Thinking | 14 September 2017
Talking Tax – Issue 94
Commercial activities prove too substantial to satisfy charitable purpose exemption in the Payroll Tax Act 2009 (SA) (Payroll Act 2009)
In South Australian Employers’ Chamber of Commerce & Industry Incorporated v Commissioner of State Taxation  SASC 127, the South Australian Supreme Court dismissed an appeal by the Taxpayer, agreeing with the Commissioner of State Taxation (Commissioner) that the Taxpayer was not exempt from payroll tax under section 48 of the Payroll Act 2009 (charitable purpose exemption).
The South Australian exemption mirrors the charitable purpose exemption in New South Wales and Victoria and closely matches the charitable purpose exemption in all other States and Territories, meaning that the case will be significant for all Australian employers with charitable activities.
The Taxpayer argued that all activities of the Taxpayer were for the promotion of South Australian trade and commerce, which is a recognised charitable purpose. However, it was held that the commercial activities of the Taxpayer were ‘too substantial to be disregarded as minor or secondary’ and therefore the dominant purpose of the Taxpayer is not a charitable purpose.
Having failed to establish that the Taxpayer’s sole or dominant purpose is a charitable purpose, it was not necessary to go on to determine whether the wages were paid for work of a charitable nature to a person engaged exclusively in that kind of work.
This two-leg, South Australian exemption mirrors or closely matches the charitable purpose exemption in all other States and Territories – such as section 48 of the Payroll Tax Act 2007 (Vic) – in that the institution must first establish that its prevailing or most influential purpose is a charitable purpose before considering whether any wages were paid to people engaged exclusively in work of a charitable nature.
Should you require any assistance in applying or defending the application of the charitable purpose exemption, please contact our State Taxes specialists.
Victoria Civil Administration Tribunal (VCAT) denies primary production land tax exemption
In Australian Investment and Development Pty Ltd v CSR  VCAT 1418, VCAT held that the primary production land tax exemption under section 67 of the Land Tax Act 2005 (Vic) (Land Tax Act) was satisfied for the 2011 land tax year but not for any of the other years under review, partly disagreeing with the Commissioner of State Revenue’s (Commissioner) decision that the exemption had not been satisfied for the 2009 – 2013 land tax years.
In this case the land was in greater Melbourne but not in an urban zone during the 2009 – 2012 land tax years (and the more lenient section 66 of the Land Tax Act applied) but the land was in an urban zone during the 2013 land tax year (and the more demanding exemption under section 67 applied).
Where land is located in an urban zone and the primary production land tax exemption under section 67 is being relied upon, the activities of the owner are considered in addition to the activities conducted on the land. That is, the exemption is made more demanding because the owner’s principal business must be the primary production business on the land. Although the 2011 land tax year may have had the benefit of the more lenient exemption applying, the exemption could not be satisfied for 2009, 2010 or 2012 largely due to the lack of evidence that the land was used primarily for primary production during those years. The key issue in dispute was whether the Taxpayer was using the land for farming or for development and sale during the period under review.
The VCAT Member, Reynah Tang, commented that many primary production cases involve more than one use of the land. However, in this situation, it was ‘not enough to say of two genuine and substantial uses that one is, perhaps only marginally, when compared with the other, the ‘chief’ use. It must be a sufficiently ’chief’ use as to give its character to the whole of the land’.
Nonetheless, the VCAT Member did make orders that the 2011 assessment was to be varied to apply the primary production land tax exemption, reducing the amount of land tax payable by $17,270.69.
The land was only exempt in 2011 because for the 2011 land tax year, the Taxpayer was able to establish that the land was being used for the sowing and harvesting of wheat, barley and canola and the ongoing propagation of the cassinia plant.
The VCAT Member held that the cropping activity was sufficient to give its character to the whole of the land and the land should be considered to be used primarily for primary production for the 2011 land tax year, which was not the case for the other land tax years.
Administrative Appeals Tribunal’s (AAT) jurisdiction to review objection decisions, not decisions
In Francis v FCT  AATA 1250, Deputy President Forgie maintained that the AAT does not have jurisdiction to review default assessment warning letters from the Commissioner of Taxation (Commissioner). Rather the AAT has jurisdiction to consider ‘reviewable objection decisions’ of the Commissioner, which requires the Taxpayer to have lodged an objection and received an objection decision from the Commissioner. This describes the review and appeal process set out in tax and administrative laws.
Deputy President Forgie explained that the application by the Taxpayer was premature as the initial steps of the review and appeal process had not been complied with.
This case is a reminder to taxpayers to understand the objection, review and appeal process for tax disputes that progress to litigation in the AAT.
The importance of drafting GST clauses in contracts – a taxpayer win!
In MSAUS Pty Ltd as the Trustee for the Melissa Trust & Anor v FCT  AATA 1408, Deputy President McCabe found for the Taxpayers with respect to their GST liability arising from two property purchases. In setting aside the Commissioner’s objection decision, the AAT determined that there was no increasing adjustment under Div 135 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act) and the margin scheme applied to determine the amount of GST payable on the property purchases.
The AAT decision turned on the interpretation of the contracts of sale and emphasises the importance (and benefits) of careful drafting of GST clauses. This is one instance where the Taxpayers would likely be very happy that they sought professional advice to draft a bespoke GST clause. The Taxpayers purchased two apartments in the same hotel complex in 2006 and 2007 and under the contracts of sale the Taxpayers treated these purchases as GST-free supplies per the ‘supply of a going concern’ (SOGC) concession in Subdivision 38-J of the GST Act.
The apartments were intended to be used a part of a serviced apartment business. At the time the contracts were entered into, there was uncertainty around whether the underlying supplies were in respect of commercial residential premises (attracting taxable treatment and subject to GST) or residential premises (attracting input taxed treatment and not subject to GST), which was an issue being litigated at the time and ultimately decided by the High Court’s decision in Commissioner of Taxation v MBI Properties Pty Ltd  HCA 49 (MBI).
While the Taxpayers’ contracts of sale provided for SOGC treatment to be applied, the contracts also had a contingency clause that provided for the margin scheme to apply if the properties were determined to be used for residential accommodation and in the event there was an increased GST liability. According to the Taxpayers, this contingency clause was intended to address the uncertainty in respect of residential premises v commercial residential premises issue which was in doubt at the time (i.e. in the lead up to the MBI case).
In 2011, the Commissioner issued amended assessments to each of the Taxpayers on the basis that the SOGC concession did not apply, nor did the margin scheme, which resulted in an increasing adjustment and an additional amount of GST payable, equal to 10% of the purchase price of each apartment. Generally speaking, Division 135 provides for an increasing adjustment so that the purchaser accounts for GST attributable to the private or input taxed use of the going concern that is acquired.
On the issue of interpreting the contingency clause, Deputy President McCabe stated the contract must be read in its entirety and, when it was, the relationship between the various terms was clear. Deputy President McCabe accepted that the purpose and effect of the contingency clause was ‘tolerably clear on its face’ and that it provided for a contingency plan that is activated if something happens to trigger a liability to pay GST. The fact that the contingency clause was not activated until a later event is not the point as the clause was in place ‘on or before the making of the supply’ as per the Margin Scheme requirements in section 75-5(1A)(a) of the GST Act.
While the two contracts of sale differed slightly in wording, this was not a substantial issue and the AAT was able to apply a similar approach to interpreting the contingency clauses.
Government Policy and Legislation
Western Australian (WA) Budget Update 2017-18
The WA Budget 2017-18 was handed down on Thursday, 7 September 2017. This is the first labour Budget in WA in over 9 years.
Below are the key announcements involving State Taxes.
Foreign Buyer Duty Surcharge
The introduction of a foreign buyer duty surcharge in WA has been announced, joining Victoria, New South Wales, Queensland and (soon to be) South Australia as States imposing a duty surcharge on foreign property investors.
The 4 per cent surcharge will apply to foreign purchasers of residential property from 1 January 2019.
The State Government did not consider other increases to property tax as part of its Budget repair measures, recognising the impact of the three consecutive land tax increases in the 2013-14, 2014-15 and 2015-16 Budgets under the previous Government.
New Progressive Payroll Tax Scale for Large Employers
The State Government intends to introduce a tiered payroll tax scale which will take effect on 1 July 2018 for a five year period. The change will increase the rate of payroll tax applied to the proportion of an employer’s WA taxable wages. That is, for employers paying Australia-wide taxable wages of:
- up to $100 million, the rate applied to their WA taxable wages will remain at 5.5 per cent
- between $100 million and $1.5 billion, the rate applied to that part of their WA taxable wages between $100 million and $1.5 billion, will be increased to 6 per cent
- $1.5 billion or more, the rate applied to their WA taxable wages above $1.5 billion will be increased to 6.5 per cent.
The effective payroll tax rate will be adjusted for employers who also operate outside WA or operate as part of a group to ensure they pay the same effective tax rate on their WA payroll as entities entirely based in WA.
Gold Royalty Changes
The State Government also plans to introduce a tiered royalty rate from 1 January 2018. The current 2.5% rate will apply for each month when the gold price average is A$1,200/ounce or less but the rate will increase to 3.75% (on the full royalty value) when the price is above A$1,200/ounce.
At the current gold price, the increased royalty equates to around $20/ounce. These changes are consistent with the previous Government’s Mineral Royalty Rate Analysis, with the exception that the increased royalty rate only applies when the price is above A$1,200/ounce.
WA Bank Levy Linked to GST Revenue
Although not introduced in this Budget, the Treasurer, Ben Wyatt, mentioned that the unfair distribution of GST revenue by the Federal Government to the States could force the WA Government to consider bringing back a WA bank levy.
The Treasurer warned, ‘We will continue consideration of a State-based major bank levy in the absence of genuine GST reform or our parliament not passing other revenue measures.’
Residential premises: no deduction for travel; limited depreciation deductions; vacant residential land fee – Bill introduced
Last Thursday, 7 September 2017, the Treasury Law Amendment (Housing Tax Integrity) Bill 2017 was introduced in the House or Representatives. It proposes to amend the Income Tax Assessment Act 1997 (ITAA 1997) to implement the following two measures announced in the 2017-18 Federal Budget:
- denying deductions for travel expenses concerning premises and
- restricting depreciation deductions for assets used in rental properties.
Travel related to use of residential premises
The Bill seeks to ensure that travel expenditure incurred by individual owners of a rental property, to inspect or maintain a rental property, or to collect rent, is:
- not deductible and
- not recognised in the cost base of the property for CGT purposes.
The measure excludes rental properties held by corporate tax entities and other institutional organisations such as managed investment trusts and superannuation funds.
Limited depreciation deductions for assets in residential premises
The Bill seeks to amend the ITAA 1997 to deny income tax deductions for the decline in value of ‘previously used’ depreciating assets (plant and equipment) in a rental property.
This measure ensures that owners of rental properties cannot claim excessive depreciation deductions by ‘refreshing’ the value or effective life of previously used depreciating assets.
Vacancy fees on foreign acquisitions of residential land
The Bill would make foreign owners of Australian residential real estate liable to pay a vacancy fee where a residential property is not occupied or genuinely available on the rental market for at least six months in a 12 month period.
For more information about the Bill see Hall & Wilcox’s 2017 Federal Budget Insight.
First Home Super Saver Scheme – Bill introduced
The Treasury Law Amendment (Reducing Pressure on Housing Affordability Measures No 1) Bill 2017 was introduced on 7 September 2017 and proposes to establish the First Home Super Saver Scheme.
For more information about the Bill see Talking Tax – Issue 90.
Consolidation Integrity Measures Released
On Monday, 11 September 2017, the Minister for Revenue and Financial Services, the Honourable Kelly O’Dwyer MP, released the long-awaited draft tax consolidation legislation and explanatory memorandum for public consultation. Submissions close on 6 October 2017.
The draft material contains measures designed to remove unforeseen tax outcomes that arise under the tax cost setting rules when an entity leaves or joins a tax consolidated group. These measures proposed to have effect from 1 July 2016:
- prevent a double benefit from arising in relation to deductible liabilities when an entity joins a consolidated group by excluding the amount of deductible liabilities from the entry allocable cost amount
- ensure that deferred tax liabilities are disregarded
- remove anomalies that arise when an entity holding securitised assets joins or leaves a consolidated group
- prevent unintended benefits from arising when a foreign resident ceases to hold membership interests in a joining entity in certain circumstances
- clarify the outcomes that arise when an entity holding financial arrangements leaves a consolidated group and
- clarify the treatment of intra‑group liabilities when an entity leaves a consolidated group.
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