Thinking | 8 December 2016
Talking Tax – Issue 61
Commissioner of Taxation v Kamal Jayasinghe  HCA 275
The High Court has granted special leave to appeal the Full Federal Court decision in Federal Commissioner of Taxation v Jayasinghe  FCAFC 79.
The Commissioner lost both cases, at first instance at the Administrative Appeals Tribunal, and on appeal to the Full Court of the Federal Court of Australia, where it was held that the taxpayer was exempt from his earnings on the basis that he was the holder of an office in the United Nations.
The case addressed the interpretation of the phrase:
- ‘a person who holds an office in an international organisation’ under section 6(1)(d) of the Interpretational Organisations (Privileges and Immunities) Act 1963 (Cth) (IOPI Act) and
- ‘a person who holds an office in the United Nations’ under regulation 10 of the United Nations (Privileges and Immunities) Regulations 1986 (Cth).
The particular issue in dispute on appeal was whether the interpretation of the phrases was informed by the meaning of the Convention to which the IOPI Act gives effect. The IOPI Act was enacted in part to give effect to the UN Convention stating that officials of the United Nations were to be exempt from taxation on the salaries and emoluments paid by the United Nations.
The majority of the Federal Court (Justice Pagone and Justice Davies) held that, as a Project Manager, the taxpayer was the holder of an office in the UN, an international organisation, meaning that he was entitled to the tax exemption. Chief Justice Allsop dissented on appeal.
The High Court granted special leave to appeal the decision.
Winday International Pty Ltd v Chief Commissioner of State Revenue  NSWCATAD 270
The NSW Civil and Administrative Tribunal has found in favour of the NSW Chief Commissioner of State Revenue (Chief Commissioner) on application by a taxpayer for review of the Commissioner’s decision that it was liable for payroll tax under the Payroll Tax Act 2007 (NSW) (PTA).
Winday International Pty Ltd (Winday) conducted a radiology facility that included the provision of radiological plant and equipment, medical supplies and staff. Winday advertised the bulk billing facility, which could be booked by radiologists to see patients for dedicated periods of time. Each radiologist bulk billed patients and directed these amounts be paid to Winday for it to collect, account and remit the radiologist’s fees.
Each radiologist had their own ABN and insurance. A standard form service agreement was entered into between Winday and a number of radiologists (or their service entities). The service agreement imposed an obligation on Winday to ensure that the net amount payable to the radiologist would be no less than $2,000.
The Chief Commissioner issued assessment notices to the applicant (Winday) for payroll tax, interest and penalty tax for the 2008 to 2013 financial years on the basis that some payments by Winday to the radiologists were subject to payroll tax under Division 7 (Contractor provisions) or Division 8 (Employment Agents) of Part 3 (Wages) of the PTA.
Winday objected to the Assessments and the objections were disallowed. Winday applied to the Tribunal for review of the objection decisions. Although Winday applied for a review of the objection decisions, the parties agreed that the Tribunal’s role would be to review the Assessments.
The issue considered by the Tribunal was whether Winday incurred a payroll tax liability in respect of amounts paid or payable by Winday to the radiologists. The Tribunal considered whether Winday, as an employment agent, procured the services of the radiologists for clients of the employment agent.
Based on the contractual obligations of Winday and the radiologists, the Tribunal found that while there was an employment agency contract under Division 8, there was no relevant contract to attract the operation of Division 7. On the basis that the relevant Division 8 provisions applied, the Tribunal affirmed the Chief Commissioner’s decision.
The Chief Commissioner submitted that all the facts and circumstances of the arrangement between Winday and the radiologists satisfied the statutory provisions of both Division 7 and Division 8. However, the Tribunal highlighted that the ‘employment agent’ provisions and the ‘relevant contract’ provisions under Divisions 7 and 8 are mutually exclusive. The Divisions classify payments made by an employer as wages in the following ways:
- Division 7 provides that amounts paid or payable by an employer for or in relation to the performance of work relating to a relevant contract of an employee are taken to be wages paid or payable during the relevant financial year.
- Division 8 provides that amounts paid or payable by a person taken to be an employer under an employment agency contract to or in relation to a person taken to be an employee in respect of the provision of services in connection with that contract are taken to be wages.
Accordingly, it was only open to the Tribunal to affirm the Assessments under either Division, but not both, if it found in favour of the Commissioner.
Winday submitted that only a radiologist could render accounts for fees, that any fees received by Winday belonged to the radiologist, and that Winday merely accounted to the radiologist for the radiologist’s own money after deducting Winday’s service fee.
The Tribunal considered the contractual obligations of the parties to determine the nature of their relationship. The Court found that the service agreement formed part of an agreement, arrangement or undertaking which comprises an employment agency contract under Division 8, and that Winday procured the professional services of the radiologists to be supplied to patients at the Premises, and thus payroll tax applied.
Bellbird Ridge Pty Ltd as trustee for Bellbird Ridge Unit Trust v Chief Commissioner of State Revenue  NSWSC 1637
The NSW Supreme Court handed down its decision in a case where a taxpayer applied for a review of the decisions of the NSW Chief Commissioner of State Revenue to issue land tax assessments for the 2011-2015 land tax years. The taxpayer claimed an exemption from tax on the basis the property was rural land used for primary production pursuant to section 10AA of the Land Tax Management Act 1956 (NSW).
The taxpayer was a wholly owned subsidiary of Johnson Property Investments Pty Ltd forming part of the Johnson Property Group, a group that is engaged in the business of property development. The taxpayer purchased the land on 7 May 2007 for $12.5 million, at which time it was zoned as ‘Rural’. From 24 January 2011, it was rezoned as partly ‘Low Density Residential’, partly ‘Public Recreation’ and partly ‘Neighbourhood Centre’.
On 12 July 2010 the Cessnock City Council granted conditional development consent for the subdivision of three lots into three stages of 60 residential lots.
Between 2012 and 2013 Johnson Property Group and the NSW Department of Planning and Infrastructure engaged in negotiations and then entered into a voluntary planning agreement in which the contributions would be made by the Group towards public infrastructure if the development application were approved. Within two days the application was approved.
In 2014 construction certificates were approved and further planning proposals were lodged.
The Court found that for the 2011 land tax year, being the year before which the land was rezoned, the assessment should be revoked. However, for later years, the onus is on the taxpayer to show that the primary production use of the land had a significant and substantial commercial purpose or character as land used for primary production purpose.
Dominant use of the land
It was accepted that at all material times, the land was used for the maintenance of animals (being cattle) for the purpose of selling them or their natural increase. However, the Chief Commissioner assessed the land on the basis that primary production was not the dominant purpose due to the ‘physical and non-physical’ uses of the land for which the commercial residential land development activities were deemed the dominant use.
The Court noted that the possible uses of the land for the purpose of determining the dominant purpose should not be restricted to the physical uses of the land. However, Justice White confirmed that possible future uses of the land for the purposes of determining the dominant use of the land are irrelevant, such that the analysis must focus on the existing uses of the land only.
Justice White describes that ‘[a]n intended future use does not become an actual existing use merely because substantial moneys and resources are applied in its planning and preparation.’ In considering the meaning of ‘use’ within the meaning of section 10AA(3), the Court relied on the reasoning in Metricon Qld Pty Ltd v CCSR (No. 2)  NSWSC 332, and held that use ‘requires the doing of something with the land, whether it be using it physically or by putting it to advantage’.
Bellbird Ridge did not use the land physically other than allow Mr Bailey (farmer) to agist his cattle on it and allowing surveyors and geotechnical engineers and consultants to go onto the land and carry out tests which were required as part of the planning approval process. All of the Bellbird lands were used for raising cattle.
Interestingly, in addition to Mr Bailey’s farming activities, between 2006 and 2014 he had a full-time job driving garbage trucks for the Cessnock City Council. In 2007 he entered into a licence agreement with Bellbird Ridge to agist cattle on the land for a licence fee of $40 per week for a period of three years with an option to renew.
Accordingly, the Court held it was clear that the dominant use of the land was the primary production purpose of raising cattle. In none of the land tax years in question was the property being currently used for residential development. That remained an intended future use.
Significant or substantial commercial purpose or character
The Commissioner contended that the taxpayer had not satisfied the requirements of section 10AA(2), being that the primary production use must have a substantial commercial purpose or character.
The Court highlighted that interpreting section 10AA(2)(a):
- for the use of the land to be significant, it must be something of importance or consequence, a key element, or something vital or critical
- for the use to be substantial it must have an ample or considerable amount, quantity or size and
- the commercial purpose or character requires that the use not only have the purpose of obtaining revenue but that it also have the potential to generate profit.
The Court considered the intensity of the operation, size and quality of the herd of cattle, the size and carrying of the capacity of the land and the resources put into the development and maintenance of the operation. At its peak, the operation generated $28,132 in cattle sales in 2015, with a gross profit of $20,084 for the sale of 51 heads of cattle.
The return received from the cattle business operated on the land was small or negative. Further, the agistment fee paid by the related party was well below commercial rate. Whilst the Court considered the time Mr Bailey dedicated to primary production activities, being two to three hours every second day on the property for which his labour was not accounted for as an expense, as the circumstances were such that no primary producer could operate a cattle business on those terms to generate a profit, the primary production use did not have a significant commercial purpose or character.
What this case demonstrates is that if a property developer acquires land in a rural zone with the intention that at some future point in time when the area is re-zoned for residential development, it will realise its capital assets by commencing residential development activities, then any preparation works that demonstrate there is an intention to develop or change its use from primary production to residential development, are permitted.
For each land tax year, the Chief Commissioner must consider its current present use for determining whether the land is used for primary production and whether this activity has significant commercial character for the taxpayer to be entitled to the primary production exemption.
The onus is on the taxpayer each year to demonstrate that the statutory tests are satisfied and any evidence that a taxpayer may intend to develop the land once a parcel of land has been re-zoned from farming to residential is irrelevant. It is likely that once a taxpayer generates greater revenue from the from the residential development than primary production then section 10AA(2) will not be satisfied. We note however, that this commercial test is not a statutory requirement in Victoria or South Australia.
The Queensland Supreme Court has upheld the decision in Can Barz Pty Ltd & Anor v Commissioner of State Revenue & Ors  QSC 59 that the garnishee procedure under the Taxation Administration Act 2001 (Qld) cannot be used to recover tax from trust property in order to satisfy tax debts of the trustees which were incurred in another capacity.
The first respondent (Custody Trustee) held real property on trust for the second respondent in their capacity as trustees for their self-managed superannuation fund (Superannuation Trustees).
It was accepted by both parties that the Superannuation Trustees were liable to pay the outstanding payroll tax to the Commissioner. The garnishee notices were issued after a property owned by the Custody Trustee was sold, the profits of which would be paid to the Superannuation Trustee. The Commissioner issued garnishee notices to:
- the real estate agent engaged to sell the property and the purchasers of the property seeking that they pay to the Commissioner moneys which would otherwise have been paid to Custody Trustee and
- the Custody Trustee seeking that it pay to the Commissioner any amount which would otherwise have been paid to the Superannuation Trustee.
The decision provides guidance on the interpretation of section 50 of the Taxation Administration Act 2001 (Qld). The Court unanimously found that the expression: ‘liable to pay an amount to the taxpayer’ under section 50 should be construed to encompass only those circumstances in which the right to payment from the garnishee was legally and beneficially held by the taxpayer, and the taxpayer was free to use the right in the taxpayer’s own interest.
Accordingly, it was unanimously held that the garnishee notices which had been issued by the Commissioner of State Revenue were invalid and placed no obligation on the recipients to pay. The appeal was dismissed.
Treasury Laws Amendment (2016 Measures No. 1) Bill 2016
The Treasury Laws Amendment (2016 Measures No.1) Bill 2016 (Bill) was introduced into the House of Representatives on 1 December 2016.
The Bill includes amendments to the Corporations Act 2001 (Cth), the Income Tax Assessment Act 1997 (Cth), and the Terrorism Insurance Act 2003 (Cth).
Amendments to the Corporations Act 2001 (Cth)
The Bill proposes amendments to the Corporations Act 2001 that include measures to restrict the public availability of employee share scheme disclosure documents lodged with ASIC for certain start up entities. The conditions for this exception are to be contained in section 1274(2AA) as follows:
- that the offer is made under an employee share scheme
- the disclosure document states that the employee share scheme interest will only be available to employees of the issuing company in relation to ordinary shares
- no equity interests in the issuing company, any subsidiary, any holding company, or subsidiary of a holding company are listed on an approved stock exchange at the end of the income year before the disclosure document was lodged (Pre-lodgement Year)
- the issuing company and all the entities listed were incorporated less than 10 years before the Pre-lodgement Year
- the issuing company had an aggregate turnover not exceeding $50 million in the Pre-lodgement Year.
Amendments to the Income Tax Assessment Act 1997 (Cth)
The Bill includes the following amendments to the Income Tax Assessment Act 1997:
- the inclusion of six new entities as deductible gift recipients; and
- a new exgratia payment to be paid by the Commonwealth as income support allowance for special category visa holders (subclass 444) where the payment is for a disaster occurring in the 2014-15 financial year or later, and for which a determination under section 36A(1) of the Social Security Act 1991 (Cth) is made.
GSTR 2000/24A5 – Addendum
The ATO has released an Addendum to GSTR 2000/24A5 which addresses the making of adjustments for changes in the extent of a creditable purpose under Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth). The Addendum gives effect to the provisions regarding cross border transactions in the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Act 2016 (Cth).
The amendments include the insertion of paragraphs 80A and 80B, addressing the adjustments for acquisitions made solely for a creditable purpose that relate to offshore intangible supplies. The changes state that:
- A supply that is acquired solely for a creditable purpose is not a taxable supply that is subject to a reverse charge under section 84-5, due to the operation of paragraph 84-5(1)(ca).
- Under subsection 84-30, for the purposes of working out any adjustment for the acquisition (including the full input tax credit referred to in sections 129-70 and 129-75), treat the supply as taxable under section 84-5 and the acquisition as fully creditable and disregard the requirement in paragraph 84-5(1)(ca).
Inquiry into Taxpayer Engagement with the Tax System
Parliament has announced that the Standing Committee on Tax and Revenue will conduct an inquiry into how taxpayers are engaging with Australia’s tax system, targeting individuals and small businesses.
The terms of reference suggest that the inquiry will be focussed on the following factors:
- impact of the ‘cash economy’ on the tax system, mechanisms to ensure tax compliance and strategies used by comparable countries’ revenue authorities
- the nature of interactions between taxpayers and the tax and superannuation system
- the use of information and communication technology by the ATO and other tax administrators to deliver services and
- behavioural insights from other service delivery agencies, including possible ways to better inform taxpayers to help them make decisions in their best interests.
Submissions close on Thursday 9 February 2017.