Superstore case in Victoria, but will have far greater implications for medical and health care practices across Australia, as the Thomas Case is the first with features common to most administrative service entities.
This decision means that businesses which rely on similar service entity models for delivering administrative services – whether in the healthcare industry or other industries – could potentially be liable to payroll tax for payments made to their contractors. For further insights, continue reading below, or read our article ‘Healthcare practices under payroll tax microscope’.
Legal Professional Privilege Protocol
The ATO has released a protocol setting out the recommended approach for identifying communications covered by legal professional privilege (LPP) and making LPP claims to the ATO.
The protocol is intended to assist taxpayers and their advisers when making LPP claims in response to requests for information from the Commissioner of Taxation.
Broadly, the ATO recommends that taxpayers take a three-step approach before claiming PP.
- Assess – your situation and communication;
- Explain – particularise the basis of your claim; and
- Advise – tell us how you approached your claims.
The protocol is detailed and, in light of recent case law on point (including the CUB case discussed above), it will be important that taxpayers and advisers have read and understood the protocol before making a LPP claim.
Employee Share Scheme (ESS): meaning of ‘genuine disposal conditions’ as a deferred taxing point
On 14 October 2021, the ATO released Draft Taxation Determination TD 2021/D5 Income tax: when are you genuinely restricted from immediately disposing of an interest provided under an employee share scheme? (Draft Determination).
The Draft Determination sets out the principles for working out when a scheme's disposal restrictions were 'genuine disposal restrictions' and, if they were, when a taxpayer is no longer genuinely restricted by the scheme for the purposes of determining the employee share scheme (ESS) deferred taxing point.
The Draft Determination contains four examples, and addresses the following key matters.
- What disposal restrictions are relevant?
- When is a disposal restriction a genuine disposal restriction?
- How do you show that you are genuinely restricted from disposing of your ESS interest?
- When are you no longer restricted?
When finalised, the determination will apply retrospectively. This may therefore mean that the Commissioner will consider that some ESSs have an earlier taxing point than previously thought to be the case.
Pandora Papers released: ATO’s involvement
In October 2021, the International Consortium of Investigative Journalists (ICIJ) released 2.94 terabytes of data (almost 12 million files) from 14 different offshore services firms.
The release is purported to include information relating to more than 330 politicians, 130 Forbes billionaires, celebrities, fraudsters, drug dealers, royal family members and leaders of religious groups around the world. Among this group there are allegedly at least 402 Australians.
The Pandora Papers eclipse earlier releases such as the Panama Papers in 2016 and Paradise Papers in 2017.
The ATO has made a public statement about the Pandora Papers release, with ATO Deputy Commissioner and Serious Financial Crime Taskforce (SFCT) Chief Will Day stating that:
While the information in data leaks is interesting, we don’t rely on data leaks to do our job. We detect, investigate and deal with offshore tax evasion year-round.
We are well connected locally and globally in our efforts to fight financial crime. We will certainly look at this data set and compare it with the data we already have to identify any potential connections.
Taxpayers affected by the Pandora Papers leaks should speak to their advisors about making a voluntary disclosure immediately.
Following the completion of the ATO’s Project DO-IT several years ago, we have assisted a significant number of taxpayers in making a voluntary disclosure to the ATO in respect of offshore income and assets. If you need assistance, please contact one of the authors.
Director Identification Number: application deadlines extended
The introduction of the Corporations (Director Identification Numbers—Transitional Application Period) Instrument 2021 extends the time for eligible officers to apply for a Director Identification Number (DIN).
Applications for a DIN must be made before the end of the applicable transitional application period, which will depend on whether the corporation is governed by the Corporations Act 2001 (Corporations Act) or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act).
The ATO has released website guidance setting out how eligible officers can apply for a DIN. Importantly, eligible officers must apply for a DIN themselves and cannot have anyone apply on their behalf (including a tax agent).
The tables below set out the relevant dates and deadlines:
Date of director appointment
Date director must apply
|On or before 31 October 2021
|By 30 November 2022
|Between 1 November 2021 and 4 April 2022
|Within 28 days of appointment
|From 5 April 2022
Date of director appointment
Date director must apply
|On or before 31 October 2021
|By 30 November 2023
|From 1 November 2021
Criteria for DGR application date extension
As previously announced, under recent legislation all non-government Deductible Gift Recipients (DGRs) will need to register as charities with the Australian Charities and Not-for-profits Commission (ACNC) in order to seek or maintain their DGR status.
This change does not affect ancillary funds and DGRs specifically listed in the Income Tax Assessment Act 1997 (although most will already have charity registration).
Existing DGRs have been given a twelve-month transitional period to register with the ACNC. The Commissioner may extend this period by an additional three years at their discretion, having regard to the criteria provided in the Treasury Laws Amendment (2021 Measures No. 2) (Deductible Gift Recipients—Extended Application Date) Instrument 2021.
The criteria include (among other things) whether the entity:
- has made reasonable steps to apply for charity registration with the ACNC;
- has made material changes to its purpose or activities, affecting ongoing entitlement to DGR endorsement;
- is likely to be eligible for charity registration with the ACNC; and
- has previously had a charity registration refused or voluntarily revoked by the ACNC.
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