Talking Tax – Issue 91
Transfer Pricing – Chevron withdraws its High Court appeal
Chevron has recently withdrawn its application for special leave to appeal to the High Court from the Full Federal Court decision in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation  FCAFC after settling with the ATO for an undisclosed sum, which is understood to be more than $1 billion. The Full Federal Court decision was discussed in Talking Tax - Issue 75.
In a media release dated 18 August 2017, Kelly O’Dwyer MP highlighted that the Chevron case “shows that the Government is taking strong action to ensure multinational companies pay their fair share of tax” and that the decision strengthens the ATO’s position in pursuing other arrangements where multinationals attempt to circumvent Australia’s transfer pricing laws. Minister O’Dwyer notes that the ATO initial estimates are that Chevron decision will yield more than $10 billion dollars of additional revenue over the next ten years in relation to transfer pricing of related party financing alone.
Are your transfer documents stamped? The Federal Court has confirmed that unstamped transfer instruments are inadmissible as evidence
The Federal Court of Australia (Court) in Pitman v Johnson  FCA 945 has dismissed (in addition to other relief sought) an application for declaratory relief, refusing to recognise that the applicants, in their capacities as trustees of a trust, were the legal owners of a large quantity of rough opalised sandstone (Rough Opal) as alleged by the applicants.
In 2013, the respondent, who was the trustee of the bankrupt estate of Sotirios Portellos (Trustee in Bankruptcy), took possession of the Rough Opal by the execution of two warrants for the seizure of property pursuant to section 130(2) of the Bankruptcy Act 1966 (Cth).
When the applicants became aware of the existence of the warrants in late 2014, they commenced proceedings seeking, among other things, declaratory relief to determine that they are the lawful owners of the Rough Opal, not the Trustee in Bankruptcy.
The applicants relied on an affidavit sworn by one of the applicants and a number of documents which the applicants alleged documented the series of transfers which resulted in the applicants obtaining ownership of the Rough Opal (Transfer Documents).
One of the central issues, in this case, was whether the Transfer Documents were admissible in court since they had not been stamped with duty.
Section 22 of the Stamp Duties Act 1923 (SA) provides that:
No instrument chargeable with duty executed in any part of South Australia… shall, except in criminal proceedings, be pleaded or given in evidence, or admitted to be good, useful or available at law or in equity, unless duly stamped.
The Court accordingly found the applicants could not adduce the Transfer Documents in evidence as:
- the applicants’ case relied upon the transfers being good, useful or available at law or in equity and
- the documents, assuming they were genuine, were instruments chargeable with duty and had not been duly stamped.
Further, the Court refused to adjourn the case to give the applicants’ an opportunity to have the Transfer Documents stamped on the grounds that, among other things, the applicants had sufficient opportunity to obtain an opinion as to whether the Transfer Documents were chargeable with duty, and that the applicants had assumed the risk that the instruments were not chargeable with duty.
Ultimately, the application was dismissed by the Court on the basis that they could not establish that they were the owners of the Rough Opal or had any interest in it superior to the Trustee in Bankruptcy.
Fun Fact: According to the Australian Opal Centre website, Australia is the only place on Earth where opalised animal fossils are found - so it is definitely worth ensuring that your transfer documents are duly stamped so that you can prove your ownership of these (or other items of value).
ATO publishes “tips and traps” in relation to tax issues for trusts
On 15 August 2017, the ATO published “tax issues for trusts – trips and traps” which provides information and guidance for trustees and beneficiaries of trusts on topics such a trustee resolutions, lodging trust income tax returns, distributions to self-managed super funds and, importantly, the behaviours and things that attract the ATO’s attention.
Things that attract the ATO’s attention
The ATO is on the watch for distributions to complying superannuation funds, differences between distributable and taxable income and distributions to tax-preferred entities.
For example, in relation to distributions to complying superannuation funds, the ATO has said it will be focusing on:
- distributions from trusts to complying superannuation funds that do not arise because of a fixed entitlement to income of the trust to ensure they are treated as non-arm’s length income and taxed in the superannuation fund at the top marginal tax rate and
- distributions of income by trustees of discretionary trusts to SMSFs, because these distributions are subject to the non-arm’s length income rules and the amount is treated as non-arm’s length income and taxed at the highest tax rate of 45%.
In this regard, the following situation could attract the attention of the ATO:
- a complying superannuation fund (particularly a SMSF) receives a distribution as a beneficiary of a trust and either:
- the trust is not a fixed trust (or one with fixed entitlements to income) or
- the trust is one with fixed entitlements but the distribution was made at non-arm’s length terms.
Private rulings - you can revise them, but they can’t be withdrawn: addendum to Taxation Ruling TR 2006/11
On 16 August 2016, the ATO issued Taxation Ruling “TR 2006/11A5 - Addendum” which is a public ruling amending TR 2006/11 to clarify that a private indirect tax ruling can be revised but not withdrawn.
TR 2006/11 outlines the system of private rulings following the enactment of the Tax Laws Amendment (Improvements to Self-Assessment) Act (No. 2) 2005 which, in respect of private rulings, inserted new Divisions 357 (common rules) and 359 (private rulings) into Schedule 1 to the TAA.
TR 2006/11 also outlines the inclusion of indirect tax and excise rulings into the system of private rulings following the enactment of Tax Laws Amendment (2010 GST Administration Measures No. 2) Act 2010
The addendum applies from 16 August 2017.
For those who haven’t looked at TR 2006/11 for some time, it is a useful exercise to review this and see how your recent experience with the private ruling process has played out in light of the rules (which were introduced some time ago).
Legislation and government policy
Millions? How many millions? If it’s more than $100 million then show us the money. Labor Government tables legislation to lower public reporting threshold from $200 million to $100 million
Senator Katy Gallagher (Labor) has introduced to the Senate Taxation Administration Amendment (Corporate Tax Entity Information) Bill 2017, which proposes to amend section 3C(1) of the Taxation Administration Act 1953 to align the public reporting threshold for private corporate entities with that of public corporate entities by lowering the threshold from $200 million to $100 million.
Section 3C details the type of income and tax information the Commissioner of Taxation is required to make publicly available on an annual basis. Section 3C was introduced by the Federal Government in 2013 and originally required public reporting of information for corporate entities with a total income of $100 million or more.
In 2015, the government increased the threshold for private corporate entities to $200 million, which the Labor party claims has resulted in approximately 600 large private companies (about two-thirds of those affected by the original measure) escaping public tax scrutiny, unlike comparably sized public companies.
The Explanatory Memorandum for this Bill provides as follows:
No genuine policy rationale was given for either the removal of the public reporting requirement for public companies, nor the restoration of the requirement with a significantly higher threshold. The $200 million threshold results in approximately 600 large private companies (about two-thirds of those affected by the original measure) not having high-level tax information scrutinised, unlike comparably sized public companies
This Bill, however, would need to be approved by the Government to pass into law, which there has been no indication of as yet.
Given the possibility that companies may be able to restructure to stay away from unwanted scrutiny which may effect their business and commercial operations, it will be interesting to see the effectiveness of this legislation and whether it makes much of a difference in the scheme of things. As the Explanatory Memorandum seems to indicate that the legislators are aware of the approximate numbers (600) of companies that are not having their information scrutinised, there does not seem to be much impeding the ATO from undertaking their usual processes to review these entities. Supporters of the Bill might argue that this legislation will positively assist the ATO in addressing aggressive tax minimisation by large companies and high net worth individuals. Some opponents to the Bill may argue that this is a toothless measure which only imposes additional costs administrative and in the context of public profile) on the targeted taxpayers. If the Bill is enacted, only time and ATO outcomes will tell whether this change is worth the effort.
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