Thinking | 10 May 2022

Talking Tax – Issue 204

In this edition of Talking Tax, we discuss the Clough decision impact statement, the OECD’s recent guidance on its suggested reform of the international tax rules, the Treasury’s release of consultation papers regarding the distribution rules for ancillary funds and the Federal Government’s recommendation for the Board of Taxation to review the non-arm’s length expense provisions for superannuation funds.

We also provide a summary of some recent cases, including Hyder v Commissioner of Taxation.

ATO updates

‘Decision Impact Statement: Clough Limited v FCT [2021] FCAFC 197’

In Talking Tax Issue 202 we discussed the Full Federal Court appeal of Clough Limited v Commissioner of Taxation [2021] FCAFC 197.

In the facts of this case, the majority shareholder owned 61.6% of Clough Limited (Clough). The majority shareholder entered a Scheme Implementation Arrangement (SIA) to acquire the remaining 38.4% shares. As part of the SIA, Clough offered to purchase employee’s unvested options and performance rights. After the SIA was implemented, the Taxpayer sought to deduct these payments under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (1997 Act).

The Full Federal Court held the payments were deductible over five years under section 40-880 of the 1997 Act.

The ATO released a decision impact statement on Clough on 10 March 2022 agreeing with the judges reasoning and referencing the principles in Taxation Ruling 2656 Income tax: deductibility of takeover defence costs. The ATO noted the principle that ascertaining whether a payment for the cancellation of employee entitlements in mergers or acquisitions is deductible, is ultimately ‘face and circumstance-specific’.

Legislative and policy updates

Consultation paper: ‘Distribution guidelines for ancillary funds'

Treasury has released a consultation paper seeking feedback on potential policy changes that would increase the flexibility offered to ancillary funds.

Ancillary funds are required to make a minimum distribution each financial year to type 1 deductible gift recipients (DGR). There are also restrictions on the transfer of assets between ancillary funds.

The consultation paper raises three issues and 15 questions for discussion. The alternative options raised by the paper are:

  • allowing ancillary funds to request the Commissioner lower the minimum distribution rate for one or more years to allow accumulating funds to support large projects;
  • increasing the flexibility for assets to be transferred between ancillary funds by:
    • allowing assets to be transferred between ancillary funds where the ancillary fund has already made its minimum distribution during the financial year; or
    • allowing assets to be transferred to another ancillary fund which would count to the fund’s minimum distribution and then a distribution of an equivalent amount must be made to a type 1 DGR within 12 months.

The paper also asks contributors whether there are any other improvements that could be made.

Responses to the consultation paper can be submitted until 6 May 2022.

The release of OECD’s guidance on the second phase of the reform of the international tax rules: ‘Pillar Two’

In December 2021, the OECD published the Global Anti-Base Erosion Rules (GLoBE Rules). The OECD has now published guidance on the GLoBE Rules.

Since 2017, the OECD has been developing a two-pillar approach to manage the digitalisation of the economy and establish rules around base erosion of large multinational enterprises (MNE). This approach will require MNE to pay a minimum rate of income tax in the countries in which they operate.

Member countries are currently not required to implement the GLoBE rules.

Case law

‘Deregistration is the corporate equivalent of death’: Trustee for B & J Chung Trust and FCT [2022] AATA 383

The director of a trustee company attempted to apply to the Administrative Appeals Tribunal (AAT) for a review of the ATO’s decision in disallowing an objection with respect to penalties imposed on the company. However, the company was deregistered by ASIC before the application was heard. Consequently, the AAT could no longer review that objection decision.

This case serves as a reminder that the AAT cannot review a decision made under section 14ZZ of the Tax Administration Act 1953 (Cth) if the taxpayer who lodged the original objection does not exist.

Oppressive conduct by the ATO: Hyder v Federal Commissioner of Taxation [2022] FCA 264

The Federal Court recently held the ATO engaged in oppressive conduct by requiring a taxpayer to pay two alternative assessments before it had been determined which assessment was correct.

Input tax credits claimed and denied: Kais Jewellery (Syd) Pty Ltd v Federal Commissioner of Taxation [2022] AATA 425

The AAT found the Taxpayer was not entitled to claim input tax credits for scrap gold it purchased because there was not enough evidence to prove the suppliers actually supplied the metal.

This article was written with the assistance of Olivia Gray, Law Graduate, and Gabrielle Terliatan, Paralegal.

Contact

Frank Hinoporos

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

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