Thinking | 23 June 2017
Talking Tax – Issue 82
Federal Court finds Commissioner wrong to decline making private binding ruling
On 13 June 2017, Justice Logan of the Federal Court of Australia in Hacon v Commissioner of Taxation  FCA 659 held that the Commissioner unlawfully declined to make a private binding ruling under Part 5-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) on whether a proposed restructure of a grazing business (Scheme) would breach the anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 36).
The Court found that under section 375-105 of Schedule 1 to the TAA, the Commissioner had an ‘imperative obligation’ to request information he considered necessary to make a private binding ruling before he could lawfully decline to make such a ruling. Having failed to request further information from the taxpayer, the Court held that the Commissioner was wrong to decline the requested ruling on the basis of insufficient information in relation to the Scheme.
In our view, the integrity of the system is reliant on taxpayers having an opportunity to disclose their affairs to the ATO and to receive a private ruling in order to avoid possible penalties in the future. As such, we welcome the Federal Court’s decision and consider that courts should intervene in circumstances where the Commissioner does not lawfully deal with a private binding ruling application in accordance with its powers under the TAA.
Following an initial application for a private binding ruling in relation to the Scheme by the taxpayer, the Commissioner advised the taxpayer that he had insufficient information to make a decision, and gave notice that he was inclined to decline the requested ruling.
The taxpayer then provided further information to the Commissioner, who, on 17 August 2016, declined to make the ruling on the basis that he had insufficient information to make a decision in relation to Part IVA of the ITAA 36. Significantly, the Commissioner did not request further information from the taxpayer as required by section 357-105(1) before deciding to decline to make a ruling.
Section 357-105 of Schedule 1 to the TAA provides that:
- if the Commissioner considers that further information is required to make a private ruling, the Commissioner must request the applicant to give that information to him or her and
- the Commissioner may decline to make the ruling if the applicant does not give the information to the Commissioner within a reasonable time.
Further, section 359-35(1) provides that the Commissioner “must” comply with an application for a private binding ruling (subject to certain matters in section 259-35(2) and (3)).
In applying the above law, the Court found that:
- if the Commissioner considers that further information is required to make a private binding ruling, he has an imperative obligation to request further information before declining to make such a ruling and
- failure to do so is an error of law which is also a jurisdictional error.
The Commissioner’s decision to decline to make a ruling was ultimately quashed by the Court and remitted back to the Commissioner to be dealt with in accordance with the law.
Behaviours and characteristics that attract the ATO’s attention
The ATO has recently published a list of behaviours, characteristics and tax issues that attract the ATO’s attention.
Broadly, the following behaviours and characteristics have been identified:
- tax or economic performance is not comparable to similar businesses
- low transparency of your tax affairs
- large, one-off or unusual transactions, including transfer or shifting of wealth
- a history of aggressive tax planning
- tax outcomes inconsistent with the intent of tax law
- choosing not to comply or regularly taking controversial interpretations of the law
- lifestyle not supported by after-tax income
- accessing business assets for tax-free private use or
- poor governance and risk-management systems.
The publication includes specific behaviours and characteristics that attract the ATO’s attention in relation to various tax areas, including but not limited to capital gains tax, consolidation, franking credits, fringe benefits tax, trusts, and tax crime.
If you are concerned that your tax characteristics may attract the attention of the ATO, please contact one of our tax lawyers and we can assist you by providing tax advice on the particular transaction or tax issue or helping you make a voluntary disclosure with the ATO where relevant.
Capital gains tax
The ATO has identified that it focuses on capital losses, and particularly losses that appear to be exaggerated, fabricated or misclassified. The following behaviours are specifically identified as attracting the ATO’s attention:
- in relation to a company, if from the time when losses were incurred to the time when the losses were utilised, there is information indicating that there was a change in ownership of the company (such that there is a risk that taxpayer failed the ‘continuity of ownership test’) or a change in the nature of the business indicates that there is a risk the taxpayer failed the ‘same business test’
- capital losses artificially generated to offset gains, which may include non-arm’s length transactions used to manipulate elements of the cost base or capital losses realised solely to offset gains through ‘wash sales’
- entities that incorrectly ‘transfer in’ capital losses and apply those capital losses
- entities that reclassify capital losses as revenue losses in order to offset taxable income
- taxpayers who deliberately trigger a capital gains tax (CGT) event to cause an unrealised loss in a year in which there is a capital gain and
- mismatches between the income tax return and the CGT schedule.
The ATO also focuses on CGT reporting and payment obligations resulting from a disposal of a capital asset, particularly where the amount of the net capital gain reported is less than what the ATO’s estimates using its external data sources. Things that the ATO has specifically identified as attracting its attention include:
- entities that fail to meet their CGT schedule lodgment obligations
- companies claiming a CGT discount, other than life insurance companies
- entities that have received cash or other ineligible consideration through a partial scrip for scrip rollover
- entities that disposed of high value assets but returned small capital gains or capital losses and
- entities who inappropriately access the small business CGT concessions.
Consolidation allows wholly-owned corporate groups to elect to operate as a single entity for income tax purposes.
In relation to consolidation, the ATO focuses on, among other things, incorrect or miscalculation of the allocable cost amount (ACA).
Specific behaviours and characteristics that attract the ATO’s attention are incorrect uplifts under the tax cost setting rules regarding amounts of revenue and/or capital gains assets through:
- a high ACA of the joining entity
- overstated liabilities of the joining entity
- overstated market value of the assets of the joining entity or
- allocation of the ACA to assets in a way that is biased towards assets that may inappropriately increase revenue deductions, or artificially increase the cost base of the joining entity’s CGT assets.
Private company profit extraction
The ATO focuses on arrangements designed to extract profits from private companies while avoiding tax on the amounts being distributed. This includes the application of Division 7A of Part III of the ITAA 36, which captures certain payments made by private companies to their shareholders or associates that are not included in their assessable income and which may result in a deemed dividend for the shareholder or their associate.
Things that attract the attention of the ATO in respect of Division 7A include:
- amounts are taken from a company and are not repaid
- a complying loan agreement has not been put in place
- minimum yearly repayments are not made
- interest income is not declared in the company income tax return
- private use of a company asset and
- attempts to avoid application of Division 7A to transactions between a private company and a shareholder or their associate.
Legislation and government policy
Treasury Laws Amendment (GST Integrity) Bill 2017 (Cth)
The Treasury Laws Amendment (GST Integrity) Bill 2017 (Cth) amends the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act) to address the exploitation of the GST law as it relates to precious metals.
According to the explanatory memorandum, the amendments introduce a reverse charge for business to business transactions between suppliers and purchasers of gold, silver and platinum. This is intended to remove the opportunity for a supplier to avoid paying GST to the Commissioner of Taxation by liquidating. The amendments also clarify the law to ensure that entities cannot exploit the special GST treatment for second-hand goods to claim input tax credits (ITCs) by changing the form of a precious metal they acquire.
The amendments have applied to supplies since 1 April 2017.
Entity liable for GST on taxable supply of gold, silver or platinum
Generally, under the current law, the supplier is liable for the GST payable on a taxable supply. The Government has identified “missing trader” schemes where suppliers have failed to remit GST they collect on supplies of altered metal (by virtue of supplier liquidation or otherwise going missing) whereas recipients have still claimed ITCs.
The amendments introduce Division 86 (Valuable metals) into the GST Act to deal with supplies of goods consisting wholly or partly of gold silver or platinum. This Division contains a mandatory reverse charge, such that, generally, the GST on such taxable supplies is ‘reverse charged’ meaning the recipient of the supply (i.e the purchaser) rather than the supplier is liable for remitting GST on the supply.
Under certain circumstances, the supplier continues to be liable for the GST payable on such taxable supplies. These circumstances include if:
- the market value of the supplied goods exceeds the market value of any valuable metal contained in the goods by 10% or more at the time of the supply (referred to as the “valuable metals threshold”), and the supplier and recipient have not agreed in writing to voluntarily reverse charge the supply or
- the Commissioner has determined by legislative instrument that a reverse charge does not apply for the class of supply.
The amendments establish a framework for parties to voluntarily reverse charge their supplies of valuable metals, whether or not the mandatory reverse charge applies to the supply.
Please contact your Hall & Wilcox contact if you would like would like assistance to amend your existing systems.
Definition of second-hand goods
Under the current law, the definition of ‘second-hand goods’ in the GST Act excludes, among other things, ‘precious metal’ and ‘goods to the extent that they consist of gold, silver, platinum, or any other substance which, if it were of the required fineness, would be precious metal’.
Certain schemes have been identified where ITCs are being claimed in respect of certain goods that contain precious metals that would otherwise be input tax supplies (for which ITCs should not be claimed). Specifically, under these schemes, entities altering the form of gold so that it qualifies for special treatment. Whilst these schemes are considered to be ineffective by the Commissioner, amendments have been introduced to avoid any doubt.
The amendments provide that goods, to the extent that they consist of ‘valuable metal’, are not second-hand goods under the GST law, unless:
- the market value of the supplied goods exceeds the market value of any valuable metal contained in the goods by 10% or more at the time of the supply
- the goods are collectables or antiques or
- the Minister has determined, by legislative instrument, that the class of goods is not prevented from being second-hand goods.
The use of the expression 'to the extent that' in the amendments indicates that for the purposes of determining an entity’s ITC entitlement, apportionment of the consideration paid for the goods between that part of the goods which qualifies as second-hand goods, and that part which is excluded may be required.
Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017
The Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017 (Cth) passed both houses on 15 June 2017 and now awaits Royal Assent.
Schedule 1 (Collection, recovery and administration of income tax) to the Bill will amend the Taxation Administration Act 1953 (TAA) to modify the foreign resident capital gains withholding payments regime to increase the withholding rate from 10% to 12.5%, and reduce the withholding threshold from $2 million to $750,000.
The measures will apply in relation to acquisitions of property on or after 1 July 2017.
The amendments are intended to implement one of the reforms in the housing affordability package announced by the Government as part of the 2017 Budget.
Summary of the law
Subdivision 14-D (Capital proceeds involving foreign residents and taxable Australian property) of Schedule 1 to the TAA imposes a non-final withholding payments obligation on the purchaser of certain Australian real property and related interests where the property is acquired from a foreign resident vendor.
If a foreign resident capital gains withholding payments obligation arises, the purchaser will be required to pay 12.5%of the first element of the cost base of the CGT asset (usually the purchase price of the asset) to the Commissioner. This amount may be withheld from the payment the purchaser makes to the vendor.
However, a foreign resident capital gains withholding payments obligation will not arise in relation to a CGT asset if, so far as is relevant, the market value of the CGT asset is less than $750,000 and the CGT asset is:
- taxable Australian real property or
- an indirect taxable Australian real property interest, the holding of which causes a company title interest to arise.
For more information regarding the foreign resident CGT withholding regime please see ‘Withholding the truth - the secrets of the foreign resident CGT withholding regime’.
Revenue Legislation Amendment Bill 2017 (Qld)
Following the Queensland Government’s release of the State Budget 2017 (Budget) last week, the Government has released Revenue Legislation Amendment Bill 2017 (Qld) which amends the First Home Owner Grant Act 2000 (FHOG Act), the Land Tax Act 2010 (LTA), the Duties Act 2001 (Duties Act) and the Taxation Administration Act 2001 (TAA).
Summary of key amendments
The Bill proposes to amend:
- the FHOG Act to implement a Budget measure to extend a temporary increase to the amount of the Queensland First Home Owners’ Grant (FHOG) from $15,000 to $20,000 for a further six months so it is also available for eligible transactions entered into between 1 July 2017 to 31 December 2017 and
- the LTA to implement a Budget measure to impose a 1.5% absentee owner surcharge on individuals not ordinarily residing in Australia (absentees) who are liable for land tax in Queensland (absentee surcharge).
The Bill also proposes to amend:
- the TAA to introduce new legislative powers to facilitate the collection and disclosure of real property transfer information in accordance with the State’s obligations under the Taxation Administration Act 1953 (Cth).
- the LTA to:
- include a new requirement for a person to lodge an approved form within one month of a change of ownership of land
- restore a prohibition on lessors directly passing on the cost of land tax to lessees under commercial leases entered into after 1 January 1992 and before 30 June 2009, following a Queensland Supreme Court of Appeal decision which held that this prohibition was repealed upon enactment of the LTA and
- clarify that where land is owned by joint trustees for a trust, land tax is to be assessed as if the land were owned by one person.
- the Duties Act to ensure that additional foreign acquirer duty (AFAD) provisions apply as intended, and in particular that AFAD applies to certain agency transactions for AFAD residential land.
Under the current regime, AFAD does not apply to duty assessed on the agreement unless the agent is a foreign person. This means a foreign principal is able to avoid AFAD by using a non-foreign agent to enter into the agreement for transfer.
The proposed amendments will ensure that where the principal is a foreign person when the relevant transfer to the principal occurs, and the dutiable property is AFAD residential land, the amendments will require the agreement to be reassessed as if AFAD applied to the agreement.
Importantly, consequential amendments will be made to the provisions for reassessing transactions with AFAD where a corporation or trust becomes foreign within 3 years and providing the Commissioner of State Revenue with a statutory charge over AFAD residential land for unpaid transfer duty principal occurs, and the dutiable property is AFAD residential land, the amendments will require the agreement to be reassessed as if AFAD applied to the agreement.
Small Business instant asset write-off extension
In the 2015–16 Budget, the Government increased the small business immediate deductibility threshold from $1,000 to $20,000 commencing 12 May 2015 until 30 June 2017.
On 15 June 2017, the Senate passed the Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2017 (Cth) which extends that measure by 12 months until 30 June 2018, after which the deductibility threshold will revert to $1,000.
This legislation has been previously discussed in Talking Tax – Issue 79.
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