Talking Tax – Issue 86
AAT rejects Taxpayer’s claim for input tax credits
In GH1 Pty Ltd (in Liquidation) v FCT  AATA 1063, the Administrative Appeals Tribunal affirmed the Commissioner of Taxation’s decision to disallow input tax credits (ITCs) totalling $817,207 for bulk earthwork services provided in relation to a development project.
The Tribunal found that the Taxpayer was unable to discharge its burden of proving, on the balance of probabilities, that the Commissioner’s assessment was excessive. In doing so, the Tribunal affirmed the Commissioner’s position, finding, among other things, that:
- the purported 'tax invoices' did not evidence any actual taxable supplies made – the mere existence of a 'tax invoice' is not, by itself, sufficient to establish that a “taxable supply” (under section 9-5 GST Act 1999) and corresponding 'creditable acquisition' (under section 11-5 GST Act 1999), has, in fact, occurred and
- that, on the evidence, the relevant stages of development works were completed prior to the dates of the purported invoices, and that ITCs in respect of the work were likely to have already been claimed in an earlier income year.
Property developers are reminded of the importance of maintaining contemporaneous records sufficient to support ITC claims particularly in circumstances where there has been no physical payment for supplies and amounts are merely credited to supplier loan accounts.
In this case, the Taxpayer had claimed ITCs in its Business Activity Statements (BASs) for the periods ended 31 December 2009 and 31 March 2010 of $912,316 and $812,142, respectively. The Taxpayer’s claims were allegedly for the acquisition of services solely related to carrying on an enterprise that includes site works, earthworks, road works, sewer reticulation, stormwater drainage, water reticulation and retaining walls.
The Taxpayer was audited by the Commissioner in respect of the 2009 to 2013 years and was subsequently issued amended assessments disallowing $817,207 for ITCs in respect of 2 stages of the development project. The Commissioner relied on the fact that the invoices did not prove that there was, in fact, an acquisition of services by the Taxpayer and that evidence demonstrated that the purported invoices were issued after the relevant stages of the works had been completed.
The evidence established that the ITCs claimed by the Taxpayer, for the periods ended 31 December 2009 and 31 March 2010 (totalling $817,207), for Stages 5 and 6, ought not be allowed because:
- the deposited plans relating to the land the subject of the development work were created before the date of the purported tax invoices
- the Taxpayer reported most of the property sales from the development of the land the subject of the development work before the date of the purported tax invoices
- the cost breakdown schedules for the development work for Stages 5 and 6 showed that the development works were either partially completed or fully completed by the date of the purported tax invoices
- evidence from the site superintendent and the Water Corporation for Stages 5 and 6 showed that construction of Stages 5 and 6 was completed before the date of the purported tax invoices
- the value of the work certified by engineers as being completed at Stages 5 and 6 almost exactly corresponds with the ITCs claimed by the Taxpayer in its earlier BAS for the tax periods ended 30 September 2008 and 31 December 2008 and
- The Taxpayer had already claimed the ITCs in its BAS for the tax periods ended 30 September 2008 and 31 December 2008.
AAT finds taxpayer entitled to claim deductions for work related expenses but liable to pay administrative penalty
The Administrative Appeals Tribunal in Amin v Commissioner of Taxation (Taxation)  AATA 1042 has recently found that a taxpayer was partially entitled to claim certain work-related motor vehicle expenses, work-related travel expenses, self-education expenses and other work-related expenses for the year ended 30 June 2012. Nonetheless, the Taxpayer was liable to pay an administrative penalty of 25% of the tax shortfall arising from disallowed deductions, for failure to take reasonable care. The Taxpayer was considered a very knowledgeable professional who claimed very significant deductions and who should have been more careful when claiming deductions.
This case serves as a warning to knowledgeable professionals to be mindful when claiming deductions as they will ordinarily be held to a higher standard of care.
During the relevant year, the Taxpayer was a Vendor Relationship Manager at a company that provides infrastructure management services to government and corporate clients in the utilities, resources and building industries.
The Taxpayer claimed various amounts for work-related motor vehicle expenses, work-related travel expenses, self-education expenses and other work-related expenses. The Commissioner disallowed the claims and imposed an administrative penalty of 25% of the tax shortfall for failure to take reasonable care. After the Taxpayer’s objection was disallowed, he sought a review of the decision by the Tribunal.
The Tribunal’s findings
Work-related motor vehicle expenses
The Tribunal found the Taxpayer failed to discharge the burden of proof in relation to his claims for motor vehicle expense (totalling $36,079), on the basis that it was not satisfied that the Taxpayer was required to travel as part of his employment in the relevant year.
In relation to the Taxpayer’s log book, the Tribunal found, among other things, that:
- it did not indicate that he visited any clients as alleged
- to satisfy the requirement in section 28-125(2) Income Tax Assessment Act 1997 (ITTA 1997) of “why the journey was made”, it is necessary to describe the purpose of the visit – the Taxpayer failed to do this and
- the Taxpayer also failed to satisfy the Tribunal that his travel constituted “travel between workplaces” under the terms of section 25-100(2) ITAA 1997 as he did not identify the workplaces in is log book.
Work related travel expenses
The Tribunal found that:
- the Taxpayer was entitled to claim a deduction for the total airfare expenses ($3,580), on the basis that the outgoing was incurred in its entirety for him to travel to the US to attend a global conference which was for work purposes
- in relation to the airfares, apportionment was not appropriate as the US trip was work related travel and the airfares were not able to be readily apportioned for any private purpose and
- in relation to accommodation expenses, however, the Taxpayer was only entitled to a deduction for the accommodation expenses relating to his stays for the work-related conference and meetings.
The Tribunal found that the Taxpayer was entitled to a deduction for course fees incurred in the relevant year for his Juris Doctor degree ($17,290.84) and corresponding costs of textbooks he purchased ($945.92), less the reduction of $250 as per section 82A(1) of the Income Tax Assessment Act 1936 (ITTA 1936). The Tribunal relied on the fact that legal studies would improve his skills and proficiency as a Vendor Relationship Manager, and lead to an increase in his income in future years.
Interestingly, the education expenses were not regarded as being capital in nature. In this respect, the case turned very much on its facts as determined by the Tribunal.
ATO guidance for unpaid present entitlements under sub-trust arrangements maturing in 2017 or 2018
The ATO has issued Practical Compliance Guideline PCG 2017/13 Division 7A - unpaid present entitlements under sub-trust arrangements maturing in the 2017 or 2018 income years. The Guideline applies to a private company (or trustee) beneficiary of a trust and sub-trust where the trustee:
- has, in accordance with Option 1 under Law Administration Practice Statement PS LA 2010/4 Division 7A: trust entitlements, on, or prior to, 30 June 2011 placed funds representing an unpaid present entitlement (UPE) in a sub-trust arrangement on a 7-year interest only loan with the main trust and
- does not repay the principal of the loan when it matures in the 2017 or 2018 income year.
Trustees who adopted Option 1 on, or prior to, 30 June 2011 are, under the terms of the investment agreement, obliged to repay the loan principal in the 2017 or 2018 income year. However, PCG 2017/13 states that if all, or part, of the principal of the loan is not repaid on or before the date of maturity, the Commissioner will allow the sub-trust and the private company (or trustee) beneficiary to put a complying Division 7A loan in place prior to the private company's lodgment day. Broadly, this requires the principal and interest to be repaid in annual instalments over 7 years.
If a complying Division 7A loan is not put in place between the sub-trust and the private company (or trustee) beneficiary prior to the private company's lodgment day, a deemed dividend will arise at the end of the income year in which the loan matures.
Prior to the release of PCG 2017/13, a trustee’s failure to repay the loan principal by maturity date (in 2017 or 2018) as required by the investment agreement, was expected to result in any unpaid principal of the loan being treated by the Commissioner as a loan for purposes of Division 7A ITAA 1936 and give rise to a deemed dividend at the end of the income year in which the loan matures.
Where Option 1 was adopted on, or prior to, 30 June 2011 taxpayers now have certainty of the advantage of being able to repay the loan principal over an additional 7 years. However, the deferral advantage must be weighed against the requirements of periodic payments of both principal and interest and the additional cost of interest for 7 years.
It remains uncertain whether, and the extent to which, the Commissioner will extend the guidance in PCG 2017/13 to sub-trust arrangements entered into after 30 June 2011 (in accordance with Option 1 of PS LA 2010/4) which would mature in the 2019 and later income years.
ATO’s 'Justified Trust' initiative
The ATO intends to audit the tax governance and risk frameworks of the top 1000 Australian companies over the next four years as part of its 'Justified Trust' initiative, to regain the public’s trust that the right amount of corporate tax is being collected.
Broadly, companies will be required to evidence that tax risks are being identified and managed effectively, through a tax governance and risk framework. Companies that have not voluntarily signed up to the Tax Transparency Code or that are not subject to mandatory public reporting of taxable income and tax paid, may expose themselves to more detailed testing and review by the ATO.
For further background on the concept of 'Justified Trust', please refer to Talking Tax - 36.
For further information on the voluntary Tax Transparency Code, please refer to Talking Tax - 43.
Draft Determination sets out method for calculating the market value of valuable metal
The ATO has issued a draft of the Goods and Services Tax: Valuable Metals Market Value Determination 2017 VM 2017/D1 (Draft Determination). The Draft Determination sets out the method to calculate the market value of valuable metal for the purposes of working out whether the market value of a taxable supply exceeds the valuable metal threshold under Division 86 (Valuable metals) GST Act 1999. Broadly, Division 86 makes a recipient (rather than a supplier) liable for the GST payable on certain taxable supplies.
By way of background, Division 86 was recently inserted into the GST Act 1999 by the Treasury Laws Amendment (GST Integrity) Bill 2017 (Cth), in response to 'missing trader' schemes that involved suppliers failing to remit GST collected on supplies of altered metal (by virtue of supplier liquidation or otherwise going missing) and recipients still claiming ITCs. The amendments were discussed in detail in Talking Tax - 82.
Public consultation for the Draft Determination is open until 26 July 2017. If you are an entity affected by this determination and would like further information about how it may impact you, please contact a member of our tax team. The Commissioner has determined that entities that receive a supply of valuable metal are to calculate the market value of the valuable metal contained in a good using the following formula on the date of the supply:
(Weight of valuable metal) * (spot price of the valuable metal on that date)
Weight of valuable metal is the weight in troy ounces of the valuable metal in the good and
Spot price of the valuable metal on the date of the supply is whichever of the following the entity chooses:
- one of the published rates for that date provided by an Australian entity recognised as a member of the London Bullion Market
- one of the published Australian rates for that date reported by the London Bullion Market Authority (LBMA), or
- one of the published Australian rates for that date provided by a commercially recognised authoritative provider of spot price data.
The Commissioner notes that entities must use their chosen spot price consistently when determining the market value of the valuable metal for the purposes of the valuable metal threshold.
ATO announces capital allowance effective life reviews
The ATO has recently announced capital allowance effective life reviews on assets used in the banking industry as well as in the gas and oil mining support services industry.
The reviews are expected to be completed within 12 months, with new effective life determinations applying from 1 July 2018.
While participation in the review process is entirely voluntary, strong participation from members of the banking industry and the gas and oil mining support services industry will help to ensure that the ATO’s determinations will be appropriate and useful to industry members. The scope of review in relation to the banking industry would include all major segments of the industry such as banking, building society operation, and credit union operation.
The anticipated scope of review in relation to the gas and oil mining support services industry would include directional drilling and redrilling, cementing oil and gas well castings, gas and oil mine site preparation and gas and oil field support service.
As part of each review, the ATO will:
- identify the assets currently used in the industry
- consult with major interest groups, such as industry representative bodies, users and suppliers (including using interviews and site asset inspections)
- complete a report with recommendations for new effective lives based on an analysis of the factors listed in the effective life taxation ruling
- remove redundant items currently in the effective life schedule.
OECD releases updated transfer pricing guidelines
The OECD has recently released an updated version (2017 edition) of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Guidelines).
The Guidelines are intended to help tax administrations (of both OECD member countries and non-member countries) and multinational enterprises (MNEs) by indicating ways to find mutually satisfactory solutions to transfer pricing cases to avoid costly litigation.
The Guidelines provide guidance on, among other things:
- the application of the “arm’s length principle”, which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises and
- the methods for evaluating whether the conditions of commercial and financial relations within an MNE satisfy the arm’s length principle and discuss the practical application of those methods.
The 2017 edition of the Guidelines mainly reflects a consolidation of the changes resulting from the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. This latest edition incorporates a number of revisions of the 2010 edition into a single (consolidated) publication, including:
- substantial revisions made in 2016 to reflect the clarifications and revisions agreed in the 2015 BEPS Reports on Actions 8-10 Aligning Transfer Pricing Outcomes with Value Creation and on Action 13 Transfer Pricing Documentation and Country-by-Country Reporting and
- revised guidance on safe harbours approved in 2013 which recognise that properly designed safe harbours can help to relieve some compliance burdens and provide taxpayers with greater certainty.
We are presently assisting taxpayers with transfer pricing compliance documentation. Please contact a member of our tax team if you have any questions on transfer pricing or if you would like to learn more about how the Guidelines may affect your business and compliance obligations.
MLI Matching Database (beta)
The OECD has recently released the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) Matching Database. The database makes projections on how the MLI modifies a specific tax treaty covered by the MLI, by matching information from Signatories’ MLI Positions.
The tool is a preliminary (beta) version that the OECD says will improve over time. The OECD is currently welcoming comments and suggestions from the public on the development of improved versions of the MLI Matching Database.
Public comments received on the BEPS discussion draft on implementation guidance on hard-to-value-intangibles
On 23 May 2017, interested parties were invited to provide comments on a discussion draft that provides guidance on the implementation of the approach to pricing transfers of hard-to-value intangibles described in Chapter VI of the Transfer Pricing Guidelines.
The OECD has recently published the comments it received.
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