Talking Tax – Issue 36
Legislation and government policy
NSW Bill introduced
A new Bill1 about the collection and disclosure of tax information was introduced to the NSW Legislative Council on 11 May 2016. It proposes changes to the Taxation Administration Act 1996 (NSW) in relation to, among other things, the collection and disclosure of information related to property transactions by the Commonwealth Government.
These amendments will enable the NSW Chief Commissioner of State Revenue to collect and disclose information to the Federal Commissioner of Taxation relating to the transfer of interests in NSW real property. The ATO intends to use the information it receives from the NSW Commissioner to ensure compliance with Federal taxation laws. In particular, the information to be disclosed will include the nationality and residency status of parties to relevant property transactions, allowing the ATO to administer its National Register of Foreign Ownership of Land Titles (which will be relevant to the application of the new foreign resident capital gains withholding tax rules relating to the acquisition of real property).
The Bill also proposes to amend the Conveyancing (Sale of Land) Regulation 2010 (NSW), to imply a term into all sale of land contracts requiring the vendor to provide a current land tax certificate to the purchaser prior to completion of the transaction. This certificate discloses to the purchaser whether land tax is charged on the land. As vendors will be required to apply for this certificate, this will enable the NSW Chief Commissioner to collect information about the vendor which it can then disclose to the ATO.
The amendments proposed by the Bill are intended to be effective from 1 July 2016.
Federal election on 2 July – Lapse of Bills before Parliament
In order to facilitate a double dissolution election on 2 July 2016, the Governor General proceeded to dissolve both Houses of Federal Parliament, effective from 9 May 2016. Consequently, all Bills that have not been passed by both Houses of Federal Parliament have now lapsed. Bills relating to tax matters were the list, include:
- Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
- Tax and Superannuation Laws Amendment (2015 Measures No 3) Bill 2015
- Industry Research and Development Amendment (Innovation and Science Australia) Bill 2016
- Tax Laws Amendment (Tougher Penalties for Country-by-Country Reporting) Bill 2016 [No 2]
- Superannuation Legislation Amendment (Choice of Fund) Bill 2016
- Superannuation Legislation Amendment (Transparency Measures) Bill 2016
- Superannuation Legislation Amendment (Trustee Governance) Bill 2015
- Australian Charities and Not-for-profits Commission (Repeal) (No 1) Bill 2014
Where Bills have lapsed as a result of a dissolution and general election (as is the case here), new Bills must be introduced to the new Houses of Parliament.
Property developers and trust arrangements
The ATO has been focusing on trusts which develop and sell properties as part of their normal business. The ATO has said that on the sale of these properties, trusts may be claiming the 50% capital gains tax (CGT) discount, which they may not be entitled to. In an effort to target these arrangements more closely, the ATO has set up a ‘Trusts Taskforce’ and has progressed 75% of the cases reviewed for audit. In particular, the ATO has stated that arrangements which display the following characteristics are being targeted:
- taxpayers have experience in either developing or selling property and establish a new trust to acquire property for development and sale;
- the circumstances of the arrangement are inconsistent with the stated purpose of developing the property as a long term investment;
- the development is advertised as available to purchase before completion or is sold soon after completion; and
- the trustee claims the 50% CGT discount on the sale of the property.
The ATO has received a number of voluntary disclosures and is encouraging taxpayers to continue to do so.
We recommend that taxpayers take steps to review their trust deeds and circumstances if they conduct property development businesses through trusts, and should prepare for future audit activity if their activities are similar to these types of trust arrangements. If you believe this may impact you or your clients, contact us for more information.
‘Tax Gaps’ and ‘Justified Trust’
On 10 May 2016 the Deputy Commissioner of Public Groups, Jeremy Hirschhorn, participated in a panel discussion which focused on the concepts of the ‘Tax Gap’ and ‘Justified Trust’.
The ‘Tax Gap’ is a comparison of the amount of tax actually collected and the amount of tax that is theoretically collectable for a defined period. This size of the ‘Tax Gap’ is seen as a measure of the efficiency of the tax system itself and the administration of that system. Mr Hirschhorn emphasised that it was important to focus on how to most effectively reduce the ‘Tax Gap’ by using proactive preventative measures, rather than reactive correction measures such as audit activity and the issuing of amending assessments.
‘Justified Trust’ is a hypothetical concept where a hypothetical informed and interested citizen jury would consider that the ATO has taken sufficient action to ensure that an individual taxpayer is paying the correct amount of tax. The ATO aims to establish Justified Trust with respect to the tax performance of its individual taxpayers and considers there to be four main criteria required, being:
- the existence of an appropriate tax governance framework and the tax framework being ‘lived’ in practice;
- the identification of the relevant risks (e.g. by way of ATO taxpayer alerts);
- understanding the current transactions and arrangements that are being entered into; and
- understanding which transactions or arrangements are not being taxed and why.
The panel discussion also considered a number of other current taxation issues, including:
- the use of hybrids in related party financing to avoid interest withholding tax;
- ATO compliance infrastructure;
- related party financing;
- thin capitalisation;
- offshore marketing and procurement hubs; and
- the Multinational Anti-Avoidance Law.
Panama Papers data leak – release of public database
As previously discussed in Talking Tax – Issue 30 and Talking Tax – Issue 32, the ATO received a substantial amount of taxpayer data from Panama law firm Mossack Fonseca, arising out of an investigation by the International Consortium of Investigative Journalists (ICIJ).
On 9 May 2016, the ICIJ announced the release of a public database providing information on almost 214,000 offshore entities that were subject to the Panama Papers leaks. This includes information concerning individuals in more than 200 countries and entities that have been incorporated in 21 different tax havens. It reveals more than 360,000 names of individuals and companies that are responsible for secret offshore structures and failures to correctly report offshore activities.
However, the ICIJ have advised that the information available on the public database represents only a fraction of the data leaked by the Panama Papers, stating that it would not be publishing the entirety of the information. The information that has been disclosed includes details regarding company owners, proxies and intermediaries in secrecy jurisdictions but does not include information related to bank accounts, email exchanges and financial transactions. The ICIJ reported that Australia intends to create its own public registry of company owners based on the leaked data.
Taxpayers and their advisors should be aware that the ATO will simply apply fraud or evasion in these circumstances, to go back and extend the review period indefinitely. We suggest taxpayers that have had dealings with Mossack Fonesca or have other offshore dealings, review their affairs and ensure they are prepared for any ATO review. In some circumstances, taxpayers may seek advice regarding a voluntary disclosure to the ATO to minimise the risks with a reactive approach.
This article was written with the assistance of Tim Hutton, Paralegal.