Talking Tax – Issue 90

Hall & Wilcox update

Michael Parker has recently been quoted in an Australian Financial Review article on Labor’s plan to change trust taxation rules, to tax distributions from family trusts at 30 per cent.

The article suggests that the new rules are a long way from being introduced, given that an election does not need to be called for another two years, and assuming that if Labor did win it would likely take some time to pass the legislation.

However, the article notes that experts are ‘taking the threat seriously’, particularly given the long term nature of financial structures and the lack of indication of any transitional arrangements that would be introduced as part of the proposed changes.

Michael was quoted, “people need to keep a watching brief on this”, and that the “closer we get to an election, the more probable that it could come sooner rather than later.”

As stated by Michael, “What works now may not be appropriate if the rules change”.

Case law

Director liable to pay $1.9 million for companies’ unpaid withholding tax and superannuation guarantee charge liabilities

The Supreme Court of New South Wales in DCT v Arora [2017] NSWSC 1016 has upheld director penalty notices issued by the Deputy Commissioner of Taxation (Commissioner), totalling $1.9 million, against a director (Defendant) of two companies in liquidation (Companies) for unpaid withholding tax and superannuation guarantee charges (SGCs). Note that where superannuation guarantee payments are not paid by the due date the SGC arises.

In 2013 and 2014, the Companies failed to remit various amounts withheld from salary, wages, and other payments to the Commissioner by their respective due dates and also incurred superannuation guarantee charges.

As a result, the Defendant, as a director of each company, became liable under Division 269 of Schedule 1 the Tax Administration Act to pay to the Commissioner a penalty equal to the amount that remained unpaid.

Importantly, this case highlights the high threshold which must be overcome in order for directors to avoid personal liability for unpaid withholding tax and SGCs.

Division 269 Schedule 1 of the Tax Administration Act imposes a duty upon a director to ensure a company meets its obligations (to pay withholding tax and SGC to the Commissioner), or otherwise promptly face administration or liquidation. A failure to comply may give rise to penalties which are imposed on directors personally.

The Defendant argued that two defences relieved him from such liability:

• first, illness made it unreasonable to expect him to take part, and he did not take part, in the management of the company at any time when he was a director under the relevant obligations and
• secondly, that at least part of the claim would be able to be met by the liquidator of either of the companies.

Regarding the first defence, the Defendant alleged that he suffered hypertension and emotional turmoil, caused by his marriage breakdown which resulted from the “overwhelming pressure” created by the ATO, in addition to other business issues. The Defendant alleged that this illness rendered him unable to manage the entities under his control. The Court rejected this defence highlighting, among other things, the lack of medical records or support for the defence.

Regarding the second defence, the Court highlighted that, under section 269-15 of the Tax Administration Act directors have an obligation (from the day when the company’s obligation is due to the Commissioner) to cause the company to comply with its obligation to remit the withholding tax or to pay the minimum superannuation guarantee (or SGC). The Court found that, the Defendant was liable for the amounts as a primary and principal debtor, and that it was irrelevant whether the money would ultimately be available following the liquidation of the company.

High Court sets aside AAT and Full Federal Court decisions to find Taxpayer not entitled to exemption from income tax

The High Court in Commissioner of Taxation v Jayasinghe [2017] HCA 26 has unanimously allowed the Commissioner of Taxation's appeal against a decision of the Full Court of the Federal Court of Australia to find the Taxpayer liable to pay income tax.

In this case the Taxpayer was a qualified engineer who was engaged under an Individual Contractor Agreement by the United Nations Office for Project Services (UNOPS), an operational arm of the United Nations (UN), to work as a project manager on the construction of a road in Sudan.

The High Court found that the Taxpayer was not entitled to exemption from taxation on the income he earned in the 2010 and 2011 income years on the grounds that he was not “a person who held an office in an international organisation” within the meaning of section 6(1)(d)(i) of the International Organisations (Privileges and Immunities) Act 1963 (IOPI Act). Further, the Commissioner was not bound to exempt him from taxation by reason of section 357-60(1) of Schedule 1 to the Tax Administration Act 1953 (Tax Administration Act) and TD 92/153.

The High Court found, contrary to the Full Federal Court, that if a person is engaged as an expert they will not be a person who holds an office under TD 92/153, irrespective of whether they are also an employee.

Issue 1: whether the Taxpayer was a person who held an office in an international organisation within the meaning of s 6(1)(d)(i) of the IOPI Act, such that he was entitled to exemption from taxation on the income he received from UNOPS?

The High Court found, contrary to the Federal Court and the Administrative Appeals Tribunal, that the Taxpayer did not hold an office in the UN within the meaning of section 6(1)(d)(i) of the IOPI Act for the following reasons:

• The Taxpayer was engaged in his individual capacity to undertake a non-core function – "to perform a specific task or deliver a specific piece of work".
• The Taxpayer had the legal status of an independent contractor of UNOPS, serving in his individual capacity and with no authority or other right to enter into any legal or financial commitments or incur any obligations on behalf of UNOPS.
• The Taxpayer did not have the status of an official of the UN for the purposes of the 1946 UN Convention. In contrast, he was considered an expert on a mission within the terms of s 22 in Art VI of the 1946 UN convention and obtained privileges and immunities under that section.
• The Taxpayer was solely liable for claims by third parties arising from his own negligent acts or omissions in the course of his service, contrary to section 6(1)(d)(i) of the IOPI Act and reg 10(1) of the UN Regulations.

Issue 2: Whether, by reason of s 357-60(1) of Schedule 1 to the Tax Administration Act and TD 92/1533, the Commissioner was bound to exempt the Taxpayer from taxation on the income he received from UNOPS?

Broadly, TD 92/153 provides the Commissioner’s view is that the phrase 'person who holds an office', in relation to a prescribed international organisation for the purposes of section 6(1)(d)(i) of the IOPI, covers those people who work as employees for that organisation (but excludes persons who are locally engaged by the organisation and paid at an hourly rate; or engaged by the organisation as experts or consultants).

The High Court found, contrary to the Federal Court, that if a person is engaged as an expert they will not be a person who holds an office under TD 92/153, irrespective of whether they are also an employee.

The High Court also found that the Taxpayer was an expert because, among other things, under his terms of engagement he was engaged to perform “specialist services” in recognition of his ‘skills and expertise” and, at least from 1 May 2010, was considered an “expert on mission” for the UN.

ATO updates

ASIC disqualifies SMSF auditor

On 10 August 2017, ASIC issued a media release announcing that it had disqualified Ross Russo from being an SMSF auditor, after finding that Mr Russo had breached fundamental independence and audit requirements.

Specifically, Mr Russo audited the fund of a close family member and as a result was found to have breached auditor independence requirements of the APES 110 Code of Ethics for Professional Accountants, and audit evidence requirements of the Australian auditing standards.

ASIC Commissioner John Price has highlighted that SMSF auditors play a fundamental role in promoting confidence in SMSF sector, and that ASIC will continue to take action where SMSF auditors do not meet their ethical and professional standards.

This disqualification serves as a reminder of the close working relationship between ASIC and the ATO, co-regulators of SMSF auditors, as the issue was identified and referred to ASIC by the ATO.

New online Smart Forms announced

The Victorian State Revenue Office has announced that the following paper-based forms have been replaced with online SmartForms:

• Registration form for approved livestock agent – Duties Form 30
• Insurance Duty - Application for registration as an insurer – Duties Form 40
• Statement for livestock duty payment – Duties Form 55
• Victorian Liquor Subsidy Claim Form – VLS form 01
• Apply for a water and sewerage rebate – Wat Sew Form

Old PDF versions of these forms will not be accepted beyond 30 September 2017.

ATO release draft Simplified Accounting Method Determination

The ATO has released the Deputy Commissioner of Taxation’s draft determination ‘Goods and Services Tax: Simplified Accounting Methods Determination for Food Retailers - Business Norms, Stock Purchases and Snapshot Methods’ (SAM 2017/D1).

The determination provides eligible food retailers with the choice to use a simplified accounting method (SAM) to help work out their net amount (GST payment or refund) by estimating their GST-free sales and GST-free acquisitions of trading stock.

The determination is substantially the same as the determination it replaces, Simplified GST Accounting Methods Legislative Instrument (No. 1) 2007.

Legislation and government policy

Report published on Federal Bill proposing to introduce safe harbour for company directors from personal liability

On 8 August 2017, the Senate Economics Legislation Committee (Committee) released a report on the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Bill) recommending that the Bill be passed.

The Bill, which is currently before the Senate, amends the Corporations Act 2001 to:

• create a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency and
• make certain contractual rights unenforceable while a company is restructuring under certain formal insolvency processes.

Broadly, the safe harbour will protect a director in relation to debts that a company incurs directly or indirectly in connection with developing and taking a course of action that is reasonably likely to lead to a better outcome for the company (which is defined to mean ‘an outcome that is better for the company than the immediate appointment of an administrator, or liquidator, of the company).

The report identified that the majority of parties making submissions to the inquiry undertaken by the Committee were broadly supportive of the bill, and encouraged its progress through the Parliament.

The proposed changes are welcomed, and appear to be sensible in offering company directors a degree of protection when undertaking restructures to avoid appointment of an administrator or liquidator

Submissions closed on exposure draft legislation to establish the First Home Super Saver Scheme

The Government has recently released exposure draft legislation (the Treasury Laws Amendment (Reducing Pressure on Housing Affordability) Bill 2017 and the First Home Super Saver Tax Bill 2017) to establish the ‘First Home Super Saver Scheme’ (FHSSS), which was announced in the 2017-18 Federal Budget as part of the Government’s package of reforms to reduce pressure on housing affordability.

From 1 July 2017, individual taxpayers are able to make voluntary contributions to their superannuation accounts of up to $15,000 per year, and $30,000 in total, as part of the FHSSS.

From 1 July 2018, a taxpayer will be able to withdraw contributions made under this scheme and any associated earnings, for the purpose of making a first home deposit. Contributions that exceed the above limits are not eligible to be released.

To be an ‘eligible’ contribution for an individual, the contribution must have been made:

• as ‘voluntary’ employer contributions (such as a salary sacrificed contribution) for the individual, or member contributions made by the individual
• as a concessional or non-concessional contribution and
• within the concessional contributions and non-concessional contributions caps.

There are various other restrictions on eligibility and release, including that the individual must not already own Australian real estate.

First-home buyers should be cautious in relying on the proposed FHSSS before the draft legislation actually becomes law. While contributions can be made from 1 July 2017, and the proposals would allow first-home buyers to save “faster” for a home deposit, the draft legislation is not yet operative and it is unclear how quickly funds can be withdrawn when a house purchase is near or pending. Until the draft legislation is passed, the existing superannuation rules would operate to limit an individual’s ability to withdraw amounts from super, if conditions of release are not met. Key features of the FHSSS include:

• First home savers who make voluntary contributions into the superannuation system can withdraw those contributions (up to certain limits) and an amount of associated earnings for the purposes of purchasing their first home.
• To initiate the release process, individuals must request a ‘first home super saver determination’ (FHSS determination) from the Commissioner.
• Individuals who receive a FHSS determination can request that the Commissioner issue a release authority for their superannuation interests.
• Amounts released under the FHSSS are subject to concessional tax treatment, and are paid first to the Commissioner, for any tax payable to be withheld by the Commissioner before the amount is paid to the individual.
• Individuals who do not purchase their first home within a specified period can either recontribute an amount into superannuation, or pay an amount of tax (the first home super saver tax) to unwind the concessional tax treatment that applied on release.

Foreign worker levy

Under reforms announced by the 2017-18 Federal Budget, the Government has proposed to introduce a foreign worker levy to replace the current regime where employers are required to contribute 1% or 2% of their payroll to training if they employ foreign workers. Under the new regime, businesses will be subject to an annual foreign worker levy of:

• $1,200 for every temporary visa worker for businesses with a turnover less than $10 million (Small Business) and
• $1,800 for every temporary visa worker if they are a business with turnovers greater than $10 million (Larger Business).

Businesses will also be subject to a one off levy of $3,000 (for Small Businesses) or $5,000 (for Larger Businesses) for every permanent skilled visa worker.

OECD

Countries that France will exchange country-by-country (CbC) reporting information

France’s official journal has published a ministerial order containing the list of countries (including all European member states, Australia and New Zealand) with which France will exchange CbC reporting information automatically and bilaterally.

This comes following last week’s announcement that the US and Australia signed a bilateral agreement to exchange CbC Reports (see Talking Tax - Issue 89).

This also signals the continued global crackdown on multinational tax avoidance as more countries commit to the exchange of information.