Thinking | 10 October 2016
Talking Tax – Issue 52
Legislation and Government policy
New remedial power of the Commissioner of Taxation
On 14 September 2016, a new discretionary remedial power available to the Commissioner of Taxation (Commissioner) was introduced by the Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016 (Cth). The remedial power allows the Commissioner to provide for a more timely resolution of certain unforeseen or unintended outcomes arising from taxation and superannuation laws.
Currently it can take up to two years to resolve an unintended outcome of the operation of the law, and as such, the Commissioner will be able to make legislative instruments that modify the operation of taxation laws, thus reducing the time it takes to give effect to minor legislative corrections.
The power is intended to be a power of last resort, and is only to be used where a purposive interpretation of the law could not adequately resolve the issue.
The power can only be exercised where:
- the modification is not inconsistent with the purpose of the relevant provision
- the Commissioner considers the modification to be reasonable
- the Department of Treasury advises that any impact on the Commonwealth budget would be negligible.
Before exercising the remedial power, the Commissioner must undertake reasonably practical public consultation such as consulting with a technical advisory group. The discretion also must not be exercised where the modification would produce a less favourable result, than if the provision had not been modified.
The remedial power provides the potential to expedite problem solving steps in relation to unintended consequences in a way that will allow for a quicker resolution of issues. Whether this will result in more certainty is unclear, but the ability for small changes to be made without the need to wait for the passage of legislation through parliament is intended to benefit taxpayers.
Amendments to Chapter 2 – Duties Act 2001 (Qld)
On 1 October 2016, the additional 3% surcharge on stamp duty for foreign purchasers commenced in Queensland, referred to as the ‘additional foreign acquirer duty’ (AFAD). The surcharge applies to certain transactions under which a foreign person directly or indirectly acquires an interest in residential land in Queensland under a contract formed, or where a liability arises, on or after this date.
For ease of reference, below we provide a summary of relevant dates and rates for each State in which a surcharge for foreign purchasers has been introduced:
- Queensland – from 1 October 2016 – 3%
- New South Wales – from 21 June 2016 – 4 %
- Victoria –
- from 1 July 2015 to 30 June 2016 – 3%
- from 1 July 2016 onwards – 7%.
Broadly, the AFAD surcharge will apply where the following conditions are met:
- The acquirer is a ‘foreign person’, which include a ‘foreign individual’, ‘foreign corporation’ and ‘foreign trust’.
- The dutiable property (or relevant property of a landholder or corporate trustee) is ‘AFAD residential land’ (as defined) and the transaction relates to such dutiable property.
- There is a dutiable transaction, relevant acquisition or an acquisition of a new right or option to acquire the land on or after 1 October 2016.
If the dutiable transaction is a partnership acquisition, trust acquisition or trust surrender, then AFAD will only apply to the extent that the acquisition or surrender relates to AFAD residential land and only to the extent of the foreign person’s interest in the acquisition or surrender.
The liability for the additional duty arises at the same time that the liability for transfer duty, landholder duty or corporate trustee duty arises.
The amendments include a reassessment provision for additional duty where a purchaser becomes a foreign person within 3 years of the original duty liability date. There is an obligation to voluntarily disclose the information to the Commissioner within 28 days.
For entities that become a foreign resident after a transaction occurs, the reassessment provisions would need to be considered as part of any due diligence.
While transactions occurring before 1 October 2016 will generally be exempt from the regime, taxpayers should seek advice in relation to option agreements signed before 1 October 2016, which may be subject to the surcharge when they are exercised.
Advice should always be sought for any proposed direct or indirect acquisitions in land to determine if the proposed purchaser would constitute a ‘foreign person’ for the purposes of the AFAD, if the assets or interests to be acquired would involve residential land for AFAD purposes, and the duty implications of the transaction on the acquirer or landholder.
Public ruling on ex gratia relief for significant development
In light of the AFAD surcharge mentioned above, the Department of Treasury has released Public Ruling DA000.15.1. The ruling allows a taxpayer to seek the Treasurer’s discretion for ex gratia relief, via the Commissioner of State Revenue.
An ‘ex gratia’ or ‘good faith’ payment occurs where the taxpayer makes a payment on the assumption that liability does exist under the legislation, but the Commissioner of State Revenue determines that the liability has arisen in an unintentional way. The portion of the assessment to which ex gratia relief is provided is settled through a payment back to the taxpayer.
The Commissioner of State Revenue has produced guidelines for when it will apply this relief. Ex gratia relief will be considered where:
- the acquirer is Australian-based
- the foreign entity has complied with all Foreign Investment Review Board requirements
- the foreign entity meets regulatory requirements under the Corporations Act 2001 (Cth)
- the development is significant
- the development uses Australian goods, services and personnel.
The discretion will be applied only in exceptional circumstances and on a case-by-case basis.
This ruling will be welcomed by taxpayers unintentionally affected by the AFAD surcharge but does not provide a high level of certainty for applicants, given the highly discretionary nature of the relief and policy considerations.
If a taxpayer believes that they may be or have been affected by the AFAD surcharge in an unintended way, they should seek advice as to applying for ex gratia relief.
PAYG withholding for donation to DGRs — draft legislative instrument
The ATO has released a draft legislative instrument on PAYG withholding for donations to a deductible gift recipient (DGR).
The draft legislative instrument will repeal and replace the existing legislative instrument ‘PAYG Withholding Variation: Donations to deductible gift recipients’ (F2016L00439), which reduced the amount used to calculate withholding if the payer had made a payment to a DGR on behalf of the payee.
The draft instrument will replace the current instrument from 1 November 2016 and continues to provide the same treatment.
ATO ID on deposit refunds withdrawn
The ATO has withdrawn Interpretative Decision ID 2009/119.
The ID considered the tax implications of refunds of deposit and was withdrawn following the decision of the Federal Court in Batchelor v Commissioner of Taxation  FCAFC 41 (Batchelor).
The ID was inconsistent with the Federal Court’s reasoning Batchelor on the issue of whether a refund of a deposit received by the taxpayer, on the termination of a contract to acquire property and assets in connection to the development of a retirement village, should be counted as ordinary income.
The Full Court of the Federal Court in Batchelor held that, contrary to ID 2009/119, the receipt should not be included as assessable income, nor should it be considered an assessable recoupment or capital gain, on the basis that a mere refund or reimbursement will not ordinarily qualify as an assessable receipt unless it was paid to compensate a loss.
Giusida Pty Ltd v Commissioner for ACT Revenue  ACTSC 275
This case considers the issue of determining the reliability of opinion evidence on the unimproved value of Crown leasehold land without reference to comparable sales evidence, in circumstances where the land could be subject to ground contamination, and yet had received approval for residential development.
Giusida had been granted a variation to an original Crown Lease of the subject land to permit it to be used for residential purposes.
One of the issues to be determined was whether a deduction could be made for the possibility of contamination as a consequence of a filled-in tank underneath the land and its proximity to a petrol station and dry cleaning business.
In the original decision an allowance was made for this when calculating the unimproved value of the land.
Under s. 11A of the Rates Act 2004 (ACT) the Commissioner may redetermine the unimproved value of the land if there is a change in circumstances in relation to the land. Giusida objected to the Commissioner’s assessment of the rates payable based on the valuations. Giusida then appealed to the ACAT and subsequently to the Supreme Court on a question of fact or law.
Giusida submitted that a desirous purchaser would take into account the possibility of contamination, requiring significant remediation cost, in valuing the land at $1,034,000. This was based on the evidence of Giusida’s expert, Dr Gunton.
On the other hand, the Commissioner argued that there was no evidence of actual contamination, and that the risk of contamination was already reflected in the sale prices for comparable properties in the area of Braddon.
This was based on the evidence of the Commissioner’s expert, Mr Robertson.
In considering the Commissioner’s argument, the Court found that in stating that the risk of contamination was built into the sales price for properties in the area, Mr Robertson had not relied on any comparable sales evidence. The two properties on which he relied were incomparable in such that one was in an entirely different suburb and the other did not permit residential use.
On this basis, the court found that in accepting Mr Robertson’s error, the Tribunal had fallen into error. The court was also critical of the Tribunal’s reliance on hearsay evidence, and stated that despite not being bound be the strict rules of evidence, the Tribunal was still required to afford each party the opportunity of a fair hearing.
The correct method of valuation
The Court noted that in evaluating a valuation there is no legal principle that requires any particular method of valuation to be rejected or preferred. It is therefore not enough to reject a valuation simply because it does not use a particular method of valuation.
The Court held that in rejecting the evidence of Giusida’s expert without adequate explanation or consideration, the Tribunal had made an arguable error.
Evidence can be based on experience, sales evidence and various other factors. The failure to take into account a comparable sale, or the taking into account of a non-comparable sale are both factors that can amount to the failure to take into account a material consideration.
The Court granted Giusida leave to appeal the valuations.
This case is a reminder that the court will accept a variety of valuation methods for determining the unimproved value of the land. However, these methods must be supported in each instance with evidence that has a comparable factual basis. To have probative force, the valuations should consider all relevant facts and circumstances which affect the particular land and provide reasons for any conclusions.