Thinking | 3 February 2017
Talking Tax – Issue 63
State Revenue Office of Victoria Interest and Penalty Tax Ruling
The State Revenue Office of Victoria (SRO) has issued amended Revenue Ruling TAA-007 (Version 3) to account for the absentee owner surcharge in force from 1 January 2016.
An ‘absentee owner’ means an absentee person who is the owner of land.
An ‘absentee person’ means:
- a natural person absentee or
- an absentee corporation or
- a trustee of an absentee trust.
These terms are further defined to mean:
Natural Person Absentee
- A ‘natural person absentee’, means a natural person who is not an Australian citizen or resident and who does not ordinarily reside in Australia and who, in the year immediately preceding the tax year, was absent from Australia either:
- on 31 December in the year immediately preceding the tax year or
- for a period of at least 6 months or for periods that when added together equal a period of at least 6 months.
A trustee of an ‘absentee trust’, means a trust under which at least one ‘absentee person’ has:
- a beneficial interest in land subject to a fixed trust or
- is a unitholder in a unit trust scheme or
- is a specified beneficiary of a discretionary trust.
The amendments provide that a notification default for penalty tax purposes, being an ‘Absentee Owner Notification Default’, will occur in the event that a taxpayer fails to notify the SRO that they were an absentee owner of Victorian land on 31 December, prior to 15 January in the following year. The taxpayer is required by section 104B of the Land Tax Act 2005 (Vic) to provide this notification. The Absentee Owner Notification Default continues to occur for each land tax year, until the Commissioner is notified.
Penalty tax is to be imposed on the additional land tax, if any, that would have been assessed if the Absentee Owner Notification Default had not occurred. This ensures that an absentee owner is charged at the higher rate. The starting rate of penalty tax is 25 per cent of the unpaid tax, with the Commissioner having the power to remit, increase or reduce this rate depending on the particular circumstances and whether the taxpayer took reasonable steps to comply with the law.
Once notified of a taxpayer’s status as an absentee owner, the Commissioner will assume that a taxpayer continues to be an absentee owner until the taxpayer notifies the Commissioner otherwise.
Entitlement to a deduction for bad debt
The Australian Taxation Office (ATO) has released TD 2016/19 stating that a beneficiary of a trust is not entitled to a deduction under section 25-35 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for an amount of any unpaid present entitlement (UPE) that the beneficiary purports to write off as a bad debt. The final determination comes after a draft was released in 2015.
The deduction is disallowed on the basis that a UPE is not included in the beneficiary’s assessable income as required by section 25-35(1)(a) of the ITAA 1997. Under section 25-35(1) of the ITAA 1997, a taxpayer can deduct a bad debt if it was included in their assessable income for that year or an earlier income year.
A UPE is not included in the beneficiary’s assessable income. A beneficiary’s present entitlement is their proportion of the income of the trust estate. That same proportion is used to work out the amount of the trust’s net income that the beneficiary will be assessed in accordance with subsection 97(1) of the Income Tax Assessment Act 1936. It is therefore not the UPE itself that is assessed.
The ATO does not express a view as to whether the reference to a ‘debt’ in section 25-35(1) was intended to extend to equitable obligations as well as debts at law, as the relevant debt would not have been deductible anyway as it was not included in the taxpayer’s income in that year or an earlier year.
Deductibility of expenditure on a commercial website
The final ruling contains minimal amendments to the draft, but does include the following changes and inclusions:
- The principles that apply to the deductibility of expenditure incurred in acquiring or developing a website will apply to ‘microsites’ (which are distinct subsidiary commercial websites with their own domain name).
- A taxpayer who holds the copyright in part of a website for a taxable purpose can claim a deduction for the decline in value of that copyright.
- Capital expenditure incurred on in-house software prior to a website being used in carrying on a business will form part of its cost, even when it was incurred in pursuit of a hobby. Deductions for the decline in value of the software can be claimed once it is used for a taxable purpose.
- Domain name registration fees will be revenue expenses and deductible when paid, except where the fees relate to a period exceeding 13 months, in which case the fee is deductible over the period to which the fee relates.
- While a social media profile is a capital asset of the business, expenditure on the profile is treated as revenue expenditure.
Draft GST ruling on cross-border supplies to Australian consumers
The ATO has released draft GST ruling GSTR 2016/D1 to assist overseas-based suppliers of services, digital products or rights to determine whether their supply is ‘connected with Australia’ for GST purposes.
If a supplier supplies services, rights or digital products to Australian consumers, the supply is ‘connected with Australia’. The supplier must satisfy the evidentiary requirements and the reasonable belief requirement. To satisfy the evidentiary requirement, a supplier can take a ‘business systems’ or ‘reasonable steps’ approach to prove their belief that a person is not an Australian consumer. To satisfy the reasonable belief requirement, the supplier must have a reasonable belief that the consumer is not an Australian consumer based on their residency.
The ‘business systems’ approach requires the supplier to have a reasonable basis for forming a reasonable belief that the recipient is not an Australian consumer, based on usual business systems and processes. The usual business systems are those applicable to the particular supplier, rather than the industry, at the time any consideration is received or an invoice is issued, in relation to a supply.
The evidence required for a supplier to demonstrate that their view was formed on a reasonable basis will depend on the facts of the case, and it is not expected that a supplier’s usual business systems will collect information on every aspect of the residency requirement.
The ‘reasonable steps’ approach requires the supplier to take reasonable steps to obtain information about whether the recipient is an Australian consumer. This is an objective assessment that will depend on the circumstances of the supply, but will not be satisfied where no steps have been taken.
Regardless of whether the ‘business systems’ or ‘reasonable steps’ approach is taken, the supplier must also reasonably believe that the recipient is not an Australian consumer by virtue of their residency. A supplier’s belief on the residency requirement is taken to be formed by any information known by the taxpayer, and extends to unsolicited information. The ruling notes that where a supply is made on a periodic or progressive basis, each supply is considered separate, and a decision should be made by the supplier for each supply.
The final ruling is proposed to apply to arrangements carried out from 1 July 2016 onwards. Transitional rules apply for periodic or progressive supplies attributable to tax periods commencing before 1 July 2017, which will be treated as being supplied continuously over that period. To the extent the supply is made after 1 July 2017, the tax payable on that portion is included in the net amount for the first tax period commencing after 1 July 2017.
Decision Impact Statements
Decision Impact statement: Financial Synergy Holdings Pty Ltd v Federal Commissioner of Taxation 2016 ATC
The ATO has released a decision impact statement outlining its response to the Full Federal Court decision in Financial Synergy Holdings Pty Ltd v Federal Commissioner of Taxation 2016 ATC. The case is discussed in Talking Tax Issue 29.
The issue in dispute concerned the time at which the cost base of units in a unit trust was determined. The trustee of a trust held pre-capital gains tax (CGT) units in a unit trust. It then sold those units to the taxpayer in exchange for shares in the taxpayer. The trustee claimed CGT rollover relief which operates to maintain the pre-CGT status of the unit trust. Later, the taxpayer formed a tax consolidated group which included the unit trust. This required the taxpayer to calculate its allocable cost amount which required the determination of the cost base of the units in the unit trust.
The Court considered whether the cost base of the units was the market value of the taxpayer's shares issued in consideration for the pre-CGT units as at the date the taxpayer formed a consolidated group, or the market value at a date prior to 20 September 1985 when they were first acquired by the trustee.
The Court held that the ‘time of acquisition’ for the purpose of calculating the cost base, is the date of the actual acquisition of the units by the taxpayer such that the units do not retain their pre-CGT status for the purpose of the tax consolidation provisions.
The decision impact statement expresses the ATO’s view that the deeming rule (that the units are deemed to retain their pre-CGT status) only applies for the purpose of exempting pre-CGT assets from the operation of the CGT provisions, and does not determine the acquisition time for the purpose of calculating the cost base of a previously pre-CGT asset.
As a result, ATO ID 2014/14 has been withdrawn as it stated that deeming rule only applied for the purpose of exempting a pre-CGT asset from the operation of the CGT provisions, which was held to be incorrect.
Decision impact statement: Blank v Commissioner of Taxation  HCA 42
The case considered whether a lump sum payment received by an employee at the termination of his employment under an Incentive Profit Participation Plan (the Plan) should be considered assessable income. The High Court confirmed that the characterisation of the payment was unambiguously income. It held that not only was the amount deferred compensation under the Plan, but the right to claim the amount as deferred consideration did not arise until Mr Blank’s employment ceased.
The decision impact statement notes that the decision is consistent with the submissions made to the Court on behalf of the Commissioner.
In our view, the decision in Blank confirms that income for services rendered remains income (and not a capital receipt) even if it is paid as a lump sum, payment is deferred or only made if an event such as termination of employment occurs.
The High Court’s reasoning should be carefully considered by taxpayers signing up to a profit share arrangement, where the payment will be triggered by a future event such as the ending of employment.
Practical Compliance Guidelines
Practical Compliance Guideline on transfer pricing issues
The ATO has published PCG 2017/1 addressing its compliance approach to transfer pricing issues related to the location of marketing, sales and distribution activities and operating risks to centralised operating models otherwise known as ‘hubs’, it concerns structures that use a related party to act as a principal or agent in relation to the procurement or sale of goods or commodities by or on behalf of an Australian resident multi-national enterprise, without substantially altering them.
In Talking Tax Issue 45, we discussed the Commissioner’s draft discussion report on offshore marketing hubs which was released late last year, supplemented by a discussion paper. In particular, the discussion paper introduced a specific risk differentiation framework for hubs with colour coded zones with the nature of compliance activities to be undertaken by the ATO.
The only substantial difference from the draft is the inclusion of a ‘white zone’ category risk zone which will apply to hubs that:
- have an existing Advance Pricing Arrangement or settlement agreement with the ATO
- have been provided with a low risk rating by the ATO within the last two years
- have had a court decision handed down within the last two years dealing with their transfer pricing outcomes or
- meet the criteria for the simplified transfer pricing record keeping materiality option and have notified the ATO that they have opted in for the current year.
Companies that fall within this ‘white zone’ category do not need to self-assess their risk rating. This ensures that companies that have recently gone through the risk rating process are not required to expend resources repeating it.
Effective from 1 January 2017, PCG 2017/1 applies to all existing and newly created hubs.
Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 - Exposure Draft
The draft legislation proposes measures to impose increased penalties on certain multinational companies that fail to adhere to their tax disclosure obligations as announced in the 2016/17 Budget. The increased penalties will apply to significant global entities (an entity with an annual global income of $1 billion or more or a member of a global group where the parent entity has annual global income of $1 billion or more).
The penalties relating to the failure to lodge tax documents will be multiplied by 100 for the relevant entities, increasing the maximum penalty from $4,500 to $450,000. This significant increase is designed to act as a deterrent for multinational companies who do not lodge Australian tax documents.
The penalties relating to false and misleading statements made to the ATO by taxpayers will be doubled, to encourage multinational companies to be diligent with their tax affairs.
The proposed penalties will come into effect from 1 July 2017.
John XXIII College v Commissioner for ACT Revenue (Administrative Review)  ACAT 152 - Exemptions on transfer of land
This case involves an affiliate of a religious school seeking an exemption from duty on the transfer of land pursuant to section 64(2) of the Duties Act 1999 (ACT) (Act).
The taxpayer operated a residential college affiliated with the Australian National University (ANU) and the Dominican Fathers and was registered as a not-for-profit Australian charity.
In 2015, the taxpayer purchased a property in the ACT and submitted transfer documents paying nominal duty of $20. The Commissioner for ACT Revenue subsequently assessed the duty payable on the land as being $60,850.
The taxpayer claimed it was eligible for the duty exemption as a charitable organisation under section 64(2) of the Act. The Commissioner disallowed the objection and the taxpayer applied to the Tribunal for review.
The Tribunal held that the taxpayer’s primary purpose was to provide student residential accommodation. The religious and educational offerings of the college were merely secondary and incidental to providing accommodation, and did not qualify the college for the exemption. For the purposes of section 64(2), a ‘charitable organisation’ is an organisation, society, institution or body carried on for a religious purpose or for an educational purpose.
The taxpayer’s constitution stated that the college, which was affiliated with the ANU, was sponsored by the Dominican Fathers, being a religious congregation of the Roman Catholic Church in Australia. The taxpayer claimed that its primary purpose was to provide religious and educational support to residents of the college and therefore fell within the definition of a charitable organisation under the Act. The Commissioner claimed that the taxpayer’s primary purpose was to provide student accommodation and that any religious and educational activities were only incidental and ancillary to providing student accommodation.
As evidence of its religious purpose, the taxpayer relied on the fact that it was entirely funded by the Roman Catholic Church, provided mass five days a week, conducted bible studies and ran various other spiritual retreats.
While the evidence that the taxpayer conducted some religious and educational activities was accepted, the Tribunal was not satisfied that the taxpayer’s religious affiliation and pursuits were interconnected with and necessary for it to maintain its affiliation with ANU. The Tribunal held that the taxpayer’s primary purpose was to provide student accommodation, and it would not exist without that purpose. Therefore, the provision of this accommodation was not in accordance with a charitable purpose and therefore the taxpayer was not entitled to claim a duty exemption.
Keyzone Nominees Pty Ltd v Commissioner of State Revenue (Review and Regulation)  VCAT 1999 - “Double Duty” and agency
A company known as Citytime Investments Pty Ltd (Citytime) entered into a contract of sale to purchase a property for $38,800,000. A subsequent Assignment of Contract was entered into between Citytime and the applicant, Keyzone Nominees Pty Ltd (Keyzone) to transfer its freehold interest in the property to Keyzone for $43,820,000. Both companies were associated through a connected entity that facilitated foreign investment from Indonesia into the Australian property market through the use of one company to own and fund the project, and a separate company to act as an agent or consultant.
‘Double duty’ arose as the sub-sale provisions charged duty for Citytime’s initial purchase price as well as on the subsequent assignment on Keyzone’s additional higher consideration.
Keyzone claimed that the difference between the initial price and subsequent price was not additional consideration, but rather an agency fee.
The Tribunal determined three main issues:
- whether Citytime was truly acting as an agent for Keyzone
- if Citytime was not acting as an agent, whether a stamp duty exemption arose under sections 32G, 34 or 36 of the Duties Act and
- consequently, whether Keyzone should be charged duty on the initial contract purchase price of $38,800,000 and/or the price referred to in Duties Form 6A, $43,820,000.
The Tribunal held that Citytime was not acting as an agent for Keyzone, but rather as a facilitator that received a significant profit for assigning the Contract of Sale. The court noted that under a typical agency arrangement the parties would record that the agent was acting for, and would be remunerated by the principal. The agency agreement did not validly appoint Citytime as Keyzone’s agent, and at no time was it mentioned that Citytime was acting as an agent for Keyzone. Further, Citytime could not have been acting as a mere agent for Keyzone because the payment of the agency fee was a condition precedent of the sale.
As there was no agency relationship, the Tribunal found that there could be no bare trust and therefore no duty exemption on that basis. Further, a resulting trust could not arise because Citytime did not intend to pay the purchase on behalf of Keyzone. There was no evidence put before the Tribunal that there was an intention to create a trust and without a trust deed, the agency agreement did not create an agency or bare trust.
It was also noted that the apparent purchaser provisions would not apply to the agency agreement or deed of assignment, as section 34 only applied in respect of a declaration of trust.
The Court found that the fee paid was properly characterised as additional consideration which gave rise to a sub-sale arrangement. The Commissioner’s assessment was confirmed, and Keyzone was liable to pay stamp duty on the transfer.
Taxpayers should be ensure when entering into any Contract of Sale that the transferee and the registered name on the title are the same person, or if a nomination occurs, that no additional consideration or land development occurs which may give rise to a sub-sale of the same property otherwise there could be significant duty implications.
Rosgoe Pty Ltd v Federal Commissioner of Taxation  FCA 1231
The Commissioner has withdrawn its application to appeal the Federal Court decision in Rosgoe Pty Ltd v Federal Commissioner of Taxation  FCA 1231, relating to the treatment of the gains made on the sale of certain properties and whether it is on revenue or capital account.
In that case, the Federal Court set aside the AAT decision on the basis that the Tribunal is bound by the facts outlined in the private ruling issued by the Commissioner to the taxpayer and should not have engaged in its own fact-finding exercise.
As the decision will stand, taxpayers are reminded of the importance of supplying specific, thorough and accurate information supplied to ATO when seeking a private binding ruling. The Commissioner will make its decision on the basis of that information, which will also restrict the taxpayer’s future appeal rights from the private binding ruling.
The Federal Court decision is discussed in detail in Talking Tax Issue 13.
Commissioner of Taxation v Normandy Finance and Investments Asia Pty Ltd  FCAFC 180
The Full Federal Court has upheld an appeal by the Commissioner of the decision in Normandy Finance and Investment Asia Pty Ltd & Anor v Federal Commissioner of Taxation  FCA 1420.
At first instance, Justice Edmonds held that a number of loans made by non-resident companies to Australian resident taxpayer companies that the Commissioner had categorised as ‘sham borrowings’, were not shams as they were intended by both parties to be subject to a repayment obligation. The Federal Court decision is discussed in Talking Tax Issue 20.
The Full Federal Court, by majority, overturned the decision on the basis that it was not open for the primary judge to find that while the written loan agreements were shams, these shams were only in place to deceive third parties, and the repayment obligations under the loans were real. Further, the primary judged had erred in dismissing certain factors relating to the loans as ‘irrelevant’, when they should have been taken into account.
As the taxpayer could not prove on the documents that the advanced funds were loans, it could not prove that the assessments were excessive. This emphasises the importance for taxpayers to maintain contemporaneous documentation to support their tax position as the burden of proof will always rest with the taxpayer. The Full Federal Court considered several issues, including:
- whether the primary judge found that the purported loans were genuine on a basis that was not open to him, and if so, whether the applications challenging the Commissioner’s objections should be dismissed or remitted for determination
- whether the primary judge erred in finding that a loan agreement existed other than by written agreement and
- whether the primary judge denied the Commissioner procedural fairness in refusing to allow further submissions when the taxpayer provided extra information regarding the alleged payments at the primary judge’s request.
The majority (Justice Jagot and Justice Davies) held that the taxpayer’s evidence did not permit the possibility that the written loan agreements were shams for the sole purpose of making third parties believe the parties to the agreements were at arm’s length, but that the repayment obligations were genuine. While the Court accepted that the loan contract could arise out of the conduct of the parties, this argument was not run by the taxpayer.
The majority also found that the primary judge erred in dismissing certain factual circumstances as ‘irrelevant’ when they were inconsistent with case ultimately accepted by the primary judge. The Court found that these matters were not irrelevant, and should have been weighed in considering the factual alternatives. A factor should only have been rejected as ‘irrelevant’ if it had no bearing on a fact in issue, and not merely because it was less significant than other considerations.
The Court held that the Commissioner was not denied procedural fairness by being refused the opportunity to file further submissions when the taxpayer provided information regarding the alleged repayments as requested by the primary judge. There was nothing new in the taxpayer’s reply submissions.