Talking Tax – Issue 88

ATO updates

Greater reporting obligations for groups with turnover above $250 million

The ATO has announced that it will be extending the obligation to lodge the reportable tax position (RTP) schedule to companies in economic groups with a turnover greater than $250million.

The RTP schedule is a schedule to the company income tax return that requires large businesses to disclose their most contestable and material tax positions. The obligation to lodge the schedule only arises once the ATO has notified the company they are required to lodge an RTP schedule.

Currently, the ATO targets companies that fall within its ‘higher risk’ or ‘key player’ categories. For income years ending on or after 30 June 2018, the obligation to lodge the RTP schedule will also apply to companies in economic groups with a turnover greater than $250 million. The ATO will notify taxpayers that are affected by these changes of their RTP obligations.

Taxpayers will need to use the Guide to reportable tax position 2018 to complete their RTP schedule which will be available from 1 July 2018.

Case law

Disclaimer of benefits insufficient to relieve Taxpayers from liquidated group company’s payroll tax liabilities

In Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184 the New South Wales Court of Appeal (Court of Appeal) held that taxpayers were ‘group companies’ for the purposes of section 72(1) of the Payroll Tax Act 2007 (Payroll Tax Act) and therefore liable for the unpaid payroll tax liabilities of a liquidated group company.

The Taxpayers claimed that the companies were not group companies for the purposes of the Payroll Tax Act on the basis that one of the beneficiaries under a discretionary trust had validly and irrevocably disclaimed his interest in the trust, such that he no longer had a ‘controlling interest’ in both companies for the purposes of the grouping provisions of the Act.

The Court of Appeal held that the liability of a group member to pay payroll tax cannot be retrospectively altered by a disclaimer, irrespective of whether the disclaimer is valid under general law principles. The Court of Appeal found that as the disclaimer was made following the crystalisation of liability under the Act, the Taxpayers were jointly and severally liable under the Act. In other words, the disclaimer did not render the grouping provisions of the Act inapplicable as contended by the Taxpayers.

Interestingly, the Court of Appeal focused primarily on the wording of the Act, rather than the validity or effect of the disclaimer under general law (which the parties and indeed the primary judge had instead focused on).

Tribunal finds Taxpayer not entitled to ‘low cost accommodation’ exemption

In Perry Properties Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 235 the New South Wales Civil & Administrative Tribunal found that a taxpayer was not entitled to the ‘low cost accommodation exemption’ under section 10Q of the Land Tax Management Act 1956 (LTM Act) in respect of two of its properties. This decision was made on the basis that the land was not used and occupied in accordance with the guidelines approved by the Treasurer, as required by section 10Q.

The Taxpayer operated a number of lodging businesses through which it provided low cost accommodation to members of the community. The Taxpayer sought review of the Commissioner’s land tax assessments in respect of two properties, on the basis that the Commissioner wrongly failed to allow a ‘low cost accommodation’ exemption in respect of each of the properties.

An exemption under section 10Q of the LTM Act is available where the land is used and occupied primarily for low cost accommodation and the Chief Commissioner is satisfied that the land is so used and occupied in accordance with guidelines approved by the Treasurer (Guidelines).

The dispute was concerned with the Taxpayer’s compliance with the Guidelines and ultimately centred on whether maximum tariff amounts specified in the Guidelines were on a ‘per room’ or ‘per bed’ basis. If the latter were the case, the Taxpayer’s rates would fall within rate threshold under the guidelines and therefore invoke the exemption.

Whilst the Tribunal noted that the language in the Guidelines was somewhat ‘clumsy’, it found that there was no room to argue that the words ‘per room’ can be read in a way other than literally. The Tribunal ultimately found that the exemption did not apply to the Taxpayer on the basis that, notwithstanding that Taxpayer charged tenants on a per bed basis, the maximum cost of the Taxpayer’s rooms exceeded the amount specified under the approved guidelines.

High Court dismisses Taxpayer’s application for special leave against Court of Appeal decision

The High Court has dismissed a taxpayer’s application for special leave to appeal against the New South Wales Court of Appeal’s decision relating to an allegation made against the ATO for ‘conscious maladministration’ in Anglo American Investments Pty Ltd v DCT [2017] NSWCA 17 (Anglo 2017) on the basis that the appeal did not enjoy sufficient prospects of success. In Anglo 2017, the New South Wales Court of Appeal unanimously dismissed the Taxpayer’s application for leave to appeal the decision in the Commissioner’s favour in his debt recovery case: DCT v Anglo American Investments Pty Ltd & Ors [2016] NSWSC 975 (Anglo 2016). Anglo 2016 was discussed in Talking Tax - Issue 43. Anglo 2016 concerned ATO officers obtaining and using documents from the Cayman Islands, in breach of Cayman Island laws. The Taxpayer alleged that this amounted to ‘conscious maladministration’ and unsuccessfully argued that on this basis, the assessments issued to it were invalid.

The New South Wales Court of Appeal in Anglo 2017 dismissed the application for leave to appeal on the basis that the amended defence filed in the proceedings was bound to fail. This decision was reached because a claim of conscious maladministration can have no reasonable prospect of succeeding in debt recovery proceedings, where no application for judicial review is made and no notices of assessment have been admitted in evidence.

Legislation and government policy

Government releases draft legislation designed to increase confidence in superannuation industry

The Federal Government has recently released draft legislation and associated draft explanatory material for consultation, which proposes to amend the Superannuation Industry (Supervision) Act 1993, the Corporations Act 2001 and the Financial Sector (Collection of Data) Act 2001 to modernise and increase confidence within the superannuation system.

The amendments are designed to improve accountability and member outcomes by (among other things):

• Replacing the current 'scale test' with an 'outcomes test' that requires trustees to undertake an annual determination to ensure the outcomes being delivered are in the financial interests of their members.
• Providing the Australian Prudential Regulation Authority (APRA) with enhanced capacity to refuse or cancel a MySuper authorisation, where it believes that the registrable superannuation entity (RSE) licensee may not comply with its obligations.
• Providing APRA with improved directions powers to enable it to intervene at an early stage to address prudential concerns.
• Aligning the superannuation director penalty regime with the penalty regime that applies to directors of managed investment schemes.
• Requiring people to seek approval from APRA prior to a change in ownership or control of an RSE licensee occurring.
• Requiring RSE licensees to hold annual meetings of members to enable members to ask questions about all areas of their RSE’s performance and operation.
• Enabling APRA to gather more information on the operational and managerial expenses of RSE's.

The Government has also released draft legislation which is intended to close a loophole used by unscrupulous employers to reduce their employee’s superannuation guarantee when the employee chooses to make salary sacrifice contributions to superannuation.

The closing date for submissions on the draft legislation is 11 August 2017.

OECD update

OECD releases new report on Neutralising the Effects of Branch Mismatch Arrangements

The OECD has recently published a report titled Neutralising the Effects of Branch Mismatch Arrangements, Action 2 (2017 Report) which sets out recommendations for branch mismatch rules that would bring the treatment of these structures into line with the treatment of hybrid mismatch arrangements, as set out in a report published in 2015 titled Neutralising the Effects of Hybrids Mismatch Arrangements (Action 2 Report) (2015 Report).

The 2015 Report was published as part of the OECD and G20’s final Base Erosion Profit Shifting (BEPS) package. The 2015 Report sets out recommendations for domestic rules that put an end to the use of hybrid entities to generate multiple deductions for a single expense or deductions without corresponding taxation of the same payment. While the 2015 Report addressed mismatches that are a result of differences in the tax treatment or characterisation of hybrid entities, it did not directly consider branch mismatches.

The 2017 Report focuses on branch mismatches, which arise where the ordinary rules for allocating income and expenditure between the branch and head office result in a portion of the net income of the taxpayer escaping the charge to taxation in both the branch and residence jurisdiction.

For more information about BEPS developments please see Talking Tax – Issue 86 and Talking Tax – Issue 64.