Thinking | 22 September 2017
Talking Tax – Issue 95
A win for the farmers!
In Brown Cavallo Pty Ltd v Chief Commissioner of State Revenue  NSWCATAD 18 , Brown Cavallo Pty Ltd as trustee for the Cavallo Family Trust (Taxpayer) applied to the Civil and Administrative Tribunal of New South Wales (Tribunal) for a review of the Commissioner of State Revenue’s (Commissioner) assessment of land tax on its land at Woolgoolga (Woolgoolga) for the 2012 to 2015 land tax years (Relevant Years).
The Tribunal determined that the Taxpayer was entitled to a primary production land tax exemption relating to the Woolgoolga, in respect of the assessments of land tax for the Relevant Years and the assessments were set aside.
Specifically, the Tribunal found that throughout the Relevant Years:
- the dominant use of Woolgoolga land was to maintain beef cattle for the purpose of sale and
- Woolgoolga land was used for the purpose of profit on a continuous or repetitive basis and had a significant and substantial commercial purpose or character.
This case is one of many recent cases across the country regarding the exemption to land tax for primary production usage. Unfortunately, these cases highlight that State Revenue Offices can (and do) make incorrect assessments, and that it will often be necessary to litigate in order to receive an accurate outcome.
The Bennett family owned Woolgoolga as well as two other properties (Glenreagh Properties) that adjoined each other. Woolgoolga was originally acquired by Mr Bennett’s parents to assist in the finishing of beef cattle, and in conjunction with a banana growing business.
In 2004, the Cavallo Family Trust was established and Mr Bennett’s parents transferred title of the Woolgoolga to the Taxpayer. The Glenreagh Properties were used by Tallawudjah Pty Ltd (Tallawudjah) to agist its cattle on Woolgoolga but there was never a formal agistment agreement.
The Taxpayer claimed Woolgoolga was exempt from land tax under the primary production exemption pursuant to section 10AA of the Land Tax Management Act 1956 (The Act).
Broadly, section 10AA of The Act provides that land zoned rural that is used for primary production is exempt from land tax. However, land zoned other than rural that is used for primary production is not exempt unless the dominant use is primary production and the commerciality tests in section 10AA(2) of The Act are satisfied.
The dominant use of the Land
The Taxpayer’s evidence was that the Woolgoolga Land was used to improve the condition of beef cattle for the purpose of the family cattle breeding and sale business since the property was first acquired over 40 years ago. With the exception of a small part of the Land (used for bananas and avocados).
The Taxpayer further provided evidence that throughout the Relevant Years, other than for a couple of months in 2014 when suffering from extreme drought, the number of cattle on Woolgoolga would have been at least four head.
The commercial purpose
Whilst not entering into an in depth analysis, the Tribunal found that the Applicant’s evidence was sufficient to show the commercial purpose of the land, having regard to the test that ‘it is appropriate to consider the entirety of the primary production activities whether conducted with the land or not’.
Tax Governance: Justified Trust
Justified Trust is an approach that the ATO is taking when dealing with large market clients. The concept originated from the Organisation for Economic Cooperation and Development (OECD).
Broadly, Justified Trust involves the ATO using the following standard as the benchmark for making certain decisions:
‘If we told the community how we assured the tax paid by a taxpayer, would they be satisfied we did ‘ (ATO),
To achieve Justified Trust, the ATO has noted that it will seek objective evidence that would lead a reasonable person to conclude a particular taxpayer paid the right amount of tax. Specifically, the ATO has noted that this may be achieved through a holistic understanding of a taxpayer’s business operations and financial performance, and ultimately being satisfied that:
- taxpayers have appropriate and functioning tax risk and governance frameworks suitable for their size, ownerships, complexity, industry and history
- no specific risks flagged to the market are present
- the tax outcomes of a typical, new or large transactions are appropriate and
- any misalignment between tax and accounting results is explainable and appropriate, and the right amount of tax on Australian-linked profits are being recognised in Australia.
The ATO will commence justified trust methodology over the next four years when reviewing the activities of the top 1,000 taxpayers.
In our experience, being proactive and prepared is the best approach. Should you require any assistance in preparing for an ATO review, please contact Raoul D’Cruz on 9603 3642.
Practical Compliance Guideline released on taxation associated with Customer Owned Banking Institutions
On 8 September 2017, the ATO published Practical Compliance Guideline 2017/15 (Guideline) which provides a safe harbour rate of 18% when determining extent of a creditable purpose (for ascertaining entitlement to input tax credits under the GST regime). This Guideline applies to customer owned banking institutions and commences on and from 1 July 2017.
Under this Guideline, the Commissioner will accept, as a matter of practical administration, a rate of no more than 18% as the extent of creditable purpose:
- for all of a taxpayer’s partly creditable acquisitions only (Option 1) or
- for all of a taxpayer’s acquisitions where the supply to it was a taxable supply and not an acquisition where the input tax credit is otherwise denied (Option 2).
This Guideline appears to reflect an ATO willingness to adopt safe harbour approaches to compliance, subject to companies having robust tax governance systems, processes and controls. According to the ATO, a Taxpayer can only apply Option 1 where they are able to identify acquisitions that solely relate to taxable, GST-free or input taxed supplies. The GST on such acquisitions is either wholly recoverable or not recoverable. The rate would only apply to remaining acquisitions that are partly creditable.
Further, Taxpayers can only apply Option 2 where they are unable to identify acquisitions that solely relate to taxable, GST-free or input taxed supplies because it is ‘practically difficult and burdensome’ for them to do so. For large, one-off acquisitions, the ATO expects that taxpayers will firstly identify whether the acquisition solely relates to taxable, GST-free or input taxed supplies.
What cover does this give you? According to the Guideline:
- If taxpayers apply the 18% under either option, the ATO will not devote compliance resources to review input tax credit claims for acquisitions to which they have applied the 18% for the purpose of determining the extent of creditable purpose.
- However, the ATO may still conduct verification of all of a taxpayer’s acquisitions to ensure that they applied the rate in accordance with the Guideline. The ATO may also verify whether taxpayers are entitled to claim the input tax credit for other reasons, for example whether they made the acquisition, whether the input tax credit was claimed in the correct tax period and whether they hold a valid tax invoice.
Government Policy and Legislation
The wagons are circling in on ‘phoenixing’ activity - Director’s may even be liable for GST!
‘Phoenixing’ can refer to the transfer of assets from one company to another by individuals or entities to avoid paying liabilities that the original company was liable to pay.
The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has decided to address this issue and created a comprehensive package of reforms, including the introduction of a Director Identification Number (DIN) and a range of other measures to deter and penalise phoenix activity.
The DIN will interface with other government agencies and databases to allow regulators to map the relationships between individuals and entities, and individuals and other people. Some of the other measures include:
- the extension of the penalties that applied to those who promote tax avoidance schemes to capture advisers who assist phoenix operators
- stronger powers for the ATO to recover a security deposit from suspected phoenix operators, which can be used to cover outstanding tax liabilities, should they arise and
- making directors personally liable for GST liabilities as part of extended director penalty.
The proposed measure to make directors personally liable for a company’s GST liability will lead to a significant increase in their personal exposure to tax related liabilities. Currently, directors are personally liable for a company’s failure to meet PAYG withholding or super guarantee charge liabilities.
Digital Currency to receive the same GST treatment as foreign currency
On 14 September 2017, the Treasury Laws Amendment (2017 Measures No 6) Bill 2017 (Bill) was introduced into the House of Representatives implementing two government initiatives to encourage innovation in Australia. Specifically, this Bill proposes to amend the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that supplies of digital currency receive equivalent GST treatment to supplies of money, such as foreign currency.
The Bill seeks to ensure that GST will no longer be charged on purchases of digital currency made on or after 1 July 2017.
If implemented, the measures will remove the potential ‘double-taxation’ which arises where GST is paid by consumers on the purchase of digital currency, and then again where digital currency is used to purchase a good or service which is subject to GST.
Compared to the Exposure Draft of the Bill, we note that the Bill (as introduced into Parliament) contains an additional mechanism to address the retrospective application of legislative instruments relating to changes made to the GST regulations (in the context of the changes to subsections 40-5(2) and 70-5(1) of the A New Tax System (Goods and Services Tax) Act 1999.
For more information about the Bill see Talking Tax - Issue 84.
Student Loan? Time to pay!
On 14 September 2017, the House of Representatives passed the Higher Education Support Legislation Amendment (A More Sustainable, Responsive and Transparent Higher Education System) Bill 2017 (Bill). This Bill proposes to amend the Higher Education Support Act 2003 to, among other things, reduce the Higher Education Loan Program minimum repayment income to $41,999 (from 1 July 2018) and replace the current repayment thresholds with new ones (including additional repayment thresholds and rates and index repayment thresholds to the CPI rather than average weekly earnings).
This Bill comes after the significant higher education reforms announced in the 2017-18 Budget, aimed to enhance sustainability in the higher education section, improve the responsiveness of providers, and create greater transparency around funding and admissions practices.
According to the Explanatory Memorandum for the Bill, the Bill also contains reforms to the Commonwealth Grant Scheme (CGS) that will expand opportunities for students, increase student choice and introduce a performance component to CGS funding.
The ACT adopts a ‘Barrier Free’ model to remove the ACT Revenue Office from the middle of transactions
The Revenue Legislation Amendment Bill 2016 (No 2) (Act) commenced on 18 September 2017, (being the day fixed by the Minister by written notice under section 2(1) of the Act). It was introduced to implement reforms to the Territory’s revenue collection system. According to Chief Minister, Treasurer, Minister for Economic Development and Minister for Tourism and Major Events, Mr Barr, in the Second Reading Speech of this Bill, the Bill ‘goes back to basics’, introducing a new model of ‘collecting conveyance duty’.
The new ‘Barrier Free’ model moves the trigger date for payment of duty from the date of exchange of contracts to the point that a buyer acquires the title to the property, which generally occurs after settlement.
Therefore, the Revenue Office will no longer be a barrier in the conveyance process, waiting periods will be shorter and transactions will be processed much faster. There will also be a significant cash flow advantage for purchasers, especially for those buying off the plan.
Land Partition Ruling
Revenue NSW has issued Revenue Ruling DUT 035 (DUT 035) (which replaces Revenue Ruling SD 178), which addresses how the concessions in section 30(1) of the Duties Act 1997 (NSW) (Duties Act) may apply to partitions of land effected on or after 27 June 2005. Section 30(1) of the Duties Act states that a partition occurs when dutiable property comprised of land in New South Wales that is held by persons jointly (as joint tenants or tenants in common) is transferred or agreed to be transferred to one or more of those persons.
DUT 305 notes (among other things), as follows:
- Duty on a partition is assessed concessionally under section 30 and is calculated on the dutiable value of the partition.
- A partition under Section 30 of the Duties Act is confined to dutiable property comprised of land in NSW. All other property, both dutiable and non-dutiable (including shares, land not in NSW and cash), is to be disregarded when calculating duty on a partition.
- Where there is a partition of land in NSW, application of Section 30 of the Duties Act is not restricted to instances where the partition involves one parcel of land or adjoining parcels of land. Section 30 of the Duties Act also applies to land that is held by partners in a partnership, that is, the partnership factor will be ignored for the purposes of a partition and, instead, the partner’s legal ownership of the land will be relevant.
- In relation to Estates, as land which is the subject of a partition is required to be held jointly, any partitioning of estate land in NSW which is held by a trustee, executor or executrix does not fall within Section 30 of the Duties Act.
- A transfer to the beneficiaries should be stamped under Section 63 of the Duties Act prior to partitioning.
- Certain documents are required to be lodged to enable the assessment of duty on a partition, including evidence of value and a current Certificate of Title for each parcel of land subject to the partition.