Thinking | 19 February 2016
Talking Tax – Issue 24
Taxpayer in Sandbach v FC of T to appeal to the Federal Court regarding excessive default assessments
The taxpayer is appealing an AAT ruling affirming the Commissioners decision to disallow certain loan deductions and impose penalty assessments. The taxpayer was a partner in a primary production partnership that ended in the 1990s. The partnership drew down two advances totalling $400,000 from Macquarie Bank with the partnership’s 3,000 acre farm as security combined with an unlimited joint and several guarantee from the partners. An additional $270,000 was borrowed from Sandhurst Trustees Ltd to reduce the debt with Macquarie, again secured by a mortgage and guarantees from the partners.
Macquarie brought proceedings against the partners that resulted in a settlement and the equitable rights to the debt being transferred to a purposely incorporated assignee Campus Martius Pty Ltd (Campus Martius). The directors of Campus Martius were the taxpayer’s wife and the wife’s brother, with the taxpayer claiming – albeit without documentary evidence - the money paid by Campus Martius to Macquarie was loaned by his wife and that he had paid her for that loan. A similar settlement arrangement was implemented with Sandhurst.
The Commissioner issued amended income tax assessments to the taxpayer for the 2005, 2006, and 2008 income years. The Commissioner disallowed the taxpayer’s objection, and so the taxpayer appealed to the AAT claiming that the claimed deductions for interest relating to the loans were allowable even though the debts were assigned to Campus Martius.
The AAT affirmed the Commissioner’s decision, holding that the interest expenses claimed by the taxpayeras deductions were not ‘incurred’ because of the assignment of the debts and the relationship between the taxpayer and Campus Martius. Regarding the interpretation of ‘incurred’ with regards to losses or outgoings, the AAT stated that:
It is not enough that the loss or outgoing is merely “threatened or contingent” (Hooker-Rex Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1241 at 1249–1250 per Sweeney and Gummow JJ, citing Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616). An obligation may be so infected by contingencies that it could not properly be concluded that the taxpayer was definitively committed to the obligation (Commissioner of Taxation v Desalination Technology Pty Limited  FCAFC 96).
The AAT found that the agreements between Campus Martius and Macquarie, and Sandhurst ‘served to relieve the [taxpayer] of the obligation to pay interest in the future save for upon the occurrence of events consequent upon a direction being made by Campus Martius’.
Amateur share trader denied deductions – Devi v FC of T  AATA 67
The AAT has held that a taxpayer was not engaging in a business of share trading and accordingly was not entitled to a deduction of $20,000 for the loss she made in the 2010/2011 financial year.
The taxpayer worked in the child care sector, earning approximately $40,000 per year and working 25 to 30 hours per week, since 2006. In July 2010, she began engaging in substantial share trading. In the 2010/11 year, the taxpayer engaged in 108 share transactions, including 71 purchases valued at approximately $380,000 and 37 sales valued at approximately $215,000. These transactions were predominantly carried out in the first six months of the year, with only 10 transactions, to the value of approximately $70,000, taking place in the second half of the year. The taxpayer traded in 20 different companies and claimed to have spent between 15 and 25 hours per week on these activities.
The taxpayer argued that she was entitled to a deduction under either the general deduction provision in section 8-1 or the trading stock deduction provision in section 70-35 of the Income Tax Assessment Act 1997 (Cth) for the $20,000 loss she incurred from these transactions.
The AAT denied the deduction, finding that the taxpayer had not been carrying on a share trading business. While her turnover from these activities was substantial, particularly when compared to her regular wages, and she did maintain a home office for the purpose of these activities, the following factors clearly indicated that no share trading business had been carried on in the 2010/11 year:
- the transactions were not regularly, routinely or systematically carried out throughout the year;
- she was likely only engaging in share trading for an average of 5 hours per week;
- her method lacked sophistication and any clear business plan; and
- she had no skills or experience in the area of share trading.
The case serves to highlight the ‘greyness’ around whether transactions by taxpayers are on revenue or capital accounts. Interestingly, the case only appears to have considered whether the taxpayer’s activities amounted to carrying on a business, rather than the broader question of whether there was a commercial transaction with a profit making intention. Even if the taxpayer had been successful in arguing her activities amounted to carrying on a business, it is possible the non-commercial business loss rules would have prevented her losses being offset against her salary income.
Draft Law Companion Guideline for ‘Netflix’ tax bill released
The ATO has published a Draft Law Companion Guideline that explains how the Commissioner intends to apply the GST changes in the Tax and Superannuation Laws Amendment (2016 Measures No.1) Bill 2016 (Cth) (Web GST Bill) – see below.
The Guideline describes, amongst other things, the new test in section 9-27 of the A New Tax System (Goods and Services Tax) Act 1999 Act (Cth) for when an enterprise of an entity is carried on in the indirect tax zone and the application of this test to non-resident entities.
Inquiry into the scrutiny arrangements that apply to the ATO
Earlier this month, the House of Representatives Standing Committee on Tax and Revenue resolved to inquire into and report on the external scrutiny arrangements that apply to the ATO. The bodies which directly scrutinise the ATO include the Inspector-General of Taxation, which investigates taxpayer complaints, the Australian National Audit Office (ANAO), who conducts performance audits, and the Office of the Australian Information Commissioner, who reviews compliance with information transparency, freedom of information and privacy.
The inquiry will have particular regard to:
- removing inefficiency and duplication;
- reducing the cost to government; and
- the “earned autonomy principle” (i.e. investigating opportunities to reduce control and provide greater operating freedom and autonomy to particular entities).
This inquiry is not intended to include the ANAOs role in the auditing of the ATO’s financial statements.
Legislation and government policy
‘Netflix’ tax on its way
As reported last week, the Web GST Bill, otherwise known as the ‘Netflix’ tax, was introduced into the House of Representatives. The Bill applies GST to digital products and services imported by Australians, which according to the Treasurer Scott Morrison will ensure ‘Australian businesses selling digital products and services are not disadvantaged relative to overseas businesses that sell equivalent products in Australia’. The Bill purports to do this by applying GST to the supply by non-resident companies of digital products such as a software subscription service, or digital content such as films and apps, and other services, such as professional or consultancy services, to Australian consumers.
Additionally, the Bill aims to remove red tape and consequently minimise compliance costs for non-resident suppliers by shifting the GST obligations to Australian-based business recipients.
R&D Tax Incentive Issues Paper released for comment
The R&D Tax Incentive Review Panel has released an issues paper and is seeking input to identify opportunities to improve the effectiveness of the incentive in promoting research and development.
Briefly, the R&D Tax Incentive is available to Australian resident companies, and in some circumstances, foreign companies. The incentive provides a:
- refundable 45 percent tax offset for companies with turnover of less than $20 million; and
- non-refundable 40 percent tax offset available to other companies.
As expenses can ordinarily be deducted at the company tax rate of 30 percent (excluding small business entities), for larger companies, the tax offset delivers a total net benefit of 10 cents in the dollar. Small profitable companies with turnover below $2 million qualify for the small business corporate tax rate of 28.5 percent, resulting in a net benefit of 16.5 cents in the dollar. For profitable companies with a turnover between $2 million and $20 million the net benefit is 15 cents in the dollar.
Submissions are due by 29 February 2016 and the panel is expected to report to the Federal Government in April 2016.
You might be also interested in...
Tax | 18 Feb 2016
In November we reported on the draft legislation to introduce a roll-over to allow a small business to change its legal structure, without incurring a capital gains tax (CGT) liability. This was first announced in the 2015-2016 budget.
Tax | 17 Feb 2016
A trust is not a legal person, like an individual or a company. It is a legal relationship that involves a legal owner (the trustee) holding property for the benefit of other people or entities (the beneficiaries). This relationship is established and governed by a trust deed. In all trusts, the trustee: