Talking Tax – Issue 23

ATO updates

Federal Commissioner announces ‘enough is enough’ – no more Mr Settlement Guy

In the wake of a number of settlements with 81 large businesses, Federal Commissioner of Taxation Chris Jordan has announced an aggressive change of strategy.

At a Senate hearing on Wednesday 10 February, Commissioner Jordan declared that ‘enough is enough’ with regards to multinational firms that are ‘gaming the system’ with their ‘operate here and bill overseas model’. He further stated that ‘the ATO will not settle a dispute at any price’ and has appointed former Federal Court judge Garry Downes to independently assist in the design and testing of settlement processes.

Commissioner Jordan has stated that the ATO has issued warning letters to 60 companies and moved another six to its list of ‘high-risk’ rating entities. He indicated there are more warning letters on the horizon and specifically identified that ‘rolled-up loans and intra-company financing arrangements will be aggressively pursued’.

This change in strategy also comes in combination with the new anti-avoidance laws that came into effect on 1 January 2016 – reported here – that impose significant disclosure obligations on multinational companies and large private Australian companies.

If you have been issued with a warning letter or have any questions about your offshore operations, please contact one of our experienced tax lawyers.

Pilot trial of ‘Effective Taxes Borne’ methodology successfully completed

The ATO has announced the successful completion of a pilot trial with various businesses aiming to find a methodology to determine the effective taxes borne (ETB) by taxpayers which can be used to analyse the tax performance of multinationals.

The ATO concluded that the ‘ETB is an effective risk and compliance tool to help us identify an economic group’s worldwide profit from Australian-linked business activities, and the Australian and offshore tax paid on that profit’.

According to the ATO, the ETB will be used to assess the tax performance of targeted entities in situations including where:

• a taxpayer is not transparent in its dealings with the ATO or the taxpayer has had limited prior interaction with the ATO;
• the taxpayer has transactions with related entities in low or no tax jurisdictions;
• the ATO has identified key tax risks such as trading, market or procurement hubs, divided supply chain or e-commerce structures; or
• the ATO is building a new and transparent relationship with the taxpayer.

Case law

Taxpayers in Bywater Investments Limited & Ors v FC of T appeal to the High Court

This week, the taxpayers in Bywater Investments Limited & Ors v FC of T applied for special leave to appeal last year’s Full Federal Court decision in relation to two related matters involving the Hua Wang Bank Berhad.

The key issues concerned the tax residency status of the taxpayers in Australia, whether profits from the share sales executed by the taxpayers were on revenue account and the accuracy of the primary judge’s finding that the shares, which were found to be trading stock, had a nil value at the start of an income year if no assessment had been issued in the prior year.

The Full Federal Court held that:

• the primary judge had been correct in finding that the taxpayers were Australian residents as the real business of the taxpayer was conducted by an accountant in Sydney such that each taxpayer’s central management and control was in Sydney;
• the question of whether the profits from the sale of shares were on revenue account was not considered as the parties did not challenge the finding that they were trading stock; and
• the primary judge had been correct in finding that, in determining the value of trading stock, pursuant to the Income Tax Assessment Act 1997, the Commissioner must consider the value of the trading stock held in the previous year. In this case, as there was no assessment for the previous year, the value of an item of trading stock at the beginning of the new income year is nil.

Legislation and government policy

It has been a busy week in the Federal Parliament, with a number of bills being introduced, passed, and further considered in Committee hearings.

New Attribution Managed Investment Trust rules referred to Senate Committee

The legislation containing the new tax regime that will apply to managed investment trusts (MIT) that qualify as an Attribution Managed Investment Trust (AMIT) has been referred to the Senate Economic Legislation Committee for review.

The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 provides fund managers with the opportunity to nominate their MIT, if it has clearly defined interests, to be taxed as an AMIT.

Under the new regime:

• an AMIT will be treated as a fixed trust for income tax purposes;
• the current ‘present entitlement’ model will be replaced with an ‘attribution model’ where the trust will be able to determine its members’ entitlements to capital and income by attributing its income, tax offsets and credits to members on a fair and reasonable basis in accordance with their interests and as set out in the constituent documents of the trust; and
• if a trust discovers a variance between the amounts actually attributed to members for an income year, and the amounts that should have been attributed, the trust can reconcile the difference in the income year that it is discovered through the use of an statutorily enshrined “unders and overs” system.

Please refer to our earlier publication for a detailed outline of the operation of the AMIT rules. The AMIT rules will come into effect on 1 July 2016. In order to ensure your trust deed, tax and accounting systems are ready for the new rules, please contact one of our tax lawyers for advice.

‘Netflix’ tax introduced into the House of Representatives

The Tax and Superannuation Laws Amendment (2016 Measures No.1) Bill 2016 (Cth) was introduced into the Federal Parliament this week. Otherwise known as the ‘Netflix tax’, the new law aims to:

• ensure that GST applies consistently to all supplies of digital products and other imported services to Australia; and
• minimise compliance costs for non-resident suppliers while maintaining the integrity of the GST base.

Small Business Rollover Bill presented to the House of Representatives

Last week the Federal Government introduced the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (Roll-over Bill). The Roll-over Bill aims to assist small businesses undergoing a genuine restructure by allowing gains and losses that would ordinarily arise, to be deferred. The key eligibility test is whether the restructure is ‘genuine’ and not a tax avoidance scheme.

Specifically, these amendments apply to:

• transfers of depreciating assets, where the balancing adjustment event arising from the transfer occurs on or after 1 July 2016;
• transfers of trading stock or revenue assets, where the transfer occurs on or after 1 July 2016; and
• transfers of capital gains tax (CGT) assets, where the CGT event arising from the transfer occurs on or after 1 July 2016.

Please refer to our previous publication on the draft Roll-over Bill for a more detailed explanation of the proposed rules.

If you feel that this roll-over relief may be available to you, please contact a member of the tax team and we can assist you in assessing any advantages the new Roll-over Bill may present.

CGT treatment of earnout rights legislation passed

The Tax and Superannuation Laws Amendment (2015 Measures No 6) Bill 2015 (Bill) was passed by both houses of Federal Parliament last week.

The two key changes implemented by the Bill are:

• capital gains or losses that manifest due to look-through earnout rights will be disregarded and any payment from earnout arrangements will instead affect the capital proceeds and cost base of the underlying assets related to the earnout arrangement; and
• purchasers of particular Australian assets now have withholding tax obligations.

For further details on the changes to earnout rights, please refer to our previous publication and contact a member of our tax team.

Bill requiring certain financial institution reporting on foreign tax residents passes the House of Representatives

The Tax Laws Amendment (Implementation of the Common Reporting Standard) Bill 2015 (Cth) (Reporting Bill) requires certain financial institutions in Australia to report information to the Commissioner concerning the financial accounts held by foreign tax residents. The Commissioner will subsequently provide this information to the foreign resident’s tax authorities. Additionally, the ATO will receive information on Australian tax residents who hold financial accounts overseas. The Reporting Bill forms a part of the Federal Government’s fight against cross-border tax evasion and the supporting Common Reporting Standards outlined in international frameworks.

The Reporting Bill was passed by the House of Representatives on Monday 8 February and now passes to the Senate.