Thinking | 28 September 2017
Talking Tax – Issue 96
Taxpayer not presently entitled to contingent distributions
In Lewski v Commissioner of Taxation  FCAFC 145, the Full Federal Court allowed an individual Taxpayer’s appeal against an Administrative Appeals Tribunal decision to uphold amended assessments that included trust distributions in assessable income.
The Taxpayer was a beneficiary of the ACE No 4 Trust (ACE Trust) and the Arjod Trading Trust (Arjod Trust). The Taxpayer’s husband was the sole Specified Beneficiary of each trust. The Commissioner of Taxation purported to assess the Taxpayer on a share of the net income of the trusts. The Taxpayer’s objection and appeal to the Tribunal were disallowed but the appeal to the Court was upheld.
The key issues determined by the Court were:
- The Taxpayer cannot be presently entitled to a distribution where it is contingent upon certain events occurring.
- The Taxpayer could not disclaim trust distributions as her agent had knowledge of the distributions at least a few years earlier and this knowledge could be attributed to the Taxpayer.
- Where it is open to the Court to adopt two different constructions of a resolution, the Court will prefer the construction that preserves the validity of the resolution.
These three issues are discussed in detail below and highlight the importance of carefully constructing a trust resolution to prevent a future tax dispute with the ATO.
Under section 97 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), the Commissioner of Taxation issued amended assessments to the Taxpayer for the years ended 30 June 2006 (2006 Year) and 30 June 2007 (2007 Year), on the basis that the Taxpayer was assessable to a share of the net income of the ACE Trust for the 2006 Year and the Arjod Trust for the 2007 Year.
The Taxpayer objected to the amended assessments with the Commissioner partially allowing the objection in relation to the 2006 Year, and disallowing in full the objection in relation to the 2007 Year. The Taxpayer’s appeal to the Federal Court raised multiple issues with the Court accepting the bulk of the Taxpayer’s submissions. The decision of the Tribunal was set aside and the matter was remitted to the Commissioner for redetermination.
Trust Resolutions Issue
The resolutions made by the trustees of the trusts in each income year sought to distribute the trust income to certain beneficiaries, with a proviso that if the Commissioner takes action that causes the distributable income of the trusts to rise, the distributions would be varied so that this additional income be distributed to other beneficiaries including the Taxpayer.
The issue was whether the Taxpayer was ‘presently entitled’ to those amounts under section 97(1) of the ITAA 1936. The Court held that as the distributions were contingent upon certain events occurring, the Taxpayer was not presently entitled to the relevant distributions.
The Taxpayer executed two deeds of disclaimer on 15 December 2015. However, the Tribunal concluded that the Taxpayer had not effectively disclaimed the relevant benefits and entitlements under the trusts for the 2006 Year and 2007 Year. The Court upheld the Tribunal’s decision.
The Court found that even though the Taxpayer was not initially aware of the distributions made to her, she had given her husband unfettered control over her financial affairs and he acted as her agent in these matters. The Taxpayer’s husband was either aware of the distributions as they were made, or was made aware in 2012 and 2013 when he received ATO position papers in respect of the 2006 Year and 2007 Year. The Court held that this knowledge could be attributed to the Taxpayer and that despite this knowledge, the Taxpayer did nothing disclaim the distributions until 15 December 2015, seven to eight years after the distributions had been made.
Ultra Vires Issue
The Taxpayer further claimed that the Tribunal erred in rejecting the Taxpayer’s contention that a resolution made by the trustee of the ACE Trust with respect to the 2006 years went beyond the power granted to the trustee by the trust deed. The Taxpayer had contended that the resolution, in purporting to appoint the ‘income’ of the Trust to the applicant, rather than the ‘net income’ (being the term used in the trust deed) was not authorised by the trust deed. The Court rejected this argument and held that the resolutions to distribute were valid.
The Court noted that it is in accordance with the established principle that in circumstances where it is open the Court to adopt two different constructions of a resolution, the Court will prefer the construction that preserves the validity of the resolution.
Charity denied land tax exemption
In Al-Jaafaria Society Incorporated v Chief Commissioner of State Revenue  NSWCATAD 283, the Civil and Administrative Tribunal New South Wales denied The Al-Jaafaria Society Inc (Taxpayer) a land tax exemption notwithstanding some years earlier an exemption from duty had been granted under section 275 of the Duties Act 1997 (Duties Act), which exempts certain transfers of land to charities and benevolent institutions from land tax.
The Tribunal decided that the Taxpayer was not entitled to rely on the exemption as it had insufficient evidence to prove that its resources were used predominantly for the promotion of education and the relief of poverty in Australia and that the acquisition was predominantly for religious purposes. It was irrelevant that the Taxpayer had some year earlier been granted an exemption from duty under section 275 of the Duties Act for a different property as each transaction should be reviewed on its facts.
This case is a reminder that taxpayers should ensure they have sufficient evidence to support a claim for a land tax exemption. In addition, this evidence should be compiled each time the taxpayer relies on an exemption. The Taxpayer entered into a contract to purchase a property located at Revesby Heights in New South Wales (Property) and sought an exemption on the basis of section 275 of the Duties Act and that some years earlier an exemption from duty had been granted. This application was denied by the Chief Commissioner of State Revenue and the Taxpayer applied to the Tribunal for a review of the Commissioner’s decision.
The Taxpayer submitted that it was entitled to an exemption from land tax on the basis of the following:
- The Taxpayer is a body corporate, society, institution or other organisation.
- The ‘resource test’ in section 275(3)(a) of the Duties Act was satisfied. This test requires that the Taxpayer’s resources are used wholly or predominantly for the promotion of education and/or the relief of poverty in Australia. ‘Education’ is a broad concept and includes religious education.
- The ‘transaction test’ in section 275(3)(b) of the Duties Act was satisfied. This test requires that the Taxpayer is a charitable or benevolent institution and the Property was purchased for purposes approved by the Commissioner.
Due to conflicting information and a lack of reliable evidence the Tribunal was not satisfied that the Taxpayer had satisfied the resources test or the transaction test.
The Taxpayer also sought an exemption on the basis that it had previously received a section 275 of the Duties Act exemption in respect of another property they had purchased. The Tribunal held that there was no authority for the proposition that the granting of an earlier exemption from duty would make it appropriate for the same exemption to be granted in respect of a separate purchase. The decision of whether to grant an exemption from duty must be made on the facts at hand at the relevant time.
If you would like more information on land tax please contact Marina Raulings.
VCAT assessment of land value upheld
In PTDA v Commissioner for State Revenue  VSCA 266, the Supreme Court of Victoria, Court of Appeal, upheld a Victorian Civil and Administrative Tribunal (VCAT) valuation of land that formed part of Southern Cross Station.
The dispute was in relation to the site value of a property forming part of Southern Cross Station (Subject Land) owned by the Public Transport Development Authority (PTDA) and leased to Civil Nexus Pty Ltd (Taxpayer). The Subject Land was part of an allotment that was divided into four assessment parcels by the State Revenue Office (SRO).
Ultimately, the Court of Appeal held against the Taxpayer noting that a determination of value is a question of fact and that the land did not have a nil value, as argued by the Taxpayer, just because it was a loss-making operation. The Valuer-General provided assessments of the site value of the Subject Land as at 1 January of each year as:
The Valuer-General undertook his assessment on the basis that the Subject Land formed part of a larger property. The Taxpayer filed an objection to each tax assessment, asserting that the Subject Land had much lower site values and at their request, the matter was referred to VCAT.
The Taxpayer asserted that the true site value of the Subject Land was nil, but this was rejected by VCAT. Based on the evidence of expert witnesses, VCAT determined that the value of the Subject Land was much lower than the originally assessed. The site value of the Subject Land was determined to be around $7,500,000 for each land tax year. The Taxpayer appealed to the Court of Appeal on the basis that VCAT should have found that the land had a value of nil for reasons including that, because the Southern Cross Station facility was a loss-making operation, the land had no value.
The Court of Appeal noted that the conclusion as to site value is a conclusion of fact. It follows that appellate intervention is only justified if it can be shown that it was not open for VCAT to make the finding on the evidence before it. Furthermore, in determining a site value VCAT may rely on expert opinion evidence but is not bound to adopt any particular expert opinion.
The Court of Appeal determined that it was reasonably open to VCAT to determine the site valuations that it did. The Court of Appeal noted that the Tribunal was entitled to reject the Taxpayer’s contention that, because the station facility was a loss-making operation, the land had no value. The Court of Appeal rejected the Taxpayer’s submissions that the land had a value of nil and affirmed VCAT’s assessment of the site value of the Subject Land for each land tax year.
If you would like more information on land tax please contact Marina Raulings.
Legislation and Government Policy
Passive investment companies ineligible for reduced corporate tax rate
Last week the Government released the draft of the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 (Bill). As discussed in the Explanatory Memorandum of this Bill, the new legislation intends to amend the Income Tax Rates Act 1986 to ensure that a corporate tax entity will qualify for the lower corporate tax rate for an income year only if:
- the corporate tax entity carried on a business in the income year
- the aggregated turnover of the corporate tax entity for the income year is less than the aggregated turnover threshold for that income year (currently the threshold is $10 million which will increase annually to $50 million by 2018-19) and
- the corporate tax entity does not have passive income for that income year of 80 percent or more of its assessable income for that income year.
The Bill also confirms that passive investment companies cannot access the lower corporate tax rate before 2023-24 when the tax rate should be 27.5% for all companies.
Passive income includes, among other things, dividends, interest, royalties, rent and capital gains. Passive income will not include non-portfolio dividends. Therefore, dividends derived by a holding company which are made by a wholly owned subsidiary company carrying on an active trading business will not be classified as passive income of the holding company.
This Bill has the potential to impact a lot of taxpayers who are benefiting from the reduced corporate tax rate and may require those who derive passive income to revert to the 30% company tax rate.
Proposal to extend Crowd-Sourced Equity Funding to proprietary companies
On 14 September 2017, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Bill) was introduced into the House of Representatives. This Bill extends the Corporations Amendment (Crowd-sourced Funding) Act 2017 to remove the regulatory barriers preventing eligible proprietary companies from accessing crowd-sourced equity funding (CSF). If the Bill is passed, Proprietary companies would not have to transition to public company status to benefit from the rules.
According to the Bill’s Explanatory Memorandum, the Bill intends to:
- Extend the CSF framework for public companies to eligible proprietary companies, subject to additional reporting requirements and accountability standards.
- provide that proprietary companies with shareholders who acquire shares through a CSF offer are not subject to the takeovers rules.
- Introduce special investor protections for proprietary companies assessing the CSF regime.
- Remove the temporary corporate governance concessions for proprietary companies that convert to or register as public companies to access the CSF regime.
If you would like more information on how this Bill could affect you, please contact Anthony Bradica.