Essential Tax Update - Cahoot Learning€¦ · Essential Tax Update March 2013 Period ending 28 February 2013 Presented by: Institute of Chartered Accountants in Australia

Essential Tax Update March 2013

Period ending 28 February 2013

Presented by: Institute of Chartered Accountants in Australia


Copyright © 2013 The Institute of Chartered Accountants in Australia 2

This package covers developments for the period 7 February to 28 February 2013

Disclaimer

This paper represents the opinion of the author(s) and not necessarily those of the Institute of Chartered Accountants in Australia (the Institute) or its members. The contents are for general information only. They are not intended as professional advice - for that you should consult a Chartered Accountant or other suitably qualified professional. The Institute expressly disclaims all liability for any loss or damage arising from reliance upon any information in these papers.

Items indicated as having first appeared in Reuters Thomson Weekly Tax Bulletin or Reuters Thomson Latest Tax News are copyright Reuters Thomson and may not be further reproduced or communicated.



• Legislation• Income• Deductions• CGT• FBT• Indirect tax• Taxation of superannuation• Tax administration• Tax controversy• Tax reform.

Session Outline

LEGISLATION ....................................................................... 7

Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 12

Tax and Superannuation Laws Amendment (2013 Measures No 1) Bill 2013 21

Superannuation Legislation Amendment (Reform of Self Managed Superannuation Funds Supervisory Levy Arrangements) Bill 2013 32

Minerals Resource Rent Tax Amendment (Protecting Revenue) Bill 2013 33

Bills referred to committees 34

International Tax Agreements Amendment Bill 2012 35

INCOME .............................................................................. 37

Yazbek v FCT [2013] FCA 39 37

AAT Case [2013] AATA 58, Re Purvis & Ors v FCT 38

AAT Case [2013] AATA 93, Re Batchelor v FCT 40

DEDUCTIONS ..................................................................... 43

Gifts to school or college building funds: TR 2013/2 43

R&D tax offsets: feedstock adjustments: TR 2012/3 46

CGT ..................................................................................... 49

AAT Case [2013] AATA 76 49



FBT ...................................................................................... 51

LAFHA: reasonable 2013-14 food and drink: TD 2013/4 51

INDIRECT TAXES ............................................................... 53

HC Legal Pty Ltd v DCT [2013] FCA 45 53

MBI Properties Pty Ltd v FCT [2013] FCA 56 55

Duoedge Pty Ltd v Leong & Anor [2013] VSC 36 56

Refunding excess GST – further draft legislation 58

GST and adjustment notes: GSTR 2013/D1 62

GST: failed payment fee not consideration: GSTD 2013/1 65

TAXATION OF SUPERANNUATION ................................. 67

Stronger Super and MySuper: changes to draft regs 67

ATO Decision Impact Statements 68

TAX ADMINISTRATION ..................................................... 71

Floods and bushfires declared disasters for tax 71

Southgate Investment Funds Limited & Ors v DCT [2013] FCAFC 10 72

ATO IDs: tax losses and FBT 74

IGT review of self-assessment system: report 75

Monthly tax instalments by large companies 77

Real-time compliance approach for large taxpayers 79

Board of Taxation venture capital recommendations 80

Experience and prior learning: Tax and BAS agents 81

ATO Decision Impact Statement: Hansen Yuncken 82

AAT Case [2013] AATA 96, Re Flood v FCT 84

Macquarie Bank Limited v FCT [2013] FCA 96 85

Appeals update: Binetter 86

Appeals update: Central Equity Limited 87

TAX CONTROVERSY ......................................................... 89

Donoghue v FCT [2013] FCA 84 89

FCT v Macquarie Bank Ltd & Anor [2013] FCAFC 13 91

TAX REFORM ..................................................................... 95

Winding back tax confidentiality for multinationals 95



Tax agent services by financial planners: draft legislation 97

Consolidating dependency tax offsets – draft legislation 100

Foreign pension funds to get access to MIT regime 101

Government’s industry plan: cuts to R&D concession 102





LEGISLATION

Progress of legislation - continued

Legislation

Bill Introduction to House

Latest Activity Date of Latest Activity

Superannuation Legislation Amendment (MySuper core Provisions) Bill 2011

3 November 2011 Received Royal Assent as Act 162of 2012

28 November 2012

Paid Parental Leave and Other Legislation Amendment (Dad and Partner Pay and Other Measures) Bill 2012

22 March 2012 Before Reps 8 May 2012

Australian Charities and Not-for-profits Commission Bill 2012

23 August 2012 Received Royal Assent as Act 168 of 2012

3 December 2012

Australian Charities and Not-for-profits Commission (Consequential and Transitional) Bill 2012

23 August 2012 Received Royal Assent as Act 169of 2012

3 December 2012


Legislation



Tax Laws Amendment (Special Conditions for Not-for-profit

Concessions) Bill 2012

23 August 2012 Before Reps 23 August 2012

Minerals Resource Rent TaxAmendment (Protecting Revenue)

Bill 2012

12 September 2012 Before Senate 28 February 2013

Tax Laws Amendment (2012 Measures No 5) Bill 2012

19 September 2012 Received Royal Assent as Act 184of 2012

10 December 2012

Personal Liability for Corporate Fault Reform Bill 2012

19 September 2012 Before Reps 19 September 2012




Legislation



Superannuation Laws Amendment

(Further MySuper and Transparency

Measures) Bill 2012

19 September 2013 Received Royal Assent as Act 171

of 2012

3 December 2012

Superannuation Laws Amendment

(Capital Gains Tax Relief and Other

Efficiency Measures) Bill 2012


of 2012

28 November 2012

Superannuation Auditor Registration

Imposition Bill 2012


of 2012

28 November 2012

Superannuation Legislation

Amendment (New Zealand

Arrangement) Bill 2012

11 October 2012 Received Royal Assent as Act 181

of 2012

10 December 2012


Legislation



Tax Laws Amendment (CleanBuilding Managed Investment Trust) Bill 2012

10 October 2012 Received Royal Assent as Act 185of 2012

10 December 2012

Fair Work Amendment Bill 2012 1 November 2012 Await Royal Assent 28 November 2012

Treasury Legislation Amendment (Unclaimed Money and Other Measures) Bill 2012

1 November 2012 Received Royal Assent as Act 176of 2012

4 December 2012

Tax Amendment (2012 Measures No 6) Bill 2012

29 November 2012 Before Reps 14 February 2013




Legislation



Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012

29 November 2012 Before Reps 29 November 2012

International Tax Agreements Amendment Bill 2012

29 November 2012 Passed both houses 28 February 2013

Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012


Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012



Legislation



Tax and Superannuation Laws Amendment (2013 Measures No 1) Bill 2013

13 February 2013 Before Reps 13 February 2013

Superannuation Legislation Amendment (Reform of Self Managed Superannuation Funds Supervisory Levy Arrangements) Bill

2013


Minerals Resource Rent Tax Amendment (Protecting Revenue) Bill 2013


Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Sharing) Bill 2013




Progress of Legislation

Bill Introduction to the House

Latest Activity Date of latest Activity

Superannuation Legislation Amendment (MySuper core Provisions) Bill 2011

3 November 2011 Received Royal Assent as Act 162 of 2012

28 November 2012

Paid Parental Leave and Other Legislation Amendment (Dad and Partner Pay and Other Measures) Bill 2012

22 March 2012 Before Reps 8 May 2012

Australian Charities and Not-for-profits Commission Bill 2012


3 December 2012

Australian Charities and Not-for-profits Commission (Consequential and (Transitional) Bill 2012


3 December 2012

Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012

23 August 2012 Before Reps 23 August 2012


12 September 2012 Before Senate 28 February 2013

Tax Laws Amendment (2012 Measures No 5) Bill 2012

19 September 2012 Received Royal Assent as Act 184 of 2012

10 December 2012

Personal Liability for Corporate Fault Reform Bill 2012

19 September 2012 Before Reps 19 September 2012

Superannuation Laws Amendment (Further MySuper and Transparency Measures) Bill 2012


3 December 2012

Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Bill 2012


28 November 2012

Superannuation Auditor Registration Imposition Bill 2012


28 November 2012





Superannuation Legislation Amendment (New Zealand Arrangement) Bill 2012

11 October 2012 Received Royal Assent as Act 181 of 2012

10 December 2012

Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012

10 October 2012 Received Royal Assent as Act 185 of 2012

10 December 2012

Fair Work Amendment Bill 2012

1 November 2012 Await Royal Assent 28 November 2012

Treasury Legislation Amendment (Unclaimed Money and Other Measures) Bill 2012

1 November 2012 Received Royal Assent as Act 176 of 2012

4 December 2012

Tax Amendment (2012 Measures No 6) Bill 2012


Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012



29 November 2012 Passed both houses 28 February 2013

Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012


Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012




Superannuation Legislation Amendment (Reform of Self Managed Superannuation Funds Supervisory Levy Arrangements) Bill 2013








Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013


Last Updated: 28 February 2013


• Has been introduced in the House of Reps

• It amends Pt IVA of the ITAA 1936 to ensure its effective operation as the income tax general anti-avoidance provision

• It also makes amendments to modernise Australia’s domestic transfer pricing rules to apply to both tax treaty and non-tax treaty cases.

Pt IVA and transfer pricing amendments Bill

Legislation

Part IVA and transfer pricing amendments: Bill


The Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 has been introduced in the House of Reps. It contains the following amendments:

Amends Part IVA of the ITAA 1936 to ensure its effective operation as the income tax general anti-avoidance provision; and

Amendments to "modernise Australia's domestic transfer pricing rules".

The Bill has been referred to the House of Reps Standing Committee on Economics for report.



Part IVA amendments

The Bill amends Part IVA of the ITAA 1936 to deal with what the government considers are perceived weaknesses in the "tax benefit" concept in section 177C that are considered to have reduced the effectiveness of Part IVA in countering tax avoidance arrangements. In particular, the proposed amendments are intended to target these perceived deficiencies in section 177C, and the way it interacts with other elements of Part IVA, especially section 177D. However, otherwise the amendments are not intended to change the operation of Part IVA.

The Assistant Treasurer said the proposed amendments seek to reinforce the view that the two limbs of the tax benefit element of Part IVA in section 177C(1) – i.e. the "would have" and "might reasonably be expected to have" limbs - are alternative tests; that there is not just one test that merely spans a spectrum of likelihood. The amendments also seek to ensure, in deciding whether an alternative to the scheme is reasonable, that regard is had both to the substance of the scheme and to the non-tax results or consequences for the taxpayer that the scheme achieved. In making that decision, the tax consequences of the alternative will be ignored.

Importantly, the amendments are different in a number of significant respects and approaches from those proposed in the exposure draft legislation that was released for public consultation on 16 November 2012.

Date of effect

The amendments will apply in relation to schemes that were entered into, or that were commenced to be carried out, on or after 16 November 2012.

Background and summary

According to the EM to the Bill, recent decisions of the Full Federal Court concerning the way in which Part IVA determines whether or not a "tax benefit" has been obtained in connection with an arrangement have revealed a weakness in the capacity of Part IVA to effectively counter arrangements that, objectively viewed, have been carried out with a relevant tax avoidance purpose. These decisions include FCT v AXA Asia Pacific Holdings Ltd (2010) 81 ATR 180, RCI Pty Ltd v FCT [2011] FCAFC 104 and FCT v Futuris Corporation [2012] FCAFC 32. The object of the proposed amendments is to remedy these perceived weaknesses.

In summary, the amendments are intended to have the following technical effects

To require the application of Part IVA to start with a consideration of whether a person participated in the scheme for the sole or dominant purpose of securing for the taxpayer a particular tax benefit in connection with the scheme and, thereby, to emphasise the dominant purpose test in section 177D as the "fulcrum" or "pivot" around which Part IVA operates;

To put beyond doubt that the "would have" and "might reasonably be expected to have" limbs of each of the section 177C(1) paragraphs represent alternative bases upon which the existence of a tax benefit can be demonstrated;

To ensure that, when obtaining a tax benefit depends on the "would have" limb, that conclusion must be based solely on a postulate that comprises all of the events or circumstances that actually happened or exited other than those forming part of the scheme; and

To ensure that, when obtaining a tax benefit depends on the "might reasonably be expected to have" limb, that conclusion must be based on a postulate that is a reasonable alternative to the scheme, having particular regard to the substance of the scheme and its effect for the taxpayer, but disregarding any potential tax costs.



Key features of amendments

When does Part IVA apply?

The proposed amendments provide that the first question to be answered when determining whether Part IVA applies to a scheme is to ask whether a participant in the scheme had the requisite "purpose" of securing a tax benefit for the taxpayer in connection with the scheme, and that the question of whether a "tax benefit" was obtained in connection with the scheme follows as a subsidiary question. This amendment is intended to ensure that Part IVA operates as an integrated whole, that is, by emphasising the central role of the dominant purpose test in section 177D as the "fulcrum" upon which Part IVA turns and ensuring that section 177C, whose role is to define when a "tax benefit" has been obtained in connection with a scheme, is read in an appropriate inter-related, but subsidiary, way.

Alternative bases for identifying tax benefits

Under proposed new section 177CB(1), a conclusion that one of the paragraphs of section 177C(1) is satisfied would require a conclusion that one of the tax effects specified in that section "would have" or "might reasonably be expected to have" happened - absent a particular scheme. This provision is intended to put beyond doubt that the "would have" and "might reasonably be expected to have" limbs of each of the paragraphs in section 177C operate as equal alternative bases for identifying relevant tax effects.

Under proposed new section 177CB(2), a decision that a tax effect "would have" occurred if the scheme had not been entered into or carried out must be made solely on the basis of a postulate comprising all of the events or circumstances that actually happened or existed, other than those that form part of the scheme. This provision is intended to make it clear that, when postulating what would have occurred in the absence of the scheme, the scheme must be assumed not to have happened (ie it must be "annihilated", "deleted" or "extinguished").

However, the postulate must otherwise incorporate all the "events or circumstances that actually happened or existed". In other words, the speculation that is permitted about any other state of affairs that might have come about if the scheme had not been entered into or carried out is limited to the removal of the scheme. A postulate cannot assume the existence of events or circumstances not in existence, nor can it assume the non-existence of events or circumstances that are in existence (other than those that form part of the scheme).

Accordingly, under this approach, a taxpayer will have obtained a tax benefit in connection with a scheme if it can be demonstrated that a relevant tax effect would have flowed, as a matter of law, from the application of the taxation law to the facts remaining once the scheme is assumed away.

Example: Deborah, a foreign resident, enters into an arrangement under which assessable income that would otherwise be derived by her from Australian sources is instead derived by her from foreign sources with the result that it is not assessable in Australia. If the scheme had not been entered into, the income would have been included in Deborah's assessable income because the only operation of the scheme was to change the source of the income for taxation purposes. The tax benefit is the reduction in Deborah's assessable income. No speculation is necessary or permitted in deciding what else might have happened if Deborah had not entered into the scheme.

Under proposed new sections 177CB(3) and (4), a decision that a tax effect "might reasonably be expected to have" occurred if a scheme had not been entered into or carried out must be made on the basis of a postulate that is a reasonable alternative to the scheme, having particular regard to the "substance of the scheme" and its "results and consequences for the taxpayer", and "disregarding any potential tax results" and consequences.



This amendment is intended to make it clear that when postulating what might reasonably be expected to have occurred in the absence of a scheme, it is not enough to simply assume the non-existence of the scheme - the postulate must represent a reasonable alternative to the scheme, in the sense that it could reasonably take the place of the scheme. Such a postulate will necessarily require speculation about the state of affairs that would have existed if the scheme had not been entered into or carried out. This may include speculation about the way in which related transactions

would have been modified if they had had to accommodate the absence of the scheme. As a result, under this approach, a taxpayer will obtain a tax benefit in connection with a scheme if it can be demonstrated that a relevant tax effect would have flowed, as a matter of law, from the application of the taxation law to the alternative postulate.

Example: Mr and Mrs Heginbothom want to borrow money to acquire both a family home and a holiday house that they plan to rent to holidaymakers. They borrow the money under an arrangement in which the repayments are applied exclusively to the borrowing in relation to the family home. The result is that the deductible interest payments are increased for the holiday home borrowing and the non-deductible interest payments for the family home borrowing are minimised. Merely annihilating the scheme would not leave a sensible result because there would be no borrowing at all, so some reconstruction is necessary. It is therefore necessary to consider what might reasonably be expected to have happened if the scheme had not been entered into. A reasonable alternative in this case might be that the Heginbothoms took out two loans, one for each of the homes they wished to acquire, each of which was entered into on normal commercial terms.

This approach will typically apply to an income scheme (or a withholding tax scheme) that both produces and shelters economic gains and in relation to schemes that result in a taxpayer obtaining a tax advantage in the form of a deduction benefit, a capital loss benefit, a foreign tax offset benefit or a withholding tax benefit (current sections 177CB(1)(b) - (e)). Furthermore, if a postulate that the scheme merely would not have happened would be inconsistent with the non-tax results and consequences sought for the taxpayer by the participants in the scheme, then a reconstruction of the scheme may expose other ways in which the non-tax results and consequences of the scheme could reasonably have been achieved without the impugned tax advantages.

The matters to which particular regard must be had

Specifically, proposed new section 177CB(4)(a) provides that in determining whether a postulate is a reasonable alternative to the entering into or carrying out of the scheme, particular regard must be had to (a) the "substance of the scheme" and to (b) "any result or consequence for the taxpayer that would be achieved by the scheme" (tax results aside). As a result, a tax advantage cannot meaningfully be linked to a scheme by comparing the tax consequences of the scheme to the tax consequences that would have flowed if the parties had chosen to pursue some other objective. Instead, to provide a meaningful comparison, the tax consequences of the scheme should be compared with the tax consequences of an alternative that is reasonably capable of achieving for the taxpayer substantially the same non-tax results and consequences as those achieved by the scheme.

An examination of the "substance of a scheme" requires a consideration of its commercial and economic substance as distinct from its legal form or shape. Further, in order for a postulate to constitute a reasonable alternative to the entering into and carrying out of the scheme, the substance of the postulate should correspond to the substance of the scheme.



Example: Assume Paul & Co placed $1 million dollars on deposit for 12 months for a return of $50,000, payable in arrears. The income produced by the investment is exempt for taxation purposes. From Paul & Co's perspective, the substance of the transaction is an investment for a fixed term carrying a right to a non-contingent return. A reasonable alternative to this transaction would be an investment of the same amount, for the same period at a comparable risk and for a comparable return. An investment in ordinary shares would not represent an investment of comparable risk and comparable return.

An examination of the "results or consequences" for the taxpayer that would be achieved by the scheme (tax results aside) requires a consideration of any financial or other consequences for the taxpayer that would be accomplished or achieved as an end result of the scheme having been entered into and carried out. Such matters could include changes in the taxpayer's financial position that result from the scheme (including the impact of transaction costs, such as fees, stamp duties, payroll taxes) and also non-financial considerations (such as the effect that the scheme has on personal or family relationships) or the fact that the scheme for example satisfied certain regulatory requirements (such as directors' duties, workplace health or safety requirements).

Importantly, it would be expected that a postulate that is a reasonable alternative to the entering into and carrying out of a scheme would achieve for the taxpayer non-tax results and consequences that are comparable to those achieved by the scheme itself. In short, these amendments are intended to make it clear that the focus is on the results and consequences achieved by the scheme for the taxpayer, as distinct from the results and consequences achieved by the scheme for one or more of the other participants in the scheme.

Schemes within broader transactions

Under the amendments, where a scheme forms part of a broader commercial transaction, a postulate would be a reasonable alternative to the scheme if it performs the same role in relation to the broader transaction as the scheme itself performs, disregarding its tax effects. As a result, if the scheme itself has no non-tax results and consequences and the broader transaction remains effective without the scheme, there would be no warrant for an alternative postulate involving a reconstruction of the broader transaction.

Where a scheme is integral to a broader transaction and facilitates it in some way, then it would be reasonable for an alternative postulate to involve a reconstruction of the broader transaction, so long as the reconstruction produces the same non-tax results and consequences as were in fact achieved by the broader transaction. However, the extent to which the broader transaction should be reconstructed should be limited by the role the scheme plays in that transaction.

Example: Assume that in order for Kerry-Anne to secure a tax deduction for borrowing money to invest in an offshore company (Offshore Co) it is necessary for her to interpose a resident Australian company. She does this by using the borrowed funds to buy shares in an Australian shelf company (Oz Co). In turn, Oz Co buys ordinary shares in Offshore Co. Oz Co performs no other role. The FCT makes a Part IVA determination on the basis that the interposition of Oz Co is a scheme to which Part IVA applies. Objectively viewed, the interposition of Oz Co achieves two effects. One is securing a deduction for interest on the borrowing, and the other is the acquisition of shares in Offshore Co. A correct alternative postulate should be another way in which Kerry-Anne could reasonably be expected to have acquired ordinary shares in Offshore Co. An alternative postulate that involved Kerry-Anne lending the borrowed monies to Offshore Co would achieve a different effect. So too would be a postulate that involved Kerry-Anne investing the borrowed monies in a completely different company.



Disregarding tax costs

Finally, the proposed amendments make it clear that, in determining whether a postulate is a reasonable alternative to the entering into or carrying out of the scheme, regard should not be had to any tax costs that are generated for the taxpayer by the scheme itself or that would be generated for the taxpayer or any other person. In short, potential tax liabilities are not to be taken into account in assessing the likelihood or reasonableness of any alternative postulate. Further, the disregarding of the potential liability of a person to tax extends not just to the taxpayer and participants in the scheme but to any person who might be a potential participant in an alternative to a scheme. This amendment is intended to make it clear that alternative postulates should not be rejected as unreasonable postulates on the grounds that the tax costs involved in undertaking those postulates (including denial of the tax benefit impugned by Part IVA) would have caused the parties to either abandon or indefinitely defer the schemes and/or the wider transactions of which they were a part.

Date of effect

The amendments apply in relation to schemes that were entered into, or that were commenced to be carried out, on or after 16 November 2012, the date on which an exposure draft of this Bill was released for public consultation.

Industry reaction

The proposed Part IVA amendments seek to strike a sensible balance between preventing untoward activity and not restricting normal commercial activity for businesses, according to Institute of Chartered Accountants Australia Tax Counsel Paul Stacey. He said the amendments "appear to have refined the existing framework to enable businesses to assess if they are operating within the boundaries of tax planning, rather than tax avoidance". Mr Stacey cautioned that the effectiveness of the reform in balancing these competing priorities would depend on how the new legislation is administered.

Transfer pricing amendments

The Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 also contains significant tranche two amendments affecting Australia's transfer pricing laws. It has been referred to the House of Reps Standing Committee on Economics for report.

The amendments would apply to both tax treaty and non-tax treaty cases. A key feature of the proposed new rules is their alignment with international best practice as set out by the OECD. They will also operate on a self-assessment basis. The proposed new rules would also introduce a seven-year time limit within which the FCT may amend a taxpayer's assessment to give effect to a transfer pricing adjustment. Specific rules linking voluntary documentation with a reduction in administrative penalties are also included.

Australia's domestic transfer pricing rules are currently set out in Division 13 of the ITAA 1936 and in Subdivision 815-A of the ITAA 1997 (which was enacted by the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No 1) 2012). The proposed amendments in the Bill would repeal Division 13 and effectively move it as new Subdivision 815-B to 815-E in the ITAA 1997. The intention is that that a single set of rules applies to both tax treaty and non-tax treaty cases. The Bill proposes to insert Subdivisions 815-B, 815-C and 815-D into the ITAA 1997 and Subdivision 284-E into Schedule 1 to the Taxation Administration Act 1953. Current Subdivision 815-A would no longer have effect when Subdivisions 815-B and 815-C are enacted.

Earlier tranche 1 amendments were enacted via the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No 1) 2012 that passed without amendment and received Royal Assent on 8 September 2012.



Key features

Proposed Subdivisions 815-B and 815-C will generally be aligned with the associated enterprise and business profits articles in Australia's tax treaties (generally Articles 7 and 9). Subsection 4(2) of the International Tax Agreements Act 1953 will continue to apply in the event of an inconsistency between Australia's tax treaties and the domestic transfer pricing rules. While Subdivision 815-B and 815-C would apply where an entity gets a transfer pricing benefit in Australia, nothing in either Subdivision prevents Australia's tax treaties from applying in circumstances where a tax treaty results in a different adjustment relative to a taxpayer's position under the domestic law provisions.

Subdivision 815-B seeks to achieve its outcome in a way that facilitates trade and investment through alignment with international standards. The international standard that is widely accepted by Australia's trade and investment partners is the arm's length principle, the application of which is set out in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as approved by the Council of the OECD and last amended on 22 July 2010. The Subdivision would implement this principle by requiring entities that would otherwise get a tax advantage in Australia from non-arm's length conditions, to calculate their Australian tax position as though the arm's length conditions had instead operated: proposed section 815-105(2).

The proposed new rules in Subdivision 815-B would require certain amounts (taxable income, a loss of a particular sort, tax offsets and withholding tax payable) to be worked out by applying the internationally accepted arm's length principle contained in the OECD Model Tax Convention on Income and on Capital. Consistent with the approaches under Division 13, the new rules in Subdivision 815-B would apply the arm's length principle to relevant dealings between both associated and non-associated entities. New Subdivision 815-B would also allow for consequential adjustments.

o Subdivision 815-B would apply to conditions that satisfy the cross-border test, irrespective of whether entities are associated or not and/or operating in treaty or non-treaty countries. The transfer pricing provisions of a tax treaty may apply in the event of an inconsistency with Subdivision 815-B.

o Subdivision 815-B would apply where an entity gets a transfer pricing benefit in an income year from conditions that operate between the entity and another entity in connection with their commercial or financial relations. In such instances, the actual conditions will not be taken to operate and instead, the arm's length conditions will be taken to operate for the purposes of working out the amount to which the transfer pricing benefit relates: proposed section 815-115(1). These amounts could be the amount of an entity's taxable income, a loss of a particular sort or tax offsets for an income year, as well as withholding tax payable in relation to interest or royalties.

o The identification of arm's length conditions under proposed Subdivision 815-B must be done in a way that best achieve consistency with: (i) the OECD Guidelines; and (ii) any other documents, or part(s) of a document, prescribed by the regulations for this purpose. Insofar as it is possible, the OECD Guidance material is to be used in all cases to determine the arm's length conditions. That is, the Guidance material is relevant in applying the Subdivision to dealings between associated entities and equally to dealings between non-associated entities, and in both treaty and non-treaty cases.

o Subdivision 815-B would take precedence over other provisions of the ITAA 1936 and the ITAA 1997 unless a limitation to its operation is explicitly provided within the Subdivision. This means that to the extent an entity is liable to a different tax result under Subdivision 815-B relative to other provisions of the tax law because of the operation of arm's length conditions instead of actual conditions, Subdivision 815-B must be applied in working out the entity's Australian tax liability.



o In contrast to the current section 136AB(2) of the ITAA 1936, proposed Subdivision 815-B does not disregard the effect of sections 70-20, 420-20, 420-30 or 355-400 (which relate to market value amounts). The EM says a rule of this kind is not required under Subdivision 815-B because in the event that a market value substitution has already been applied under one of those provisions (or a similar provision), Subdivision 815-B would still apply to the extent that an adjustment under Subdivision 815-B is greater than the market value amount.

o If a taxpayer receives a transfer pricing benefit in relation to withholding tax, the actual conditions would be substituted with the arm's length conditions for the purpose of working out the amount of withholding tax payable in respect of interest or royalties. The effect of substituting the actual amount with the arm's length amount would be that the actual amount would be treated as never having been paid or received, and that for all purposes of the Act, the arm's length amount was received in accordance with the arm's length conditions. In such circumstances, the time the liability to withholding tax under the arm's length conditions arises would be determined by those conditions (as opposed to when an adjustment to the actual conditions is made).

o Insofar as it is possible, the OECD Guidance material is to be used in all cases to determine the arm's length conditions. That is, the Guidance material is relevant in applying Subdivision 815-B to dealings between associated entities and equally to dealings between non-associated entities, and in both treaty and non-treaty cases.

o Some aspects of the OECD Guidelines assume that transfer pricing adjustments will be made by the tax administrations rather than the taxpayer. Because proposed Subdivision 815-B would operate on the basis of self-assessment, where appropriate, the references in the OECD Guidelines to tax administrations making adjustments, taking actions, or being prevented from taking actions should be read as references to whoever is applying the rules (which may be the taxpayer or the FCT).

o Regulation making powers are included in the proposed provisions to allow for modifications to the list of guidance material. The regulation making powers would include the ability to prescribe additional documents or parts of a document. The OECD Guidelines may also be removed from the list of guidance material by regulation. This would allow material to be removed in the event that it is no longer relevant to determining the arm's length conditions of an entity.

The term "transfer pricing benefit" describes the shortfall amount of Australian tax that an entity has as the result of its non-arm's length dealings with other entities. In the context of a self-assessed position under these proposed rules, this tax advantage would be a notional one as it would only be realised in the absence of the entity applying Subdivision 815-B. An entity would get a transfer pricing benefit in an income year from conditions that operate between the entity and another entity in connection with their commercial or financial relations if: (i) the actual conditions differ from the arm's length conditions; (ii) the actual conditions result in a tax advantage in Australia, relative to the arm's length conditions; and (iii) the actual conditions satisfy the cross-border test: proposed section 815-120(1).

In order for an entity to get a transfer pricing benefit in an income year, the actual conditions that operate between that entity and another entity must satisfy the cross-border test: proposed section 815-120(1)(b). The cross-border test will be consistent with the to be repealed section 136AC of the ITAA 1936 and is designed to ensure that Subdivision 815-B does not apply to purely domestic arrangements. The test would apply to the conditions that operate between two entities in connection with their commercial or financial relations. Although the test would examine the conditions from the perspective of each entity individually, it would be satisfied where either entity meets its requirements. The cross-border test would be satisfied in relation to conditions that operate between entities where the "overseas



requirement" for those conditions would be satisfied by either or both of the entities. Different overseas requirements apply in relation to different types of entities.

While Subdivision 815-B would only operate where the entity would otherwise have received a tax advantage in Australia, it does not rely on or assume any tax avoidance purpose or motive.

In determining whether an entity would get a transfer pricing benefit, the conditions which operate between the entity and another entity in connection with their commercial or financial relations must differ from the arm's length conditions.

Proposed Subdivision 815-B would require an assessment of what an entity's Australian tax position would have been had the arm's length conditions operated. Assessing what the entity's tax position would have been will require a comparison between the arm's length conditions and the actual conditions. In order to have a transfer pricing benefit, it must be demonstrated that the entity would have received a tax advantage in Australia because of the operation of non-arm's length conditions. An entity would have a tax advantage of this kind where, under arm's length conditions, relative to actual conditions:

o The amount of the entity's taxable income for the income year would have been greater;

o The amount of the entity's loss of a particular sort for the income year would have been less;

o The amount of the entity's tax offsets for the income year would have been less; or

o The amount of the entity's withholding tax payable in respect of interest or royalties would have been greater.

Proposed Subdivisions 815-B and 815-C would be self-executing in their operation ie they would apply on a self-assessment basis instead of the current situation where the FCT must make a determination under Division 13 or Subdivision 815-A.

Proposed Subdivision 815-C concerns the attribution of profits between a Permanent Establishment (PE) and the entity of which it is a part. Consistent with Australia's current treaty practice, the relevant business activity approach (also known as the single entity approach) must be followed in applying Subdivision 815-C. The Subdivision would apply to a foreign PE of an Australian resident and to an Australian PE of a foreign resident entity, irrespective of whether a tax treaty applies.

o Broadly, the allocation of profits between a PE and the entity of which it is a part will be determined by analysing the functions performed, the assets used or contributed, and the risks assumed or managed by the various parts of the business. From this analysis, the most appropriate and reliable transfer pricing method or combination of methods should be chosen, having regard to the circumstances of the commercial or financial relations - bearing in mind the limitation in the attribution process to the actual expenditure and income of the entity.

o Within this framework, applying the most appropriate and reliable transfer pricing method or methods determines the arm's length profits that are attributable to the PE of an entity.

Proposed new Subdivision 815-D sets out special rules about the way Subdivisions 815-B and 815-C apply to trusts and partnerships. The rules seek to ensure that the transfer pricing rules apply in relation to the net income of a trust or partnership in the same way they apply to the taxable income of a company. The Subdivisions also apply to the partnership loss of a partnership in the same way they apply to the tax loss of a company.

Proposed new Subdivision 284-E of Schedule 1 to the TAA sets out the type of documentation that an entity may prepare and keep in self-assessing its tax position under Subdivision 815-B or 815-C. In order to satisfy the requirements of Subdivision 284-E, transfer pricing documentation must be prepared before the lodgment of the relevant tax return. While the



Subdivision does not mandate the preparation or keeping of documentation, failing to do so prevents an entity from establishing a reasonably arguable position. However, nothing in these amendments prevents the FCT from exercising a general discretion to remit administrative penalties where appropriate (as currently available under the law).

Administrative penalties may apply if an assessment is amended by the FCT for an income year to give effect to Subdivision 815-B or 815-C and the provisions of proposed section 284-145 of Schedule 1 to the TAA have been met.

An amendment to give effect to Subdivision 815-B or Subdivision 815-C would be able to be made within seven years (it was eight years in the previously released draft legislation) after the day on which the FCT gives notice of the assessment to the entity. Currently, the FCT has an unlimited period in which to make or amend an assessment. Note that some tax treaties impose specific time limits in relation to transfer pricing adjustments under the tax treaty.

Date of effect

The rules would apply to income years commencing on or after the earlier of: (i) 1 July 2013; and (ii) the day the Bill receives Royal Assent. In respect of withholding tax, the rules would apply in relation to income derived, or taken to be derived, in income years commencing on or after the earlier of the above two dates.

14/02/2013



• It contains amendments including: – Company loss carry-back

– Acquisition and disposal of certain assets between related parties for SMSFs

– FBT and airline transport fringe benefits

– Interest on unclaimed money.

Tax Bill (No 1) 2013 introduced

Legislation

Tax Bill (No 1) 2013 introduced


The Tax and Superannuation Laws Amendment (2013 Measures No 1) Bill 2013 has been introduced in the House of Reps. It contains the following amendments:

Company loss carry-back: the Bill proposes to amend the income tax law to allow corporate tax entities that have paid tax in the past, but are now in a tax loss position, to carry their loss back to those past years to obtain a refund of some of the tax they previously paid. This will be done through the mechanism of a refundable tax offset.



SMSFs - acquisitions and disposals of certain assets between related parties: the Bill proposes to amend the Superannuation Industry (Supervision) Act 1993 to prescribe requirements for acquisitions and disposals of certain assets between Self-Managed Super Funds (SMSFs) and related parties.

FBT and airline transport fringe benefits: amends the Fringe Benefits Tax Assessment Act 1986 to align the special rules for calculating airline transport fringe benefits with the general provisions dealing with in-house property fringe benefits and in-house residual fringe benefits and will be calculated as 75% of the stand-by airline travel value of the benefit, less the employee contribution. The method for determining the taxable value of airline transport fringe benefits would also be updated to simplify the practical operation of the law and to better reflect the economic value of the benefit.

Interest on unclaimed money: amends the income tax and superannuation law to ensure that income tax is generally not payable on the interest paid by the Commonwealth on unclaimed money from 1 July 2013.

Sustainable Rural Water Use and Infrastructure Program: The Bill proposes to amend the ITAA 1997 to allow participants in the Sustainable Rural Water Use and Infrastructure Program to choose to make payments they derive under the program free of income tax (including CGT), with expenditure relating to the infrastructure improvements required under the program then being non-deductible.

Miscellaneous amendments: include for example: amendments relating to resource rent taxation (including correcting minor technical errors in the mining tax and the PRRT); amending the definition of "tax preferred end user" in the ITAA 1997; simplifying the process for future changes to the phase-out thresholds in the Income Tax Rates Act 1986; correcting typographical errors; updating references.

The Bill has been referred to the Parliamentary Joint Committee on Corporations and Financial Services for report. Company loss carry-back rules

The Bill proposes to allow corporate tax entities to carry back all or part of a tax loss from the current income year or the preceding income year against an unutilised income tax liability for either of the years before the current year (a one year carry-back period applies for 2012-13). If the loss carry-back conditions are satisfied, a corporate tax entity will get a refundable tax offset for the loss or losses it chooses to carry back. The operative rules for the loss carry-back regime will primarily be contained in proposed new Division 160 of the ITAA 1997.

A corporate tax entity (which includes corporate limited partnerships, corporate unit trusts and public trading trusts) can choose to utilise a tax loss to obtain a loss carry-back tax offset if:

It has an unutilised tax loss for the current income year or for the preceding income year (called "the middle year");

It has an unutilised income tax liability for the middle year or for the income year before that (called "the earliest year") – the income tax liability is the amount of income tax assessed to the entity for the relevant year and is not the amount of unpaid tax for the year; and

For the current income year and each of the previous five income years, it has lodged an income tax return, or it was not required to lodge a return (eg because the entity did not exist) or it has been assessed for income tax purposes by the FCT (e.g. where the entity did not lodge a return even though required to do so).

Only tax losses can be carried back. An entity will not be able to carry-back capital losses, nor losses that have been transferred under:

Division 170 of the ITAA 1997 — transfers between companies in the same foreign banking group; or



Subdivision 707-A of the ITAA 1997 — transfers to the head company of a consolidated group by an entity joining the group.

In addition, the part of a tax loss that is deemed to exist when a corporate tax entity has excess franking offsets for an income year (see section 36-55 of the ITAA 1997) will not be eligible for carry-back because it does not represent an economic loss. As well as choosing whether or not to claim a loss carry-back tax offset, an entity will also be able to choose which tax loss to carry back if it has a loss in both the current year and the middle year. It could choose to carry back losses from both years. The entity will also be able to choose which years to carry a tax loss back to if it has a tax liability for both the middle year and the earliest year. It could choose to carry its loss back to both of those years.

Loss carry-back period

For the 2013-14 and later income years, a loss carry-back tax offset can be claimed against tax liabilities of either of the two income years preceding the current income year. For the 2012-13 income year, a loss carry-back tax offset can only be claimed against the tax liability for 2011-12.

Amount of offset

An entity will be able to choose how much of a loss to carry back. However, the tax offset for any given year will be the lowest of:

The tax value of the amount of the loss the entity chooses to carry back – this is worked out by multiplying by the corporate tax rate (currently 30%) the amount remaining after the tax loss that the entity chooses to carry back to the middle year and/or the earliest year is reduced by the net exempt income of the year the loss is carried back to;

The tax payable on $1m taxable income ($300,000 at the current corporate tax rate); The entity's franking account balance at the end of the current year - this limit does not apply

to a foreign resident entity with a permanent establishment in Australia (but it does apply to NZ franking companies); and

The tax liability for the year(s) the entity carries the loss back to.

If amounts were carried back to both the earliest year and the middle year, the loss carry back tax offset components for those two years will be added together to produce the amount of the tax offset.

Net exempt income

If an entity has net exempt income in the current year and an unutilised loss from an earlier year, it must apply that unutilised loss against the current year's net exempt income (see section 36-17(7) of the ITAA 1997). This reduces the unutilised amount of the loss. It also means that a tax loss from the middle year that might otherwise be available for loss carry-back might first have to be reduced by any net exempt income in the current year.

If an entity chooses to carry a loss back to a year in which it had net exempt income, the amount carried back will be reduced by the net exempt income of that earlier year before being converted into an offset.

If there is net exempt income in the middle year or the earliest year but not both, an entity will be able to choose to carry a current year loss back to only the year without net exempt income. If it does so, the loss will not be reduced by the other year's net exempt income.



Choosing the offset

The choice to claim a loss carry-back tax offset will be made by notifying the FCT in the approved form – this will usually be the entity's income tax return. The choice will have to be made by the time that the entity lodges its tax return for the current income year, or within such further time as the FCT allows.

Relationship between loss carry-forward and loss carry-back rules

Corporate tax entities must deduct losses from prior years in the order in which they arose (see section 36-17(7)). No similar ordering rules apply to using losses for the loss carry-back tax offset. However, prior year tax losses will be deducted before the loss carry-back refundable tax offset can be worked out because the deduction occurs as part of working out an entity's taxable income for the current year (see section 4-10 of the ITAA 1997). The loss carry-back tax offset will then be applied after the corporate tax entity has calculated its basic income tax liability on that taxable income for the current year (see section 4-10(3)).

Utilising tax attributes

Proposed new section 960-20 will expressly provide that a tax loss, a net capital loss and net exempt income can only be used once in working out an amount for an entity under the income tax law (including an amount of the entity's loss carry-back tax offset).

Consolidated groups

Loss carry-back will be available to the head company of a consolidated group or Multiple Entry Consolidated group (MEC group), just like any other corporate tax entity. However, consolidated groups and MEC groups will not be able to access loss carry-back in relation to losses transferred to the group by a joining entity.

Similarly, when an entity with prior year tax liabilities joins a consolidated group or MEC group, the group will not be able to carry back any tax loss against tax liabilities previously assessed to the joining entity. An entity can only carry its losses back against its own tax liabilities.

Loss carry-back will not available for losses transferred to an entity under Division 170 of the ITAA 1997 (transfer of losses between entities in a corporate group where an Australian branch of a foreign bank is involved).

Integrity rule

A specific integrity rule will deny a corporate tax entity a loss carry-back tax offset it would otherwise be entitled to where a scheme for the disposition of membership interests in the entity results in a change in the control of the entity and, considering all relevant circumstances, one or more parties entered into or carried out the scheme (or part of the scheme) in order for the entity to obtain the loss carry-back tax offset (the purpose need not be the dominant one, but there must be more than an incidental purpose). A disposition of a membership interest will effectively encompass any scheme whereby control or ownership of a member ship interest can be changed.

The relevant circumstances to be considered include:

The extent to which the corporate tax entity continues the same activities undertaken after the scheme has been implemented as prior to implementation;

The extent to which the corporate tax entity continues to use the same assets; and The various matters listed in section 177D(b)(i) to (vii) of the ITAA 1936 (i.e. for Part IVA

purposes).



The scheme must have been entered into or carried out between the start of the year the entity seeks to carry the loss back to and the end of the year it claims the loss carry-back tax offset. For the purposes of the integrity rule:

A non-share equity interest in a corporate tax entity will be treated in the same way as a membership interest in a corporate tax entity; and

An equity holder in a corporate tax entity will be treated in the same manner as a member in a corporate tax entity.

The integrity rule will not apply if:

The corporate tax entity does not have an income tax liability for a year that a loss can be carried back to; or

The corporate tax entity does not have, or expect to have, a franking credit balance.

Losses that cannot be carried back as a result of the integrity rule can still be carried forward and claimed as a deduction against the income of future years, provided the requirements for doing so are met.

The general anti-avoidance provisions in Part IVA of the ITAA 1936 will also be amended so that the FCT may rely on Part IVA if the specific integrity rule does not apply (e.g. if there has been a scheme that does not involve a disposition of membership interests).

Other amendments

The Bill will make various amendments to deal with the application of the loss carry-back rules to pooled development funds, corporate limited partnerships that stop being venture capital entities, foreign hybrids and life insurance companies.

In addition:

For franking purposes, it will be made clear that a refund arising from a loss carry-back tax offset is a "refund of income tax" and will therefore result in a debit to its franking account;

A reduction in tax in the previous year as a result of a loss carry-back tax offset will be not reflected in calculating the rate the FCT provides for the next year's PAYG instalments;

The meaning of "assessment" will be amended to include refunds arising from refundable tax offsets (various consequential amendments will be made as a result);

A corporate entity's tax return will be required to include the amount of the entity's refund arising from its refundable tax offsets; and

A corporate tax entity that claims a loss carry-back tax offset will be able to object (under Part IVC of the TAA) to the amount of any refund arising from the offset.

Date of effect

These measures will apply to assessments for the 2012-13 and later income years.

SMSF related party acquisitions and disposals

The Bill proposes to amend the SIS Act to prescribe requirements for acquisitions and disposals of certain assets between Self-Managed Superannuation Funds (SMSFs) and related parties from 1 July 2013.



The amendments are designed to implement the government's Stronger Super reforms in response to the Cooper Review recommendation that acquisitions and disposals of assets between related parties and SMSFs should be conducted through an underlying market where one exists. If no market exists, the Cooper Review recommended that the transaction should be supported by a valuation from a suitably qualified independent valuer.

SMSF acquisitions from related parties

The Bill will amend the existing prohibition on acquiring assets from related parties so that section 66 of the SIS Act only applies to regulated superannuation funds other than SMSFs.

Proposed new section 66A will prohibit a trustee of an SMSF from acquiring an asset from a related party, subject to certain exceptions. The key exceptions will apply if:

The asset is a "listed security" acquired in a way prescribed by regulations (yet to be released);

The asset is "business real property" of the related party, and the acquisition of the asset is at market value, as determined by a qualified independent valuer;

The asset constitutes is an investment in certain in-house assets covered by section 66(2A)(a)), acquired at market value as determined by a qualified independent valuer and would not result in the level of in-house assets of the fund exceeding 5%; or

The asset is acquired solely as a result of a change to the trustees of an SMSF.

Apart from the proposed exception relating to listed securities, the other exceptions in section 66A are not intended to operate in a different manner to SMSFs than the existing exceptions in section 66, other than for the requirement of "market value" to be determined by a qualified independent valuer.

Listed securities

A "listed security" is defined in section 66(5) to mean a security (eg a share, unit in a unit trust, bond, debenture, right or option) listed for quotation on an approved stock exchange (including many foreign exchanges (see Schedule 5 of the ITA Regulations 1997).

Currently, SMSF trustees can acquire listed securities from a related party provided they are acquired at market value. The method by which these transactions have traditionally been effected has been dependent on the rules of the market the securities are traded on. The Cooper Review found that off-market transactions outside a formal market lack transparency and could be used to manipulate transaction dates and asset values to illegitimately benefit the SMSF or a related party.

Business real property

The Bill proposes to repeal the current definition of "business real property" in section 66(5) and insert a new definition in section 21 (reworded for clarity) to apply across the SIS Act from 1 July 2013. To acquire business real property from a related party, an SMSF trustee will be required to obtain a market valuation from a "qualified independent valuer": proposed section 66A(3)(b).

Qualified independent valuer

The Bill does not propose to define a "qualified independent valuer". However, the Explanatory Memorandum suggests that a valuer may be qualified either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community. This may be demonstrated by being a current member of a relevant professional body or trade association. The valuer must also be independent. According to the Explanatory Memorandum, the valuer cannot be a member of the fund or a related party of the fund. They should be impartial, unbiased and not be influenced or appear to be influenced by others. See also the ATO’s Valuation Guidelines for self-managed superannuation funds.



Disposals of certain assets

Proposed new section 66B will prohibit a trustee of an SMSF from disposing of an asset to a related party, subject to certain exceptions. The key exceptions will apply if:

The asset is a "listed security" disposed of in a way prescribed by regulations (yet to be released);

The asset is not a listed security and is disposed of for market value, as determined by a qualified independent valuer;

The asset is a collectable and personal use asset covered by regulations in force for the purposes of section 62A immediately before 1 July 2013; or

The asset is disposed of solely as a result of a change to the trustees of an SMSF.

Prohibition on avoidance schemes

Proposed new section 66C will prohibit trustees from entering into a "scheme" in relation to acquisitions and disposals of assets by SMSFs to circumvent the application of proposed sections 66A and 66B.

Penalties

A trustee who contravenes proposed sections 66A and 66B will be liable to an ATO administrative penalty of $10,200 (i.e. 60 penalty units) for each contravention. Proposed sections 66A, 66B and 66C will also be civil penalty provisions carrying civil and criminal consequences. As such, the ATO may seek a civil penalty order of up to $340,000 (or up to five years imprisonment for certain offences involving fraud or dishonesty).

Transitional provision - in-house assets

The Bill also includes a transitional provision to make it clear that the existing meaning of "business real property" applies for in-house asset purposes in section 71(1)(g), despite the deletion of the words "(within the meaning of subsection 66(5)" by the Superannuation Industry (Supervision) Amendment Act 2010. The transitional provision will re-instate those words in section 71(1)(g).

Date of effect

The amendments will commence on 1 July 2013. Note that the administrative penalty provisions are subject to the commencement of the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012.

FBT and airline transport fringe benefits

The Bill seeks to amend FBTAA to align the rules for calculating airline transport fringe benefits with the general provisions dealing with in-house property fringe benefits and in-house residual fringe benefits. It also seeks to update and simplify the method for determining taxable value of airline transport fringe benefits.

An airline transport fringe benefit arises under Division 8 of Part III of the FBTAA when an employee of an airline operator or a travel agent is provided with free or discounted air travel on a stand-by basis. Since the airline industry has evolved and stand-by travel is no longer offered by airlines commercially to members of the public, the Bill seeks to simplify the practical operation of the law.

The Bill proposes that:

The taxable value of airline transport fringe benefits will be aligned with the in-house benefit valuation method, and will be calculated as 75% of the stand-by airline travel value of the benefit, less any employee contributions;



Where the transport is on a domestic route, the stand-by airline travel value will be 50% of the carrier's lowest standard single economy airfare for that route as publicly advertised during the year of tax;

Where the transport is on an international route, the stand-by airline travel value will be 50% of the lowest of any carrier's standard single economy airfare for that route as publicly advertised during the year of tax.

The amendments seeks to ensure that airline transport fringe benefits that are accessed by way of salary packaging arrangements will not receive the concessional in-house valuation and instead will be valued using the notional value. To facilitate the alignment of the airline transport fringe benefits with in-house fringe benefits, the Bill will introduce a rewritten definition of "airline transport fringe benefit" which will replace the previous definition in Division 8. The rewritten definition will include an in-house property fringe benefit or an in-house residual fringe benefit to the extent that the benefit includes the provision of transport in a passenger aircraft operated by the carrier and is subject to the stand-by restrictions that customarily apply in the airline industry.

The proposal will also not alter the reduction of aggregate taxable value of fringe benefits under section 62 of the FBTAA that applies to airline transport fringe benefits as an in-house fringe benefit.

Date of effect

The proposal applies to airline transport fringe benefits provided after 7.30pm by legal time in the Australian Capital Territory on 8 May 2012.

Interest on unclaimed money

The Bill proposes to amend the income tax and superannuation law to ensure tax is not payable on interest paid by the Commonwealth in relation to unclaimed money reclaimed from 1 July 2013.

In the 2012-13 MYEFO, the government announced reforms to the treatment of unclaimed money (i.e. money held by an institution on behalf of an owner that has lost contact). The changes to bring forward the time at which money is recognised under the law as lost or unclaimed contained in Treasury Legislation Amendment (Unclaimed Money and Other Measures) Act 2012.

Under the current law, the interest paid by the Commonwealth on unclaimed money would be subject to income tax. Therefore, this amendment has been introduced to ensure that the real value of unclaimed money does not diminish over time. The proposal does not apply to unclaimed money of former temporary residents.

The proposed amendments seek to ensure that interest paid by the Commonwealth in relation to unclaimed bank accounts, unclaimed corporate property, unclaimed First Home Saver Accounts, and unclaimed life insurance amounts are exempt from income tax.

In relation to unclaimed superannuation, the Bill proposes that the interest paid by the government on payments of unclaimed super from 1 July 2013, with the exception of former temporary residents, will be a tax-free component of a super benefit. As a consequence of this proposal, the interest payments will be classified as non-assessable non-exempt income.

For interest paid on the return of unclaimed super to former temporary residents after 1 July 2013, the Bill proposes that the payment will be subject to a Departing Australia Superannuation Payment (DASP) tax of 45%.

Date of effect

The amendments in relation to superannuation and DASP will commence from Royal Assent. All the other amendments in relation to general income tax will commence from 1 July 2013.



Sustainable rural water use and infrastructure program

The Bill proposes to amend ITAA 1997 to allow participants in the Sustainable Rural Water Use and Infrastructure Program (SRWUIP) to choose to make payments they derive under the program free of income tax (including CGT), with the expenditure related to the infrastructure improvements required under the program then being non-deductible.

Under the SRWUIP, in return for Government payments, participants agree to undertake improvements to their water infrastructure to reduce their water consumption and transfer a part of the water saved to the Commonwealth. Currently, the payment to participants is treated as assessable income and partly as capital proceeds for disposing of water rights. The expenditure on improvements is also deductible over time.

The proposal would allow taxpayers who participate in the program to either choose the existing treatment of their SRWUIP payments and related expenditure, or:

Make the subsidy part of their SRWUIP payment Non-Assessable Non-Exempt (NANE) income – this includes both payments the participant derives from the Commonwealth (i.e. direct payments), and the payments it derives that are reasonably attributable to the program (i.e. indirect payments), so long as the program is on the Commonwealth's published list of SRWUIP programs for the day the particular payment is made.

Disregard any capital gains and losses arising from transferring of the water rights under the program – this ensures that there are no tax consequences for the part of a commonwealth payment that subsidises water infrastructure improvements, and the part that relates to the transfer of water rights.

Forgo their deductions in relation to expenditure under the SRWUIP program – deduction of the expenditure will only be affected to the extent that it is matched by the SRWUIP payment. Expenditures in excess of the payment can still be deducted.

Exclude the expenditure required under the program from the cost of any assets they acquire – the expenditure will also be excluded in the cost of asset for capital allowance/depreciation purposes.

Under the proposed amendments, participating taxpayers can only make a choice by the time they have to lodge its income tax return for the year that they:

Derive the first SRWUIP payment under a particular SRWUIP program; or Incur the first expense that satisfies an obligation under an arrangement entered into under the

SRWUIP program.

The proposed amendments indicate that where an entity is assessed before it lodges its income tax return for that year, it will have to make the choice before the assessment is made. In addition, it states that the FCT will have the discretion to allow for more time to make the choice, however, the discretion will only be exercised where the taxpayer has a reasonable explanation for not making the choice on time. Further, the proposed amendments indicate that the choice does not have to be sent to the FCT, the choice will be evidenced by how the taxpayer's return is prepared. However, taxpayers will still be required to retain documentation to substantiate their choice where necessary for a period of five years.

Date of effect

Applies to payments made by the Commonwealth under a SRWUIP program on or after 1 April 2010.



Miscellaneous amendments: medical expenses; phase-out thresholds; MRRT; PRRT

The No 1 Bill makes a number of important miscellaneous amendments including:

Medical expenses rebate – to clarify that payments relating to contact lenses are treated the same way as payments relating to spectacles for the purposes of the medical expenses rebate.

Definition of "tax preferred end user" in the ITAA 1997 – will bring Australian residents within the definition of "tax preferred end user" to the extent that they carry on a business at, or through, a permanent establishment in a foreign jurisdiction.

Simplifying the process for future changes to the phase-out thresholds in the Income Tax Rates Act 1986 – to make amendments to the Income Tax Rates Act 1986 and Tax Laws Amendment (Income Tax Rates) Act 2012 to replace the fixed monetary thresholds with a formula that is used to produce new monetary amounts that are used in the thresholds.

Public ancillary funds – amendment will allow for more than one trustee to be prescribed as exempt during the transitional period.

Allowing for the amendment of assessments – will allow the Commissioner to amend assessments of those taxpayers who are entitled to apply the foreign income tax offset against the Medicare levy and Medicare levy surcharge back to 1 July 2008.

In addition to the above miscellaneous amendments, the No 1 Bill also makes amendments to the MRRT and PRRT laws as follows.

MRRT amendments

A number of miscellaneous amendments are proposed to the Minerals Resource Rent Tax Act 2012 (MRRT Act) to correct minor technical errors in the drafting including:

Starting base returns and assessments – amendments will provide the Commissioner with the same power to acquire a further starting base return as he has in relation to annual MRRT returns.

MRRT instalments – amendments alter the Guide to Division 115 of the TAA to include a reference to pre-mining revenue.

False or misleading statements about MRRT – amendments will add a reference to the MRRT in the TAA, and also extend the scope of the TAA in relation to false or misleading statements to cover the PRRT.

Interest on overpayments of MRRT – amendments will make clear that amending an assessment to reduce a liability for assessed MRRT is a decision to which the Taxation (Interest on Overpayments and Early Payments) Act 1983 applies. It will also extend the current application to "BAS provisions" to various Acts including the MRRT Act.

Substituted accounting periods – proposed amendments will be made to sections 190-1, 190-5, 190-10 and 190-15 to extend the use of a substituted accounting period to entities such as explorers.

Transfers and splits – amendment is made to provide that where a mining project interest is taken to have been transferred because of the start of a mining venture, the amount of the pre-mining loss cap for the original interest will transfer to the new miner and the new interest. A note will also be added to indicate that when a mining project interest originates from a pre-mining project interest, the origination is taken to be a transfer of the interest.

Additional areas under changed or renewed exploration rights – amendments will remove the rule that prevents already added areas being taken into account in deciding whether another additional area is significant if they have already had that effect for an earlier additional area.



Combining mining project interests – amendment will provide that the starting base loss of the combined interest for the relevant MRRT year or a later MRRT year will be reduced by the declines in value for the year of any starting base asset that does not comply with section 115-35.

Accounting profit for the simplified MRRT method – amendments will adjust the accounting profit of a miner who acquires/transfers a mining project interest during a year (and still holds it/does not hold it at the end of the year) to include/remove the profits it would have included for the part of the year it held the interest.

Resource marketing operations - extending the definition of "resource marketing operations" to include operations that involve marketing, selling, shipping, or delivering things produced using the taxable resources.

Recoupments of mining expenditure that has been adjusted - ensuring that the amount of mining expenditure considered under section 30-40(2) of the MRRT Act is an amount that takes into account any adjustments that have been made under Division 160. The amendments will also ensure that the amount of pre-mining expenditure considered under paragraph 40-70(2)(b) and section 30-40(2) is an amount that takes into account any adjustments that have been made under Division 160.

Treatment of revenue from supplies deemed not to be initial supplies - ensuring that an amount is not included in a miner's mining revenue if the reason the amount does not relate to a particular mining revenue event is that it is received for a supply that paragraph 30-20(2)(a) treats as not being an initial supply.

Amounts included in expenditure due to changed use of starting base assets - amendments will be made to the notes in sections 35-5(1) and 70-35(1) to broadly include references to amounts of mining expenditure arising as a result of the changed use of starting base assets under section 165-55.

The low-profit offset formula - amendments will be made to the low-profit offset formula by moving the 3/2 factor so that it only modifies the phase-in part of the formula, and not the reduction for the miner's allowances.

Starting base - amendments will be made to:

o Limit the meaning of starting base asset to assets held immediately before 1 July 2012;

o Ensure that this change does not inappropriately exclude those rights or interests in a mining project interest that starts to exist on or after 1 July 2012 but originates from a pre-mining project interest that existed before that time;

o Ensure that interim expenditure that is incurred in relation to a pre-mining project interest can be attributed to the mining project interest that originates from it;

o Section 165-15 to recognise the range of situations where the miner has given up their opportunity or is prevented from realising their starting base losses;

o Section 90-65 to ensure that the starting base recoupment rules recognise that some of the starting base may not have been realised by the miner; and

o Definition of "uplift factor" in section 80-45(1) to replace "MRRT year" with "relevant financial year".

Pre-mining profits – amendments will be made to ensure that the notional mining project interest is taken to originate from the pre-mining project interest, so that any pre-mining losses of the interest can be used to offset against its profit.



Transferred pre-mining losses and combined mining project interests – amendments will be made to section 115-55 to limit the transfer of a pre-mining loss to or from a combined project interest to the extent that such a loss would have been limited in relation to the constituent interests, as if those constituent interests had not combined.

Various amendments to clarify ambiguities and correcting references.

PRRT amendments

A number of miscellaneous amendments are also proposed to the Petroleum Resource Rent Tax Act 1989 (PRRT Act) to correct minor technical errors in the drafting.

Date of effect

The MRRT amendments will generally commence from 1 July 2012. The PRRT and other amendments will commence on Royal Assent.

14/02/2013

Superannuation Legislation Amendment (Reform of Self Managed Superannuation Funds Supervisory levy Arrangements) Bill 2013


• It would increase the maximum levy payable by a trustee of an SMSF for a year of income from $200 to $300

• Date of effect: Proposed to apply from 1 July 2013.

Increase in SMSF supervisory levy: Bill introduced

Legislation

Increase in SMSF supervisory levy: Bill introduced


The Superannuation Legislation Amendment (Reform of Self Managed Superannuation Funds Supervisory Levy Arrangements) Bill 2013 has been introduced in the House of Reps. It amends the Superannuation (Self Managed Superannuation Funds) Supervisory Levy Imposition Act 1991 and the Superannuation (Self Managed Superannuation Funds) Taxation Act 1987 to reform the Self-Managed Superannuation Fund (SMSF) supervisory levy arrangements. The changes are designed to ensure that the levy is collected from SMSFs in a more timely way, and the ATO costs of regulating the sector are fully recovered.

The Bill will increase from $200 to $300 the maximum amount of SMSF supervisory levy that a trustee of an SMSF may be charged from the 2013-14 income year onwards. However, the actual



levy amount for a specific income year will continue to be prescribed in the relevant regulations. [Note that the government has previously announced that it will increase the SMSF supervisory level to $259pa from 2013-14 (up from $191 in 2012-13)].

The Bill also provides for the regulations to specify when the SMSF levy is due and payable so that the amount may be levied and collected in the same income year. Currently, the SMSF supervisory levy is payable on lodgment of the SMSF's annual return. Transitional provisions also provide flexibility by allowing regulations to stagger the payment of the SMSF levy for 2013-14. The regulations may provide that an amount of the levy for the 2013-14 year of income is due and payable on a different specified day to the rest of the levy for the year in respect of the entity.

If there is more than one trustee of an SMSF at any time during an income year, the Bill provides that the trustees will be jointly and severally liable to pay a levy for that year of income.

The Bill has been referred to the Parliamentary Joint Committee on Corporations and Financial Services for report.

Date of effect

1 July 2013.

14/02/2013

Mineral Resource Rent Tax Amendment (Protecting Revenue) Bill 2013

• Has been introduced in the House of Reps as a private member’s Bill by the Australian Greens

• Bill seeks to protect the revenue generated from the MRRT from being eroded by increasing royalties by the States

• Date of effect: Proposed to apply to MRRT assessments from its first year of operation ie 2012-13.

MRRT amendments private member’s Bill

Legislation

MRRT amendments private member Bill introduced


The Minerals Resource Rent Tax Amendment (Protecting Revenue) Bill 2013 has been introduced into the House of Reps as a Private Member's Bill. Introduced by the Australian Greens (Mr Bandt), the purpose of the Bill is to protect the revenue generated from the Minerals Resource Rent Tax (MRRT) from being eroded by state governments increasing royalties. The Bill proposes to amend section 60-25 of the Minerals Resource Rent Tax Act 2012 to provide that any increases in royalties after 1 July 2011 should be disregarded when calculating royalty credits for the MRRT.



The House of Reps Standing Committee on Economics will inquire into and report on the Bill.

Proposed date of effect

The amendments are proposed to apply to MRRT assessments from its first year of operation ie from 2012-13.

14/02/2013

• Following Bills have been referred to Committees for report: – Tax Laws Amendment (Countering Tax Avoidance and

Multinational Profit Shifting) Bill 2013

– Tax and Superannuation Laws Amendment (2013 Measures No 1) Bill 2013

– Superannuation Legislation Amendment (Reform of Self Managed Superannuation Funds Supervisory Levy Arrangements) Bill 2013

– Minerals Resource Rent Tax Amendment (Protecting Revenue) Bill 2013 [Private Member’s Bill].

Bills referred to committees

Legislation

Bills referred to committees


The House of Reps Standing Committee on Economics will inquire into the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013. The Bill contains amendments concerning Part IVA and also transfer pricing. Committee chair Julie Owens said the Committee would examine the adequacy of the Bill in achieving its policy objectives and where possible identify any unintended consequences. Interested persons and organisations are invited to make submissions to the inquiry by Friday, 22 February 2013. Details are on the Committee's website.


The Tax and Superannuation Laws Amendment (2013 Measures No 1) Bill 2013 has been referred to the Parliamentary Joint Committee on Corporations and Financial Services for report.


The Superannuation Legislation Amendment (Reform of Self Managed Superannuation Funds Supervisory Levy Arrangements) Bill 2013 has been referred to the Parliamentary Joint Committee on Corporations and Financial Services for report.




The Minerals Resource Rent Tax Amendment (Protecting Revenue) Bill 2013 (a Private Member's Bill introduced by the Greens) has been referred to the House of Reps Standing Committee on Economics for report.

21/02/2013


• International Tax Agreements Amendment Bill 2012 has been passed by the Senate and awaits Royal Assent

• Bill gives force of law in Australia to the Protocol to amend the DTA between Australia and India

• It also gives force of law in Australia to Agreements re allocation of taxing rights between Australia and the Marshall Islands, and Australia and Mauritius.

International Tax Agreements Bill awaits Assent

Legislation

International Tax Agreements Bill awaits Assent


The International Tax Agreements Amendment Bill 2012 has been passed by the Senate without amendment and effectively awaits Royal Assent. The Bill gives the force of law in Australia to the Protocol to amend the DTA between Australia and India, and also gives the force of law in Australia to the Agreements between Australia and the Marshall Islands and Australia and Mauritius for the Allocation of Taxing Rights with Respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in Respect of Transfer Pricing Adjustments. The Bill had previously been passed by the House of Reps without amendment.

28/02/2013





INCOME

Yazbek v FCT [2013] FCA 39

• Federal Court has dismissed a taxpayer's appeal from an AAT decision which held that the taxpayer was at all relevant times a beneficiary of a trust

• Federal Court also agreed with the AAT that an amended assessment was issued within the relevant time limits

• In dismissing the appeal, the Court found no error in the decision or reasoning of the AAT.

Court confirms taxpayer was a beneficiary of a trust

Income

Court confirms taxpayer was a beneficiary of a trust

Yazbek v FCT [2013] FCA 39

The Federal Court has dismissed an appeal from the decision in AAT Case [2012] AATA 477, Re Yazbek and FCT. In doing so, it confirmed that for the purposes of the time limits within which an assessment can be amended under section 170(1) of the ITAA 1936 (and for other tax purposes, unless otherwise stated), the term "beneficiary of a trust estate" takes its ordinary meaning to mean "a person for whose benefit a trust is to be administered and who is entitled to enforce the trustee's obligation to administer the trust according to its terms" and not a person who has an actual interest in trust income or property.

The taxpayer was "a potential object of a discretionary trust" at all times during the 2005 tax year (in terms of being defined as the member of an "eligible class" of persons who could benefit under the trust). For that income year, the taxpayer did not return any income from the trust in terms of trust distributions or other entitlements. However, nearly 4 years after the original assessment issued to the taxpayer for the 2005 income year, the FCT issued an amended assessment to include a distribution of some $2.1m in his assessable income.

The taxpayer argued that the FCT was outside the two year time limit in Item 1 in section 170(1) of the ITAA 1936 to issue an amended assessment. In particular, he argued that the exception in Item 1 for individuals who are "beneficiaries of a trust estate at any time in that year" (which allowed a four year time limit) did not apply to him as the undefined term "beneficiary" did not include "potential beneficiaries" of a discretionary trust but rather meant "someone, for whom the trustee holds legal title in property, and who can deal with their equitable interest in that property as an owner".



However, in dismissing the taxpayer's appeal, the Court held that the AAT had made no error in law. In particular, it found that under established case law and in terms of the ordinary meaning of the word, a "beneficiary" meant any person for whose benefit a trust is to be administered and who was entitled to enforce the trustee's obligation to administer the trust according to its terms and that the term "reaches beyond a person who has a beneficial interest in the trust property". In short, the Court agreed that a "beneficiary" of a trust does not have to have a beneficial interest in the trust property and can include a person who has received no income or benefit from the trust in a given year (as in this case).

In arriving at this decision, the Court also noted that while the general purpose of section 170(1) was to limit the time for issuing assessments to individual with non-complex tax matters to two years, the actual language of the exception for "beneficiaries" in section 170(1) "did not obviate the common meaning of beneficiary" in the circumstances. It also noted that where the tax law meant for the term to apply to a beneficiary who was actually presently entitled to income or trust property in a particular year, the tax law expressly said so. Finally, the Court held that it had the jurisdiction to hear the appeal from the AAT even though it involved the issue of the time limit in which assessments could be made as this was not a mere procedural issue.

Yazbek v FCT [2013] FCA 39, Federal Court, Bennett J, 31 January 2013

07/02/2013

AAT Case [2013] AATA 58, Re Purvis & Ors v FCT

• AAT has confirmed lump sum payments made to former pilots under a “loss of licence insurance” scheme made under and agreement with their employer were assessable as Eligible Termination Payments (ETPs)

• AAT found the payments were related to, or were an effect or followed from, the termination of the pilots’ employment

• Accordingly, AAT concluded that relevant connection between payment and termination of employment existed.

“Loss of pilots’ licence” payments were ETPs

Income

"Loss of pilots' licence" payments were ETPs

AAT Case [2013] AATA 58, Re Purvis & Ors v FCT

The AAT has confirmed that lump sum payments made to former Qantas pilots under a "loss of licence insurance" scheme if they lost their pilots' licence for medical reasons were assessable to the pilots as eligible termination payments: AAT Case [2013] AATA 58, Re Purvis & Ors and FCT (AAT, Ref Nos 2011/3492-3494, Dunne SM, 4 February 2013).



Background

The taxpayers were several pilots who lost their pilots' licences for medical reasons and were paid lump sum capital payments under a "loss of licence insurance" scheme that formed part of the terms of their employment under certain "Collective Agreements" with their employer. Each of the taxpayers suffered a medical condition that resulted in the cancellation of their licence by CASA and they received the relevant payments.

The taxpayers argued that the payments were not assessable ETPs essentially because they were received for the loss of their pilots' licences and not in consequence of the termination of employment. They also claimed there was no relevant connection between each termination and the applicable payments because the termination of employment was not a condition for payment under either the Collective Agreements or the insurance policy.

Furthermore, they argued that if the payments were received in consequence of the termination of their employment, then the payments were capital payments in respect of personal injury and therefore fell within the exception for ETPs under section 82-135(i) of the ITAA 1997. Alternatively, they argued that the payments were exempt FBT payments in respect of personal injury or non-assessable payments under section 15-2(1) (allowances etc provided in respect of employment).

Decision

In dismissing the taxpayers' arguments and finding that the payments were assessable ETPs, the AAT held that on the basis of established case law, the proper test was to assess whether or not the payments were related to, or were an effect or followed from, the termination of the taxpayers' employment with Qantas. Moreover, it found that under this test the payments did satisfy this requirement.

In particular, the AAT found that the relevant agreements under which the payments were made "contemplated that a pilot's employment will terminate as a result of the pilot's licence being cancelled or not renewed". In this regard, it also noted that the capital payment made under "the loss of licence" insurance plan was meant, in part, to recover the cost of a pilot retraining himself for a career other than flying, following a permanent loss of licence and "to get themselves re-established in a new career".

Accordingly, the AAT concluded that the payments were ETPs as in each case the terms of employment anticipated the termination of employment of a pilot who received the payment or, in other words, the consequence of the capital payment was that there would be a termination of employment. Therefore, the AAT found that the relevant connection between the payment and termination of employment existed as evidenced in the relevant agreements that gave rise to the payments.

The AAT then found that the payments as ETPs were not exempt capital payments for, or in respect of, personal injury under section 82-135 of the ITAA 1997. This was essentially because there was nothing to suggest that the taxpayers' capacity to obtain other employment was taken into account in determining the payment and that, as a result, there was no basis for concluding that the amount was reasonable having regard to the likely effect of the personal injury on the taxpayers' capacity to derive income from personal exertion.



Although unnecessary to decide, the AAT also found that the payments were not exempt FBT payments under section 136(1) of the Fringe Benefits Tax Assessment Act 1986 because, under subparagraph (lc) of section 136(1), a fringe benefit cannot include an ETP. Likewise, it found that the payments were not statutory income under section 15-2 because of the exclusion for ETPs under section 15-2(3)(a). Finally, the AAT found that the payments resulted in CGT Event C2 occurring and that the exclusion for capital gains that are compensation received for a wrong, injury or illness under section 118-37(1) did not apply.

As a result, the AAT affirmed each of the objection decisions under review.

07/02/2013

AAT Case [2013] AATA 93, Re Batchelor v FCT

• AAT has held that the repayment of a deposit paid upon entering a contract to buy a retirement village was an assessable recoupment under section 20-20 of the ITAA 1997

• It did so on the basis that the payment had been received “by way of indemnity”

• AAT also decided that the term “indemnity” can apply to a loss already incurred and is not restricted to a loss that may happen in the future.

Repaid deposit is an assessable recoupment

Income

Repaid deposit is an assessable recoupment

AAT Case [2013] AATA 93, Re Batchelor v FCT

The AAT has decided that the repayment of a deposit paid upon entering into a contract to buy a retirement village was an assessable recoupment pursuant to section 20-20 of the ITAA 1997: AAT Case [2013] AATA 93, Re Batchelor and FCT (AAT, Deutsch DP, Ref No: 2012/0392, 22 February 2013).

Background

Four entities collectively formed a partnership, whose business included the acquisition, development and management of retirement village facilities. The taxpayer held an interest in the business and assets of the partnership through one of the four entities forming the partnership.

In June 1999, the partnership entered into an agreement with two other entites (Cresthaven and GDK), whereby Cresthaven was appointed to act as bare nominee for the partnership and GDK was appointed to manage the partnership's business. Shortly thereafter, Cresthaven entered into a contract to buy a retirement village in Victoria from Primelife. Cresthaven paid a deposit of $6.5m, of which the taxpayer's share was $55,500. The balance of the purchase price was payable on settlement, which was conditional on Primelife completing certain works.



The taxpayer claimed a deduction in the 1998-99 income year for a partnership loss of $284,674. This included her share of the full purchase price for the retirement village, even though settlement had not occurred. The FCT's decision to allow as a deduction only the taxpayer's share of the deposit (ie $55,500) was eventually upheld by the Full Federal Court in FCT v Malouf (2009) 75 ATR 335.

Two things happened In February 2006. First, proceedings brought by the partnership against the vendor of the retirement village were settled, with the vendor agreeing to repay the deposit plus interest. Secondly, in proceedings brought by ASIC, the Federal Court decided that a scheme operated by certain entities, including Primelife, Cresthaven and GDK, in relation to the retirement village in question was an unregistered managed investment scheme and ordered that it be wound up. As a result of these events, the partnership was eventually repaid most of the deposit, of which the taxpayer's share was $47,927. The issue to be decided was whether that amount was assessable in the hands of the taxpaeyer.

Decision

The AAT firstly set out a few basic propositions.

(1) Whether a receipt is income or capital is determined by the character of the receipt in the hands of the taxpayer.

(2) In order for something to have the character of income, there must be a gain by the taxpayer who derived it.

(3) A profit or gain made by a taxpayer in the course of carrying on a business is income according to ordinary concepts. This includes the gain arising from an isolated transaction which arises otherwise than in the ordinary course of carrying on the taxpayer's business, provided the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction (and the transaction is not simply the realisation of a capital asset).

(4) There is no general principle of Australian tax law to the effect that amounts received by way of reimbursement or compensation for deductible expenses are assessable.

The AAT then said that as the partnership's business included the acquisition of retirement villages, the payment received by the Partnership could be seen as the return of an amount paid as part of its on-going business activities and thus would seem to fall within the "income from business" classification (principle 3 above). More significantly, however, the AAT concluded that it was difficult to characterise the payment received by the partnership (whether described as a refund of the deposit or the settlement of a litigation claim) as anything remotely like a gain or profit to the partnership's business (principle 2 above). At most, it constituted in one way or another, a compensatory amount equal to the amount which the partnership had previously expended in the form of the deposit. The payment was therefore not assessable under section 6-5 of the ITAA 1997 as income according to ordinary concepts.

The AAT then considered whether the payment was an assessable recoupment pursuant to section 20-20 of the ITAA 1997. The key question was whether the payment was received "by way of indemnity". The AAT looked at the dictionary definition of the term "indemnity" - protection against, or compensation for, loss or damage - and various relevant cases and made the following observations:

There need not be a contract or deed of indemnity; A payment by way of damages can be a payment of indemnity; and The term "indemnity" can apply to a loss already incurred and is not restricted to a loss

that may happen in the future – on this point, the AAT preferred a decision of the Supreme Court of South Australia to a decision of the Supreme Court of NSW.



In light of the above, the AAT concluded that the $47,927 was received by way of indemnity and thus was an assessable recoupment in terms of section 20-20.

The AAT also briefly considered whether the payment was an assessable capital gain should its conclusion that the payment was assessable under section 20-20 be wrong. The taxpayer effectively conceded that CGT event E2 happened when the relevant intangible CGT asset (the bundle of rights under the contract to buy the retirement village, including the right to a refund of the deposit) came to an end. However, the AAT did not accept the taxpayer's contention the capital gain was effectively nil because the cost base of the asset was $47,927. The AAT pointed out that if the payment was not assessable under section 6-5 or section 20-20, section 110-45(2) excluded the payment from the cost base (which would therefore be zero).

28/02/2013



DEDUCTIONS

Taxation Ruling TR 2013/2

• Ruling sets out FCT’s view on the way in which section 30-15 and Item 2.1.10 of the table in section 30-25(1) of the ITAA 1997 apply to individuals who make a gift or contribution to a school building fund

• Among other things, it discusses factors relevant in determining what a “school or college” is and whether a building is used as a school or college by the entity

• Date of effect: Applies before and after its date of issue.

Gifts to school or college building funds

Deductions

Gifts to school or college building funds: TR 2013/2


This Ruling sets out the FCT's view on the way in which section 30-15 and Item 2.1.10 of the table in section 30-25(1) of the ITAA 1997 apply to individuals who make a gift or contribution to a public fund which purports to be a school building fund.

The Ruling discusses factors relevant in determining what a "school or college" is, whether the building is "used as a school or college" by an entity, and whether the fund was established and maintained solely for providing money for the acquisition, construction, or maintenance of a building used as a school or college. Specifically, it considers the key requirements of Item 2.1.10 as outlined below.

There must be a school

For the purposes of the Ruling, the word "school" carries its ordinary meaning, which indicates that it must be both a place of assembly (ie there must be one or more buildings where people come together in order to be instructed in an area of knowledge), and an educational organisation (ie has a distinct identity and provides regular, ongoing, systematic instruction in a course of non-recreational education).

According to the Ruling, in order for the education organisation to be a school it must have its own distinct identity, which would ordinarily involve the following:

Have its own name and be an institution in its own right; Is established for the promotion, pursuit and achievement of one or more defined purposes; Has a quality of permanence; and Has a governing body which controls its affairs.



Further, the Ruling also outlines the following factors which indicate that an education organisation is providing regular, ongoing, and systemic instruction in a course of non-recreational education:

A set curriculum; Instructions or training provided by suitably qualified persons; The enrolment of students; Some form of assessment and correction; and The creation of a qualification or status which is recognised outside of the organisation.

There must be a building

For Item 2.1.10 to apply there must be a building or an objective intention to acquire or construct a building. The word building carries its ordinary meaning as a permanent structure, roofed and usually with walls and flooring that provides protection from the elements. The Ruling however states that a permanent structure such as a covered outdoor leaning area can also be a building, provided that such a structure is fixed to the ground and has a roof.

In addition, the Ruling indicates that part of a building is itself a building where it is permanent, fixed and structurally delineated part of the building, and is capable of being made the subject of a separately identifiable legal or equitable interest. It says a building in the context of the Ruling also includes fixtures which has become permanent additions to buildings.

The building must be used as a school

The Ruling states that a building is "used as a school" where:

It is used to provide instruction as outlined in the Ruling; The extent and character of that use is such that the building can be described as "used as a

school" as a matter of ordinary language; and Its use is incidental to the provision of instruction in a building.

According to the Ruling, in order for a building to be a school building, its school use must be substantial. Therefore, it will not be regarded as a school building where its non-school use is of such kind, frequency or relative magnitude as to preclude the conclusion that the building has the character of a school building. Other factors outlined in the Ruling which are relevant to determining whether a building is used as a school include:

The amount of time the building is put to school use relative to the amount of time for non-school use;

The number of people involved in the school use compared to non-school use; The physical area of the building for school use compared to non-school use; and The extent to which the building has been adapted or modified in order to accommodate

school or non-school use.

Therefore, the Ruling indicates that a building's character is determined on an objective basis, including the surrounding circumstances, and the physical attributes of a building. It states that a building will not be a school building where it has been designed or adapted in a manner which prevents it from being regarded as a school under the ordinary meaning of the word.



In relation to incidental buildings (i.e. those buildings used together with a school building but are ancillary or subordinate to it), the Ruling states that it can also be used or to be used in a school where:

Its actual or intended use is incidental to the provision of instruction in one or more school buildings; and

It can be regarded as being "used as a school" as a matter of ordinary language when considered in conjunction with these buildings.

The Ruling states that regard must also be had to the extent of non-school use of incidental buildings in determining whether it is used as a school. Where a qualifying body carries on a school organisation and also acts in other capacities (i.e. church), the test is whether the school organisation has control of the use of the building, the inability of the school organisation to control the use is an indication that the building is not used as a school.

The building must be used as a school by a qualifying body

According to the Ruling, in order for a qualifying body (ie government, public authority, or a society or association which is carried on otherwise than for the purposes of profit or gain to its members) to use a building as a school, it must:

Carry on the school as an organisation; Control the use of the building; and Use the building in the provision of instruction as outlined in the Ruling.

The Ruling states that whether a qualifying body carries on a school is to be determined by reference to the constituent and governing documentation of the body and its actual activities and operations. In addition, it says a qualifying body does not use a building as a school merely due to a third party providing access to the building for purposes which are beneficial to the operation of a school carried on by the body.

There must be acquisition, construction or maintenance

The Ruling says a building is acquired where an entity obtains ownership of a legal or equitable interest in the building, and that interest is sufficient to enable the entity to control the building's use. It also states that a building is maintained when action is taken to keep it in proper or good condition

The fund must be established and maintained for the requisite purpose

Under Item 2.1.10 a school building fund must be established and maintained solely in order to provide money for particular purposes (the "sole purpose test"), which is a question of fact. The Ruling states a fund will not satisfy the sole purpose test where it is established or maintained to provide money for the purpose, or purposes which include, the non-school use of a building. It states that this is the case even though the building may be a school building.

The Ruling also states that inferences about the fund's purpose may be drawn from what the fund provides money for. Further, the fund can only disburse money for the following:

Acquiring or constructing a school building for the purposes of its school use; Maintaining a school building for the purposes of its school use; Investing or lending money in order to provide money for the acquisition construction or

maintenance of a school building for the purposes of its school use; or Administering the fund.



The Ruling does not consider what constitutes a gift, the meaning of a "public fund", or the administrative processes relating to the endorsement of section school building fund. It was previously released as Draft Taxation Ruling TR 2011/D5 and contains more detailed explanation of the concepts compared to the draft.

Date of effect

The Ruling applies both before and after its date of issue.

14/02/2013


• Ruling considers certain aspects of the feedstock adjustment provision in Subdivision 355-H of the ITAA 1997

• Subdivision 355-H reduces the concessional effect of granting R&D tax offsets for entities involved in certain activities

• Ruling explains in detail the requirement under Subdivision 355-H for R&D entities

• It was previously issued as Draft TR 2012/D6

• Date of effect: Applies both before and after its date of issue.

R&D tax offsets: feedstock adjustments

Deductions

R&D tax offsets: feedstock adjustments: TR 2012/3


This Ruling considers aspects of the feedstock adjustment provisions in Subdivision 355-H of the ITAA 1997. It applies to R&D entities (as defined in section 355-35) conducting registered R&D activities (under sections 355-20, 355-25 and 355-30) that became entitled to a tax offset under section 355-100.

Background

Division 355 generally allows an R&D entity that is engaged in registered R&D activities to claim either:

A refundable tax offset calculated as 45% of the notional deductions it is entitled to under the Division (aggregated turnover of less than $20m); or

A non-refundable tax offset calculated as 40% of its notional deductions.

Subdivision 355-H reduces the concessional effect of granting R&D tax offsets where the registered R&D activities also involve the production of a tangible product by including an amount in the assessable income of the entity. This is referred to as the "feedstock adjustment".



Meaning of "expenditure...in acquiring or producing goods, or materials"

The Ruling says paragraph 355-465(1)(a) sets out the first condition for a feedstock adjustment to arise, and refers to three tests which must be satisfied for the first condition to be met:

An R&D entity incurs expenditure in one or more income years in acquiring or producing goods, or materials (i.e. the feedstock inputs);

The feedstock inputs are transformed or processed; The feedstock inputs are transformed or processed during R&D activities in producing one or

more tangible products (feedstock outputs).

The Ruling indicates that the words "expenditure...in acquiring or producing goods, or materials" form a composite phrase. Therefore, it is only limited in its scope to cover expenditure incurred up to the time transformation or processing activities begin. In addition, it says, the expenditure does not include expenditure incurred on the transformation or processing of relevant goods or materials (with exception to certain multistage production processes).

Some examples of expenditure incurred directly in producing a feedstock input include: direct labour; material costs; cost of transporting it to a place for production, transformation, or processing; cost of inspection; insurance in transit; and administrative costs.

Multi-stage production processes

The Ruling indicates there is a clear distinction between expenditure associated with the acquisition and production of feedstock inputs, and expenditure on the transformation and processing of the inputs. However, there are 2 exceptions:

Paragraph 355-465(1)(b)(ii) specifically excludes expenditure incurred "on any energy input directly into transformation or processing" which an R&D entity has been able to notionally deduct. These notional deductions for expenditure can come within the calculation of feedstock adjustments;

Costs incurred in the production of an output which in turn becomes a feedstock input in relation to some other R&D activities may also fall within the description of expenditure in transforming and processing of the inputs.

Therefore, according to the Ruling, in multi-stage production processes, it will be the total amount of the expenditure on all production stages, and amounts that the R&D entity has been able to notionally deduct which will come within the expenditure from transforming and processing of the inputs.

Meaning of "transformed feedstock output"

The Ruling says a transformed feedstock output results from transforming a feedstock output so a new and different product emerges with a different appearance, condition, nature or character. The resulting product will be a "marketable product" or a "transformed feedstock output". According to the Ruling, a product can be described by the label "marketable product" where it is capable of being one to which either of the feedstock trigger conditions can apply (i.e. it is a product which can be supplied to another entity, or applied to the R&D entity's own use).

Meaning of "applied to the R&D entity's own use"

The phrase "applied...to the R&D entity's own use", refers to the use of a marketable product with a broad meaning, the Ruling says. It says it refers to actual use and is not satisfied in cases where a product has been produced and is merely being held for supply to someone else at a later time. Additionally, the Ruling says it is only the first time that such use occurs that can trigger a feedstock adjustment.



Calculating feedstock adjustment

In calculating the amount to be included in the assessable income of an R&D entity under section 355-465(2), the Ruling says a comparison is required between two amounts and an identification of the "lesser" amount:

The feedstock revenue for the feedstock output; and So much of the total of the amounts deducted as described in section 355-465(1)(b) that is

reasonably attributable to the production of the feedstock output.

Determining the "lesser" amount

The Ruling says the R&D entity does not need to calculate each of the amounts precisely, provided that on the balance of probabilities, it is evident that one of the amounts is clearly the lesser one. However, it says evidence must be present and form a reasonable basis of coming to that conclusion, including records which show:

The nature of the relevant R&D activities and their impact on the market value of the feedstock outputs; and

The circumstances surrounding the production of those outputs (eg a lengthy costly process with high unit cost involved).

When multiple outputs may be treated as a single output

According to the Ruling, in calculating the feedstock adjustment, whether or not aggregation of feedstock outputs is appropriate or not depends on the same considerations as the basis for reasonable attribution. It says where the outcome of a single calculation for such an aggregation differs materially from what would be reasonably expected to occur if the feedstock outputs were not aggregated, it would be inappropriate to perform a single calculation.

Meaning of the "cost of producing" and "feedstock revenue"

The Ruling says that feedstock revenue is worked out by applying the proportion that the "cost of producing the feedstock output" is to the "cost of producing the marketable product", to the market value of that marketable product. It says the cost of producing the feedstock output is not limited to the notionally deducted amounts that are reasonably attributable to the production of the feedstock output.

Rather, the Ruling indicates that the cost of producing the feedstock output would include all costs as determined by appropriate accounting absorption costing methodology. It says the same applies to determining the cost of producing the marketable product.

Date of effect

Applies to years of income commencing both before and after its date of issue.

Notified in the Commonwealth Gazette No GN 7, 20 February 2013 [p 502]

21/02/2013



CGT

AAT Case [2013] AATA 76

• AAT has decided that a CGT asset was disposed of for the purposes of CGT event A1 when a Heads of Agreement was executed and not when the formal Contract of Sale was executed

• Therefore, it held the taxpayer was not entitled to access CGT small business concessions as he did not satisfy the maximum net asset value test as required by section 152-15 of the ITAA 1997.

CGT small business concessions: date of disposal

CGT

CGT small business concessions: date of disposal

AAT Case [2013] AATA 76

The AAT has decided that a CGT asset was disposed of for the purposes of CGT event A1 when a Heads of Agreement was executed and not when the formal Contract of Sale was executed: AAT Case [2013] AATA 76 (AAT, Fice SM, Ref No: 2011/4176, 15 February 2013).

Background

The taxpayer made a capital gain of $704,129 when he sold his interest in a business. He claimed he was eligible for the CGT small business concessions which, when applied along with the general 50% CGT discount, reduced the assessable capital gain to nil.

The crucial question was when did CGT event A1 happen – when the taxpayer, his business partner and the purchaser executed a Heads of Agreement on 7 August 2008 or when the Contract of Sale of Business was executed on 17 December 2008? If the earlier date applied, the taxpayer would not be entitled to access the CGT small business concessions because he did not satisfy the maximum net asset value test just before that date (as required by section 152-15 of the ITAA 1997).

The opening clause of the Heads of Agreement read as follows:

"The Vendor [i.e. the taxpayer and his business partner] agrees to sell to the Purchaser and the Purchaser agrees to purchase from the Vendor, the Vendor's interest in the … business described in the First Schedule below on the terms and conditions set out in such schedule".



The Heads of Agreement was expressed to be "subject to and conditional upon" various matters and contained a clause stating that "[t]he Vendor and the Purchaser will as soon as practicable execute a formal Contract of Sale". The Agreement also stated that the parties "hereby agree to be bound by the terms of this Heads of Agreement".

The Contract of Sale was a standard document, which dealt in more detail with matters included in the Heads of Agreement. The evidence indicated that, following the execution of the Heads of Agreement, there were protracted negotiations between the parties' legal representatives before final agreement was reached on the terms of the Contract of Sale.

There was also evidence that it was a long-standing practice in the particular industry concerned for an intending purchaser and vendor to enter into an in-confidence period of exclusivity during which the intending purchaser used professional advisers to carry out due diligence. This practice was embodied in a variety of documents, often called a Heads of Agreement. The parties to a Heads of Agreement were aware that it conferred rights to exclusive dealings and obliged confidentiality, and if the purchaser chose to proceed with the sale, the parties would be required to enter into a Sale Contract. It was also industry practice that a party which had signed a Heads of Agreement could walk away at any time if dissatisfied with the results of a due diligence enquiry.

Decision

The AAT decided that despite evidence suggesting that the industry did not regard a Heads of Agreement as a binding contract, there was little doubt that the parties to the Heads of Agreement had agreed to the sale and purchase of the business in question. The Heads of Agreement was a binding contract and not simply, as submitted by the taxpayer, "an agreement to agree". The AAT added that the agreement reached by the parties to the Heads of Agreement was not conditional upon the execution of the formal Contract of Sale. The condition in the Heads of Agreement that the parties would execute a formal contract of sale did not mean that there was no binding agreement until such time as the formal Contract of Sale was executed.

Accordingly, the AAT held that the the CGT asset in question (the taxpayer's interest in the business) was disposed of for the purposes of CGT event A1 on 7 August 2008 when the Heads of Agreement was executed.

21/02/2013



FBT

Taxation Determination TD 2013/4

• Determination sets out the weekly amounts FCT considers reasonable under section 31G of the FBTAA for food and drink expenses incurred by employees receiving LAFHA in the period 1 April 2013 to 31 March 2014

• Determination was previously issued as Draft Taxation Determination TD 2012/D8

• Date of effect: Applies only to FBT year beginning 1 April 2013.

LAFHA: reasonable 2013-14 food and drink

FBT

LAFHA: reasonable 2013-14 food and drink: TD 2013/4

Taxation Determination TD 2013/4

This Determination sets out the amounts the FCT considers reasonable under section 31G of the FBTAA for food and drink expenses incurred by employees receiving a Living-Away-From-Home Allowance (LAFHA) fringe benefit in the period 1 April 2013 to 31 March 2014.

If the total of food and drink expenses for an employee (including eligible family members) does not exceed the amount the FCT considers reasonable, the taxable value of a LAFHA fringe benefit is reduced by the exempt food component (and substantiation is not required).

If the total of an employee's food or drink expenses exceeds the amount the FCT considers reasonable, the exempt food component is so much of the food and drink expenses (less the applicable statutory food total) as are substantiated by the employee. If the food and drink expenses exceed the reasonable amount and are not substantiated in full, only the reasonable amount will be exempt.

The Determination sets out reasonable amounts for food and drink for a LAFHA for a one week period (seven days). Where the period is longer than a week, the total reasonable amount for the period is calculated by multiplying the weekly amount by the total number of weeks (and part thereof). The weekly amounts for food and drink include breakfast, lunch and dinner. The figures cover amounts expended on all food and drink, including meals in restaurants, hotels, clubs etc, fast food and takeaway food and alcoholic beverages.



Separate reasonable amounts apply for locations within Australia and for locations overseas. The weekly amounts for locations within Australia are as follows (for large family groupings add $117 for each additional adult and $59 for each additional child):

1 adult - $233;

2 adults - $350;

3 adults - $467;

1 adult and 1 child - $292;

2 adults and 1 child - $409;

2 adults and 2 children - $468;

2 adults and 3 children - $527;

3 adults and 1 child $526;

3 adults and 2 children - $585; and

4 adults - $584.

The Determination was previously issued as Draft TD 2012/D8.

Date of effect

The Determination applies only to the FBT year beginning on 1 April 2013. As a transitional measure for the FBT year commencing on 1 April 2013, where an employee and employer have an existing employment agreement in force as at 27 February 2013 that specifies a rate in Taxation Determination TD 2012/5, and that employment agreement is not varied in a material way or renewed, the rates in TD 2012/5 will continue to be accepted by the FCT as reasonable amounts under section 31G.

28/02/2013



INDIRECT TAXES

HC Legal Pty Ltd v DCT [2013] FCA 45

• Federal Court has dismissed a taxpayer’s application to set aside a statutory demand for payment of a GST debt and associated penalties of some $6.9m re a purported purchase

• Broadly, taxpayer contended there was a genuine dispute under section 459H of the Corporations Act 2001

• Court held the error did not affect the assessment and refused to exercise its discretion to set aside the statutory demand for the debt

• Appeals update.

Application to set aside demand for debt dismissed

Indirect Taxes

Application to set aside demand for debt dismissed

HC Legal Pty Ltd v DCT [2013] FCA 45

The Federal Court has dismissed a taxpayer's application to set aside a statutory demand for a payment of a GST debt and associated penalties of some $6.9m in relation to a purported capital purchase which occurred on 31 December 2011: HC Legal Pty Ltd v DCT [2013] FCA 45 (Federal Court, Murphy J, 5 February 2013).

Background

The taxpayer is a small law firm which in 2011 executed an agreement with a third party to purchase the exclusive right to represent a group of clients for 10 years for a fee of $45m plus GST. The transaction did not require the taxpayer to advance any money at the time and finance was provided by the third party to the taxpayer on a non-recourse basis. The taxpayer then claimed the GST related to the purchase in its BAS for the period 1 October to 31 December 2011, which resulted in a net refund of some $4.5m.

The Court said the FCT was concerned about the transaction and the claim for input tax credits and froze the taxpayer's bank accounts. Shortly after, the FCT audited the taxpayer. As a result, in May 2012, the FCT issued an assessment for $4.5m for GST, although the taxpayer disputed the period to which the assessment related. The FCT then issued a penalty assessment notice for $2.5m. On 4 July 2012, the FCT issued a statutory demand seeking payment by the taxpayer of $6.9m being the RBA deficit debt as at that date. In September 2012, the FCT sent a letter to the taxpayer enclosing another notice of assessment. The letter sought to address the fact that the wrong tax period was specified in the first Notice of Assessment.



The taxpayer contended that the statutory demand should be set aside as there was a genuine dispute under section 459H of the Corporations Act 2001. It argued there were issues with the first notice of assessment issued by the FCT which indicated an incorrect tax period to which the debt related. Alternatively, it contended that the demand should be set aside for "some other reason" under section 459J of the Corporations Act. Broadly, the taxpayer argued that the demand should be set aside due to the FCT's conduct and that it had a reasonably arguable case in relation to the disputed assessment.

Decision

The Court said the taxpayer's argument was flawed as it equated "assessment" with "notice of assessment". It held that the incorrect tax period did not affect the assessment itself, and in any event the FCT corrected the error in the first notice of assessment by way of a second notice of assessment. Therefore, it held that the error did not give rise to a genuine dispute under section 459H as to the existence or amount of a debt to which the statutory demand related.

In relation to the taxpayer's other argument under section 459J, the Court said it was "impossible for [it] to be satisfied at this stage that [the taxpayer] has a reasonably arguable case". It said the taxpayer did not present any evidence to address whether it was entitled to the GST input tax credits in relation to the purchase. Hence, the Court held it was unable to make any assessment as to whether the taxpayer had a reasonably arguable case. Further, after considering various submissions by the taxpayer, the Court said it did not consider "the FCT's actions, considered individually or collectively, are unconscionable, oppressive, or abusive or productive of substantial injustice". Therefore, the Court refused to exercise its discretion to set aside the statutory demand for the debt.

Appeals update

It is understood that the taxpayer will appeal to the Full Federal Court against the decision of Murphy J.

07/02/2013



MBI Properties Pty Ltd v FCT [2013] FCA 56

• Federal Court has held that an increasing adjustment arose under section 135-5 of the GST Act re acquisition of three apartments by the taxpayer as a going concern

• Case concerned the acquisition of apartments which were subject to certain leases and used as a part of a serviced apartment business

• Court held taxpayer as recipient of the going concern intended the supply to be treated as a continuing supply and therefore it was liable to the increasing adjustment

• Appeals update.

GST: increasing adjustment affirmed

Indirect Taxes

GST: increasing adjustment affirmed

MBI Properties Pty Ltd v FCT [2013] FCA 56

The Federal Court has held that an increasing adjustment arose under section 135-5 of the GST Act in relation to the acquisition of three apartments by the taxpayer as a GST-free supply of a going concern: MBI Properties Pty Ltd v FCT [2013] FCA 56 (Federal Court, Griffiths J, 6 February 2013).

Background

The taxpayer acquired three apartments which were subject to certain leases and used as part of a serviced apartment business. The GST treatment of the supplies relating to the apartments were subject to earlier proceedings in South Steyne Hotel Pty Ltd v FCT (2009) 74 ATR 41. In those proceedings, the Full Federal Court, by majority, held that the granting of leases over the apartments was input-taxed and that sales of individual apartments were GST-free supplies because the sale was a supply of a going concern. The taxpayer’s application for special leave to appeal to the High Court was subsequently refused.

In February 2012, the ATO concluded an audit in relation to the taxpayer's GST affairs for the period 1 October 2007 to 31 December 2007. It determined that the taxpayer had an increasing adjustment of $215,000 (representing 10% of the total purchase price for the three apartments) and issued a notice of assessment under Division 135. Under that Division, the recipient of a supply of a going concern has an increasing adjustment to take into account the proportion (if any) of supplies that will be made in running the concern and that will not be taxable supplies or GST-free supplies.

The taxpayer initiated the current proceedings after the FCT disallowed its objections. Broadly, the taxpayer argued that it did not have an increasing adjustment because it did not intend that some or all of the supplies made through the enterprise to which the GST-free supply of the going concern related would be supplies that were neither taxable nor GST-free supplies. The FCT broadly argued that the purpose of Division 135 is so that taxpayers are only able to obtain the going concern GST-free to the extent they intend to make taxable supplies with it, which he claimed was not the case with the taxpayer.



Decision

The Court said the taxpayer sought to separate its interest as owner and lessor of the apartments from the serviced apartment business to which they relate. However, it said "the terms of the lease themselves demonstrate strong if not virtually inextricable connection with the serviced apartment business". Therefore, the Court said in circumstances where there is a supply that is treated as a continuing supply (i.e. the supply of the residential premises by lease) which continues to be made through the enterprise constituted by the serviced apartment business after its supply as a going concern, the requirements of section 135-5(1)(b) are satisfied. In conclusion, the Court held the taxpayer "as recipient of the going concern intended that that be the case" and it was liable for the increasing adjustment.

Appeals update

The taxpayer has lodged a notice of appeal to the Full Federal Court against the Federal Court's decision.

14/02/2013

Duoedge Pty Ltd v Leong & Anor [2013] VSC 36

• Supreme Court of Victoria has allowed an appeal concerning rectification of a contract for the sale of a property re the GST component of the sale price

• Case concerned a purchase of property which was specified in the contract as GST inclusive, however, the purchaser’s claim for input tax credits was later rejected by the ATO

• Court denied the rectification of the contract for the seller to refund the GST to the purchaser.

Rectification of contract re GST refund denied

Indirect Taxes

Rectification of contract re GST refund denied

Duoedge Pty Ltd v Leong & Anor [2013] VSC 36

The Supreme Court of Victoria has allowed an appeal from a Magistrate's decision concerning rectification of a contract for the sale of a property concerning the GST component of the sale price: Duoedge Pty Ltd v Leong & Anor [2013] VSC 36 (Supreme Court of Victoria, Dixon J, 13 February 2013).

Background

In September 2009, Mr Leong purchased a property from Duoedge Pty Ltd for a price specified in the contract as "$916,000 GST inclusive". Mr Leong is the director of OCMC Pty Ltd which intended to develop the land. OCMC was later nominated by Mr Leong as purchaser. In October 2009, at



OCMC's request, Duoedge provided it with a tax invoice for the sale of the property which specified the following breakdown: (i) To Contract/Purchase Price $832,727.27; (ii) PLUS GST $ 83,272.73; (iii) Total payable $916,000. On 10 November, 2009 the contract settled.

The Supreme Court said OCMC commenced its development and in 2010 submitted a BAS for the 2009 fourth quarter that claimed a GST input tax credit of $83,272. On 12 May 2010, the ATO revised OCMC's BAS rejecting its claimed entitlement to an input tax credit for the GST component of the purchase from Duoedge.

Mr Leong and OCMC contended successfully before a Magistrate for an entitlement to a refund from Duoedge of 1/11th of the purchase price. The Magistrate held that the contract contained an implied term entitling Mr Leong and OCMC to that refund and ordered rectification of the contract as follows: (a) The purchase price of $916,000 GST inclusive is amended to read $832,727.27 plus GST of $83,272.73; (b) the words "Plus GST" be inserted into the GST box on Page two of the Particulars of Sale. The Magistrate also ordered payment of the sum of $83,272.73 by Duoedge to OCMC.

The Magistrate identified his task as being to determine the objective intention of the parties in order to give effect to what the parties were objectively to be taken to have intended by the agreement. To this end, the Court said the Magistrate stated he looked at the language used, the commercial circumstances the contract for sale addressed and the objects intended and, with care, at what can be classified as "surrounding circumstances".

The Magistrate then stated that he had no hesitation in accepting that a reasonable observer, having regard to all the circumstances, would conclude that the parties contracted on the basis that the purchase price included GST. The Court said the objective view that the purchase price of $916,000 was inclusive of anticipated GST was strengthened by special condition two in the agreement. There was no qualification to that condition, such as "subject to GST applying" or similar. The Magistrate concluded that rectification of the contract would give effect to what the parties intended.

Duoedge contended that the Magistrate had erred and appealed to the Supreme Court of Victoria.

Decision

The Supreme Court allowed the appeal and ordered that the judgment of the Magistrates' Court be set aside.

The Court said it was satisfied that the Magistrate erred in law. The Court said it was not open to the Magistrate to find there was an implied term of the contract that, if GST did not apply to the sale, Duoedge would refund the GST amount of $83,272.73 and then to rectify the contract to give effect to the implied term. A contract is either rectified to accord with the true agreement, or properly construed to identify the true agreement it records, the Court said.

The Court considered it was "unambiguously clear" that the parties agreed that the purchaser was not liable to pay GST. If the transaction was a taxable supply and the parties intended that the purchaser was to be liable to pay GST but pay no more than a total of $916,000 including GST, the Court said the true agreed price needed to be $832,727.27. In the Court's view, a term "cannot be implied into this contract that the sum of $83,272.72 is refundable to the purchaser, because it is on account of GST, if the transaction does not involve a taxable supply because such an implied term is … contradicted by the express terms of the contract".

The Court said the Magistrate erred in finding that the vendor breached the contract by not refunding $83,272.73 when it was determined that the sale was not a taxable supply because there was no term to be implied into the contract that the vendor was so obliged.

21/02/2013



• Government has released draft legislation for a second round of public consultation re circumstances where FCT will refund an overpayment of GST

• Draft legislation seeks to clarify circumstances in which the restriction on GST refunds applies to overpayments of GST and allows taxpayers to self-assess their entitlement

• Date of effect: Proposed to apply to tax periods commencing on or after 17 August 2012

• Comments due by 26 March 2013.

Refunding excess GST – further draft legislation

Indirect Taxes

Refunding excess GST – further draft legislation

The Assistant Treasurer has released draft legislation for a second round of public consultation regarding the circumstances where the FCT will refund an overpayment of GST.

The draft legislation seeks to clarify the circumstances in which the restriction on GST refunds applies to overpayments of GST and allows taxpayers to self-assess their entitlement to a GST refund by reference to ascertainable criteria. It also aims to address a gap in the existing law relating to refunds associated with miscalculations of GST payable on a supply.

The first consultation draft legislation was released in August 2012. It seeks to implement recommendation 45 of the Board of Taxation's Review of the Legal Framework for the Administration of the GST, announced by the government in the 2009-10 Federal Budget.

Mr Bradbury said that first consultation highlighted a number of concerns with the draft legislation, including:

The perceived inability to obtain a refund of overpaid GST would encourage taxpayers to shy away from adopting a conservative approach to their GST obligations;

A concern that rights to object to an assessment of GST would be removed as the relevant assessment would not be excessive as section 36-5 would deem the GST to have always been payable;

The restriction on refunds would override the operation of the adjustment provisions resulting in businesses not being able to get a refund in their dealings with other businesses;

The concept of passing-on was introduced without being adequately defined creating considerable uncertainty;

Recipients that have excess GST passed on to them may not have an entitlement to an input tax credit on the excess GST as it may not be consideration for a taxable supply and therefore would not be a creditable acquisition for the purposes of Division 11; and

The FCT should be able to retain his discretion to pay refunds where appropriate eg where a taxpayer does not satisfy the requirements of Division 36 but there is no windfall gain to the taxpayer.



Copies of the submissions on the first round draft legislation are on the Treasury website.

Another impetus for the amendments came from the 2011 Federal Court decision in the Sportsbet case.

A taxpayer may overpay an amount of GST by incorrectly treating a supply it makes as a taxable supply and the supply is actually not a taxable supply to any extent. This includes incorrectly apportioning the taxable and non-taxable components of a mixed supply.

Prior to the Federal Court's decision in International All Sports & Ors v FCT (2011) 81 ATR 607 (the Sportsbet case) handed down on 26 July 2011, the FCT considered that section 105-65 applied to miscalculations (as well as mischaracterisations) of the GST payable. The effect of the Sportsbet decision is that the restriction in section 105-65 does not apply where the supply is correctly treated but an overpayment arises as a result of a miscalculation of the GST payable. Following the Sportsbet decision, the FCT has also accepted that a taxpayer miscalculates the amount of GST in applying the GST margin scheme.

The government says the decision in Sportsbet gives rise to the potential for windfall gains if an overpayment arises as a result of a miscalculation, which it considers is inconsistent with the policy intent that taxpayers should not obtain a windfall gain irrespective of how the overpayment arose.

Key features

The key features of the proposed amendments are outlined below.

The draft legislation proposes to amend the GST Act to allow taxpayers to self-assess their entitlement to a refund by reference to a set of objective criteria, rather than having to rely on the FCT to exercise the discretion to refund an overpaid amount of GST. However, the FCT's discretion to grant a refund would be retained to cover exceptional circumstances where the FCT is satisfied that a refund is appropriate.

The amendments also seek to ensure that the policy of denying windfall gains to taxpayers is achieved, irrespective of how the overpayment arises. In doing so, the proposed amendments seek to address the impacts of the Federal Court's decision in Sportsbet by amending the law to ensure that overpayments of GST resulting from a miscalculation of the GST payable are not excluded from the provisions.

A proposed new Division 142 would be inserted into the GST Act to provide that, subject to certain exceptions, where an assessed net amount takes into account an amount of GST that exceeds what is actually payable, then so much of that excess after adjustments and corrections ("extra GST") that has been passed-on to another entity is taken to have always been payable and always been on a taxable supply until the taxpayer reimburses the "other entity" for the passed-on GST. The recipient generally would be taken always to have been able to claim the amount of the input tax credit corresponding to the amount of extra GST.

Proposed Division 142 would also apply to excess GST relating to cancelled supplies. In such circumstances, any decreasing adjustment would be reduced to the extent that any passed-on GST is not reimbursed to the recipient of the supply.

Division 142 would only apply where an assessed net amount includes excess GST. Net amounts would be defined as GST – Input tax credits. Where a refund or credit arises as a result of the FCT amending an assessed net amount to include additional input tax credits, Division 142 would have no application. Because Division 142 would impact on the assessed amount, taxpayers would be able to challenge their assessment under Part IVC of the TAA.



Excess GST relating to cancelled supplies

Where an adjustment event is as a result of the supply being cancelled and this results in a decreasing adjustment for the supplier, the adjustment would be reduced to the extent that GST had been passed-on to the recipient of the supply but not reimbursed.

Having regard to the High Court decision in FCT v Qantas Airways Ltd (2012) 83 ATR 1, the draft EM to the proposed changes says that in many cases, there will still be a supply where money is paid for goods and services that are ultimately not provided. However, there might be cases where money is paid with a mere expectation of a future supply, which does not eventuate.

Refunding extra GST

Proposed section 142-10 would provide that, subject to certain exceptions, so much of the "extra GST" which has been passed-on to another entity would be taken to have always been payable and always on a taxable supply, until the taxpayer reimburses the "other entity" for the passed-on GST.

Under proposed section 142-10, generally taxpayers would no longer need to ask the FCT to exercise the discretion to refund an amount that has been overpaid. Instead, taxpayers would self-assess their entitlement to a refund of extra GST against the following criteria:

Where the extra GST has not been passed on, the taxpayer would be entitled to a refund of the extra GST;

Where the extra GST has been passed on by the taxpayer, the taxpayer would be entitled to a refund to the extent that they have reimbursed the other entity with the amount of the extra GST.

If the taxpayer could establish that either of the above conditions were satisfied, the taxpayer would be entitled to a refund of the extra GST and would be able to seek a refund from the FCT by applying for an amendment of the relevant assessment or objecting to the relevant assessment (whichever is applicable).

FCT's discretion

In exceptional circumstances, affected taxpayers may still be able to receive a refund of extra GST if the FCT is satisfied that the refund of the extra GST would flow to the entity that has effectively borne the cost of the extra GST and would not give an entity a windfall gain.

Input tax credits

A recipient who is registered for GST would ordinarily have claimed input tax credits on the acquisition of the thing supplied. Under the proposed amendments, such a recipient could continue to treat the extra GST in the same way that they treat the GST payable on the transaction for the purpose of working out the amount of its input tax credits under Division 11. This would be achieved by treating the extra GST as having always been payable and always on a taxable supply. The government expects that this should not result in any change to the recipient's input tax credits but is designed to preserve the GST outcomes of the original treatment despite including extra GST. However, the recipient may have an increasing adjustment where the extra GST is reimbursed to it.

Proposed subs 142-10(4) would be added to guard against the potential for parties to contrive arrangements that may enable additional input tax credits to be claimed where there would otherwise be no entitlement, where the corresponding GST is not paid to the FCT. This would be sought to be achieved by stating that subs (1) would not apply where the other entity knows or could reasonably be expected to have known that the supplier had not paid the extra GST to the FCT. Without such an amendment, the government considers an opportunity may arise due to the approach taken in proposed Division 142 which would provide extra GST as having been always payable and always been on a taxable supply.



When has extra GST been passed on?

The phrase "passed on" is not defined in the GST legislation. The government considers that whether GST has been passed on is a question of fact and must be determined on a case-by-case basis taking into account the particular circumstances of each case.

A tax invoice issued to an entity, that contains enough information to allow the amount of GST payable in relation to the supply to be clearly ascertained, will be prima facie evidence of that part of the extra GST having been passed on.

The onus is on the taxpayer to demonstrate that the extra GST has not been passed on. This may be achieved by showing the pricing policies of the entity at that time in respect of that transaction or that type of transaction.

GST may have been passed on even though a tax invoice has not been issued, or does not specifically or separately identify the GST component or is not a valid tax invoice for the purposes of the GST Act. For example, information contained in a document purporting to be a tax invoice, but that does not satisfy the requirements under section 29-70(1), or that does not result in the FCT treating the document as a tax invoice under section 29-70(1B), may be sufficient to indicate that the extra GST has been included in the price of a supply and therefore passed on.

The GST regime is similar to the former sales tax regime in that the entity liable to remit the tax is not intended to be the entity that actually bears the cost of the tax. As such, the draft EM says a number of judicial observations "can be readily adapted to a GST context":

In an economy geared to making a profit, GST is expected to be passed on; Businesses set prices to cover foreseeable costs; GST will be passed on in the usual course of doing business; It is inherent in an indirect system that GST will be passed on; and It is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of

the overpayment has not been passed on.

Under the margin scheme, the draft EM says a mere assertion that GST was not a factor in setting the price would not, of itself, be sufficient to establish that the extra GST had not been passed on. Instead, a wide range of factors may be relevant to the question of "passing on" in any particular case. In the case of taxable sales of real property, some of those factors may include the market in which the taxpayer operates and the contracts under which sales are made.

Date of effect

As previously announced in the first consultation on the proposed changes, the amendments would apply in relation to working out net amounts for tax periods commencing on or after 17 August 2012.

Comments

Comments on the draft legislation are due by 26 March 2013 and should be sent to: General Manager, Indirect, Philanthropy and Resource Tax Division, The Treasury, Langton Crescent, PARKES ACT 2600; Email: [email protected]. Enquiries should be directed to Rob Dalla Costa on (02) 6263 3328.

28/02/2013



Draft GST Ruling GSTR 2013/D1

• Draft Ruling sets out the requirements for adjustment notes under Division 29 of the GST Act

• It outlines when a document is in the approved form for an adjustment note, the information requirements, and when FCT will treat a document as an adjustment note

• Date of effect: When finalised, the Ruling is proposed to apply from 1 July 2010

• Comments due by 10 April 2013.

GST and adjustment notes

Indirect Taxes

GST and adjustment notes: GSTR 2013/D1

Draft GST Ruling GSTR 2013/D1

This Draft Ruling sets out the requirements for adjustment notes under Division 29 of the GST Act. In particular, it outlines:

When a document is in the approved form for an adjustment note; The information requirements that the FCT has determined under section 29-75(1)(c) and an

explanation of how those information requirements in the A New Tax System (Goods and Services Tax) Adjustment Note Information Requirements Determination 2012 apply; and

When the FCT will treat a particular document as an adjustment note even though that document does not meet all of the adjustment note requirements under section 29-75(1).

The Draft also summarises the circumstances when a decreasing adjustment can be attributed without an adjustment note as determined by the FCT under section 29-20(3). However, it does not consider third party adjustments and third party adjustment notes under Division 134. Nor does it consider in detail special rules in the GST Act that may be relevant to adjustment notes, including those concerning agents, insurance brokers, GST groups and GST branches.

Note also that GST Ruling GSTR 2000/1 (Adjustment notes) will be withdrawn when the final Ruling is issued, but that taxpayers may rely on it for the purposes of section 357-60 of Schedule 1 to the TAA until the Ruling is withdrawn.

Approved Form

The Draft Ruling states that a document is in the approved form for an adjustment note if "it includes the information required by section 29-75(1), including the additional information requirements which the FCT has determined, and if applicable section 54-50". It also states that details of more than one adjustment may be shown on an adjustment note, and that if a document includes multiple adjustments and does not meet the requirements of section 29-75(1) for a particular adjustment or adjustments, it remains an adjustment note in the approved form for all other adjustments for which the requirements of section 29-75(1) are met. Likewise, the Draft states that one document may be



both a tax invoice and an adjustment note if it satisfies the requirements for a tax invoice in section 29-70(1) and the requirements for an adjustment note in section 29-75(1).

In relation to "summary statements and subsequent invoices", the ATO says adjustments may be shown on the next tax invoice (eg a monthly statement issued at the end of the month that shows the supplies made during the month, as well as any adjustments such as returns or discounts is an adjustment note if it includes the information required by section 29-75(1)). However, when a number of adjustments are included on the one summary statement, a separate amount must be shown for each type of adjustment. A document in electronic form that meets the requirements of sections 29-75(1) and 54- 50(1) will be in the approved form.

The Draft notes that the FCT has made a Determination (ie a Legislative Instrument) under section 29-75(1)(c) setting out other information requirements that a document must contain to be an adjustment note or a recipient created adjustment note. It states that the adjustment note must contain enough information to enable the information to be clearly ascertained, including (a) that the document is intended as an adjustment note and the effect of the adjustment; (b) the identity of the supplier or the recipient where required; and (c) the difference between the prices of the supply before and after the adjustment event. This Determination requires that the information listed can be clearly ascertained from the information in the document and enough information must be present and it must be clear what it represents. However, if the information required can only be determined by reference to an external source (eg the Australian Business Register), then that information cannot be clearly ascertained from the information in that document.

The Draft Ruling also explains that "it must be clear from the document that it was intended to be an adjustment note or a recipient created adjustment note [and that] this is an objective test that must be satisfied by reference to the document". For example, this requirement may be satisfied by including the words 'Adjustment Note'; 'GST Adjustment'; 'Tax Invoice Adjustment'; 'Amended Tax Invoice', 'Recipient Created Adjustment Note' or 'Adjustment Note Issued by Recipient' in the heading of the document. The Draft also notes that in some situations, the context of the document itself may make the intention clear without any title to that effect (eg where a tax invoice provides terms for a prompt payment discount including the amount of the discount). Importantly, it emphasises that it must also be clear from the document what the effect of the adjustment is.

The Draft then explains that an adjustment note must include information to establish the identity of the supplier or supplier's agent, and the recipient or recipient's agent where applicable and that in the case where the supplier or the recipient is a trust, the identity of the trust must be clearly ascertainable from the document and that the ABN issued to the trust must also be clearly ascertainable from the document. It also notes that where a member, officer, or employee of a company has made a pre establishment acquisition to which Division 60 applies, an adjustment note that is required to identify the recipient should identify the member, officer or employee.

The ATO says that the difference in the price of the supply before the adjustment event and the price of the supply after the adjustment event needs to be shown or enough information needs to be provided for the difference to be clearly ascertainable. For a supply that is not a wholly taxable supply before and/or after the adjustment event, the Draft states that the difference in price refers to that part of the supply that is affected by the adjustment event and that is taxable at the time of the adjustment event or that becomes taxable in relation to that adjustment event.

If the amount of GST payable is 1/11th of the price, a statement can be included as an alternative to showing the amount of the adjustment to the GST payable on the adjustment note, but the statement must make it clear that the difference in the price of the supply includes GST.



For an adjustment note contained in two documents (eg a commercial credit or debit note and a tax invoice), the entity receiving the adjustment note will have a document that is treated as an adjustment note pursuant to the Determination if: (a) that document satisfies sections 29-75(1)(a) and (b), and (b) both documents read together satisfy the requirements that the FCT has determined in the A New Tax System (Goods and Services Tax) Adjustment Note Information Requirements Determination 2012.

When a document may be treated as an adjustment note

The Draft states that the FCT has the discretion to treat a document that does not satisfy the adjustment note requirements as an adjustment note and that the discretion can also be used to treat a document that does not meet the requirements for a recipient created adjustment note as an adjustment note. In this regard, the Draft emphasises that the FCT will exercise this discretion on a case-by-case basis and that the factors he will consider in the exercise of this discretion are explained in Practice Statement Law Administration PS LA 2004/11.

The Draft then explains that when the FCT exercises the discretion to treat a document as an adjustment note, that document is an adjustment note and that this treatment applies for the purposes of both the supplier and recipient. Furthermore, the document for which the discretion has been exercised is treated as an adjustment note for the supply from the date it was created. However, the Draft emphasises that this does not mean the supplier had, before the exercise of the discretion, complied with its obligation to issue an adjustment note within the required time.

Correcting errors on an adjustment note

Finally, the Draft provides that a document issued for an adjustment may not meet all of the requirements for an adjustment note because of an error or omission made by the supplier (eg if the document contains transposition errors in the legal name or ABN or shows an incorrect price). In this case, when the supplier becomes aware the document issued does not meet the requirements for an adjustment note, they can cancel and reissue the document for the adjustment and the replacement document showing the required information will be the adjustment note for the adjustment. However, if the FCT has exercised the discretion to treat a document as an adjustment note, the Draft states that a supplier does not have to reissue the document to meet the requirements for an adjustment note (as above).

Date of effect

When finalised, the Ruling is proposed to apply from 1 July 2010. Note also that GST Ruling GSTR 2000/1 (Adjustment notes) will be withdrawn when the final Ruling is issued, but that taxpayers may rely on it for the purposes of section 357-60 of Schedule 1 to the TAA until the Ruling is withdrawn.

Comments

ATO contact: Stephen Willis

Telephone: (07) 3213 8967

Fax: (07) 3213 8499

Email: [email protected]

Comments are due by 10 April 2013.

28/02/2013



GST Determination GSTD 2013/1

• Determination states that the payment of a failed payment fee is not consideration for a supply in circumstances “when a payment for a supply fails” subject to certain conditions

• Date of effect: Applies both before and after its date of issue

• ATO has also withdrawn GST Advice GSTA TPP 065 which described a failed payment fee as consideration for an input taxed financial supply.

GST: failed payment fee not consideration

Indirect Taxes

GST: failed payment fee not consideration: GSTD 2013/1

GST Determination GSTD 2013/1

This Determination (not previously released in draft form) states that the payment of a failed payment fee is not consideration for a supply in the circumstances "when a payment for a supply fails" - that is, where:

There is an attempt to make a payment for the underlying supply by way of the supplier presenting a cheque or the supplier attempting a direct debit on the recipient's bank account in accordance with the authority it has from the recipient;

The attempted payment is dishonoured or declined and the supplier's financial institution imposes an 'inward dishonour fee' on the supplier;

The supplier and recipient have agreed, or would be taken to have agreed, that in utilising direct debit or cheque payment methods, the recipient will have available funds to make the payment of the initial consideration amount for the underlying supply;

The supplier and the recipient have agreed that if the payment fails, the recipient will be liable to pay a fee (which may be included in the agreement or contract for the underlying supply, or in the terms of the direct debit authority for a direct debit, or because the supplier's ability to charge a failed payment fee is specified by statute);

The failed payment fee arises because the recipient of the underlying supply has not fulfilled its obligation to ensure funds were available to honour a cheque, or meet a direct debit request;

The recipient's failure to fulfil its payment obligations causes the supplier to incur additional costs, such as the inward dishonour fee charged by the supplier's financier, or to suffer other loss, such that the failed payment fee is characterised as compensatory for the additional costs or loss incurred; and

There is nothing in the agreement between supplier and recipient that describes the failed payment fee as part of the consideration for anything supplied by the supplier.



In the circumstances, the Determination states that the payment of a failed payment fee is not consideration for either a financial supply or another supply. However, the Determination also states that the characterisation of a payment for GST purposes is dependent upon the facts in each case and that as a result it may be possible for the payment of a failed payment fee to have a sufficient nexus with the underlying supply for the failed payment fee to form part of the consideration for that supply.

Note that in this Determination, a "failed payment" means a dishonoured cheque or a declined direct debit request, an "underlying supply" means the supply in respect of which the payment failed and that a fee charged by the supplier to the recipient in respect of the failed payment is described as a "failed payment fee".

Date of effect

This Determination applies both before and after its date of issue.

Withdrawal: GST Advice GSTA TPP 065: Is GST payable on a dishonoured cheque fee?

Following the issue of GST Determination GSTD 2013/1, GST Advice GSTA TPP 065 has been withdrawn. The Advice dealt with situations where a dishonoured cheque fee is on-charged by a supplier to its customer, and is considered to be not correct to the extent it suggests that an on-charged dishonoured cheque fee is consideration for an input taxed financial supply. However, note that GST Determination GSTD 2013/1 states that a taxpayer can choose to apply the GST treatment stated in the Determination to past transactions despite having previously relied on GSTA TPP 065 if their circumstances are consistent with those described in the Determination, but any entitlement to a refund would involve consideration of relevant time limits and the restriction on refunds of overpaid GST, including potential reimbursement of unregistered recipients.

28/02/2013



TAXATION OF SUPERANNUATION

• Government has indicated that it will make changes to its proposed Stronger Super regulations dealing with aspects of MySuper and governance reforms

• Government said the operating standard for the types of insurance that may be offered will be deferred to 1 July 2014

• In addition, it will clarify insurance aspects of MySuper.

Stronger Super and MySuper: changes to draft regs

Taxation of Superannuation

Stronger Super and MySuper: changes to draft regs

The government has indicated that it will make changes to its proposed Stronger Super regulations dealing with aspects of MySuper and governance reforms. The Exposure Draft - Superannuation Legislation Amendment Regulation 2012 was released for comment on 8 November 2012. It proposes to establish regulations relating to MySuper notification requirements for accrued default amounts, operating standards for permitted types of insurance and the prohibition on self-insurance.

MySuper and insurance changes

In response to industry concerns raised during consultation (which ended on 21 November 2012), Treasury has released a Consultation Outcome indicating that the government will make changes to the draft regulations, including:

Types of insurance - the government said the proposed operating standard for the types of insurance that may be offered will be deferred from 1 July 2013 to 1 July 2014 to provide sufficient time for funds to prepare new insurance arrangements for new members. The Government also said that members who join a fund prior to 1 July 2014 will be able to continue existing cover after 1 July 2014;

Definition of "insured benefits" - the government has decided that the definition of "insured benefits" will exclude the payment of anti-detriment payments to ensure that anti-detriment death benefits can continue to be paid.

Prohibition of self-insurance - the government will clarify that if a fund is self-insuring as at 1 July 2013 in respect of members who become MySuper members, then the insured benefits of those members can continue to be provided through self-insurance until 1 July 2016. Furthermore, it will be clarified that until 1 July 2016, self-insurance can be provided to new members of a fund that currently self-insures;

MySuper notification - where there is no increase in fees (or reduction in insurance benefits), the government has decided that a notice may be provided in the 12 months following the



attribution of an accrued default amount to a MySuper product. For notices that must be provided 90 days prior to an attribution to a MySuper product, the government has decided that only the accrued default amount at the time the notice is provided will need to be provided under proposed SIS Regulation 9.46;

MySuper significant event notice - the government has decided to clarify the circumstances in which a significant event notice applies when recommending to a MySuper member that they move to another product.

14/02/2013

• Interhealth Energies Pty Ltd as Trustee of InterhealthSuperannuation Fund v FCT [2012] FCAFC – Full Court had dismissed taxpayer’s appeal on a matter concerning a breach of undertaking by an SMSF. ATO said Court applied established case law in dismissing the appeal

• AAT Case [2012] AATA 898, Re Kingston & Anor and FCT– AAT had held, in a tax avoidance scheme, that income of a family trust belonged to the husband taxpayer alone. ATO said AAT’s decision was consistent with its submissions.

ATO Decision Impact Statements

Taxation of Superannuation

ATO Decision Impact Statements

SMSF: no leave to add new ground of appeal

The ATO has issued a Decision Impact Statement on the Full Federal Court's decision in Interhealth Energies Pty Ltd as Trustee of the Interhealth Superannuation Fund v FCT [2012] FCAFC 185. In that decision, the Full Court dismissed a taxpayer's appeal seeking leave to raise a new point on appeal not raised before. The matter concerned a breach of undertaking by a SMSF.

The ATO said the Full Court applied established case law in dismissing the taxpayer's appeal. It said while not required, the Full Court also observed that the FCT was the correct Regulator pursuant to section 10(4) of the SIS Act, which was consistent with its views on the application of the provision.

In relation to the first instance decision, the ATO said it was also consistent with its views on the operation of section 262A of the SIS Act. It noted that the Court in the first instance also confirmed that the FCT may apply for enforcement of undertakings provided by trustees of super funds that he regulates.

In relation to Logan J's comments regarding unpaid distributions in the first instance, the ATO said it needs to be considered in the context of the enforceable undertaking and the particular facts of the case. Therefore, it said it does not consider that the decision impacts on the views expressed in SMSFD 2007/1 (SMSF: When is a dividend or trust distribution "received" before the end of 30 June 2009 for the purposes of paragraph 71D(d) of the SIS Act) and SMSFR 2009/3 (SMSF: Application of the SIS Act to unpaid trust distributions payable to a SMSF).



Tax avoidance scheme - Kingston case

The ATO has issued a Decision Impact Statement on the AAT's decision in AAT Case [2012] AATA 898, Re Kingston & Anor v FCT. In that decision, the AAT held that, in a tax avoidance scheme case, the income of a family trust purportedly distributed between husband and wife taxpayers was in fact income to which the husband alone was presently entitled. It also upheld penalties that had been imposed on the husband.

The ATO said that during the course of the hearing, the taxpayers conceded that the distribution was a sham and that the tax liabilities should fall on the trustee of the family trust. It said the Tribunal, in applying a clause in the family trust's deed, made the entirety of the assessable income that of the husband taxpayer, which was consistent with the alternative submissions made by the FCT.

Further, the ATO said in light of the taxpayers' concession that the transaction was a sham, the AAT's decision confirmed that the FCT had power to amend under former section 170(2)(a) of the ITAA 1936. It said the decision was broadly consistent with Taxpayer Alert TA 2005/1 (Profit washing scheme using a trust and loss entity) and Taxation Determination TD 2005/34 (What are the results for income tax purposes of entering into a profit washing arrangement as described in Taxpayer Alert TA 2005/1).

14/02/2013





TAX ADMINISTRATION

• Government has declared the following as disasters for the purpose of establishing Australian disaster relief funds:

– Victorian bushfires

– Queensland floods and tornadoes

– NSW floods

• Donations to the funds will be tax deductible for a period of two years

• Funds are still required to apply to the ATO for formal endorsement.

Floods and bushfires declared disasters for tax

Tax Administration

Floods and bushfires declared disasters for tax

The Assistant Treasurer has declared the following three events as disasters for the purposes of establishing Australian disaster relief funds:

The Victorian bushfires - which occurred from 18 January 2013. The Queensland floods and tornadoes - which occurred from 26 January 2013. The NSW floods - which occurred from 27 January 2013.

These declarations ensure that new funds and qualifying existing funds established for the relief of people in communities affected by these disasters can receive tax deductible donations. Donations to Australian disaster relief funds, established to provide relief in the aftermath of the bushfires, floods and tornadoes will be tax deductible for a period of two years from the day the disaster occurred i.e. the dates noted above. Funds still need to apply to the ATO for formal endorsement. The Australian Charities and Not-for-profits Commission and the ATO have jointly established a fast track process for this purpose.

Source: Assistant Treasurer's press release No 004, 1 February 2013

07/02/2013



Southgate Investment Funds Limited & Ors v DCT [2013] FCAFC 10

• Full Federal Court has unanimously allowed a taxpayer’s appeal and held that decision of the Court at first instance to grant summary judgment re tax debts and deny it a stay of execution pending an appeal had miscarried

• Full Court said the Court at first instance had not properly considered the merits of the likely success of the appeal.

Taxpayer wins right to have stay re-heard

Tax Administration

Taxpayer wins right to have stay re-heard

Southgate Investment Funds Limited & Ors v DCT [2013] FCAFC 10

The Full Federal Court has unanimously allowed a company taxpayer's appeal from the decision of a Court at first instance to deny the taxpayer a stay of execution (in relation to a grant of summary judgment for $9.7m for its tax debts) pending the hearing of its appeal on the basis that the decision of the Court at first instance had miscarried. This was because the Full Court found that the Court at first instance had not properly considered the merits of the likely success of the appeal: Southgate Investment Funds Limited v DCT [2013] FCAFC 10 (Full Federal Court, McKerracher, Jagot and Griffiths JJ, 12 February 2013).

Background

At first instance, in DCT v Hua Wang Bank Berhad (No 2) [2010] FCA 1296, the Court at first instance (Kenny J) granted summary judgment to the DCT for some $39m against several companies in relation to profits made on the sale of shares, including penalties and GIC of over $2m and at the same time dismissed their application for a stay of execution of the judgment. In doing so, the Court at first instance followed the precedent decision of the High Court in DCT v Broadbeach Properties Pty Ltd (2008) 69 ATR 357 that in considering a stay for execution of a judgment debt, the Court was bound to proceed on the basis that the Part IVC appeals were not pending.

Note that the current proceedings only concerned only one of the companies subject to the original dispute (Derrin Brothers Properties Limited) as the other two taxpayers had paid their debts in full in the interim.

In an earlier judgment on 15 September 2010 (in DCT v Hua Wang Bank Berhad & Ors (2010) 80 ATR 449), the Court (Kenny J) said each of the taxpayers (including the taxpayer in the current matter, Derrin Brothers Properties Limited) was a foreign corporation and each had been involved in transfers of "significant amounts" of money out of Australia following the sale of shares in companies listed on the Australian Stock Exchange. They each chose not to file tax returns in Australia and the DCT assessed each as liable to pay substantial amounts in tax and administrative penalties.



Note that in DCT v Hua Wang Bank Berhad & Ors [2010] FCA 1014, freezing orders had previously been granted and extended over the companies' assets and that in DCT v Hua Wang Bank Berhad (No 3) & Ors [2012] FCA 594, the Federal Court granted the taxpayers' application to have GIC excised from assessments, but dismissed their application to stay the execution of the original judgments.

Decision

In unanimously finding that the Court at first instance had erred, the Full Federal Court first distinguished the decision in Broadbeach on a number of grounds including that Broadbeach arose in a different statutory and factual context (namely, that it concerned the winding up of a company in insolvency) and that it did not involve the courts' powers to stay recovery proceedings in circumstances where a Part IVC appeal was on foot (as in these proceedings).

The Full Court then found that while the Court at first instance had identified the issues on appeal (namely, the taxpayer's residency status and whether the taxpayer beneficially owned the shares in question), it had not given due consideration to the likelihood of the taxpayer's success. In particular, it found that the Court at first instance had made no attempt to determine whether there was sufficient material before it to enable the Court to assess the merits of those appeals, let alone actually make a determination as to their merits.

In arriving at its decision that the Court at first instance had erred in the manner it exercised its discretion not to stay execution of the summary judgment, the Full Federal Court relied on a range of principles extracted from other precedent case including the following matters:

The power to grant a stay should be exercised sparingly and the taxpayer bears the onus of persuading the Court that a stay ought to be granted;

Great weight must be given to the clear legislative policy which give priority to the recovery of taxation revenue notwithstanding that a taxpayer has a Part IVC proceeding on foot;

The merits of pending Part IVC proceedings may be a relevant consideration to be taken into account in the exercise of the discretion, but the court should not attempt to determine the merits unless it has sufficient material before it to do so;

It is too narrow a view of the discretion to grant a stay of proceedings or execution merely because Part IVC proceedings are pending, or because on review of those proceedings there appears to be an arguable case or complex questions to be determined - but that is not to say, however, that the outcome of Part IVC proceedings has to be certain in the sense that they are bound to succeed or fail;

In cases where the Court considers it is in a position to assess the merits of pending Part IVC proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relative strength of the merits, but the taxpayer needs to have more than merely an arguable case;

In appropriate circumstances, a court might consider that a stay is warranted in cases of extreme hardship to a taxpayer (noting however that the mere obligation to pay income tax of itself does not impose extreme hardship and the possibility that the taxpayer may be bankrupted is generally not of itself an extreme hardship);

Irrespective of the merits of pending Part IVC proceedings, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid tax; and

Other considerations may need to be taken into account in determining whether to exercise the discretion in a particular case (eg any conduct on the part of the taxpayer or the DCT which impacts upon the efficient and expeditious conduct of Part IVC proceedings).

Accordingly, after considering these matters, the Full Federal Court remitted the matter back to the Court at first instance for reconsideration. It also agreed that the matter should be remitted to the same judge for a range of reasons including that he already had a strong familiarity with the proceedings, there was no evidence that this might create any apprehension of bias, and that the



judge himself was best placed to assess whether or not there was a risk of apprehended bias having regard to all the relevant circumstances, including all the material and arguments before him in support of the stay application.

Interestingly, the Full Court also noted that the taxpayer's argument that it could be prejudiced and "out of pocket" if the DCT sold the shares in question at the time of the granting of the judgment to meet the taxpayer's debt (when the market was at a low point), and that if the taxpayer subsequently won on appeal, it would be disadvantaged in trying to buy back into the share market when it had risen quite dramatically in the interim.

14/02/2013

• ATO has issued two IDs on:– Transferring a tax loss for consolidation purposes and the

application of Subdivision 166-A of the ITAA 1997

– FBT consequences of when an employee is required to change usual place of residence in order to perform duties of employment.

ATO IDs: tax losses and FBT

Tax Administration

ATO IDs: tax losses and FBT

The ATO has released the following IDs:

ATO ID 2013/7: Tax losses: transferring a loss for consolidation purposes – choosing not to apply Subdivision 166-A of the ITAA 1997 – no effect on the head company subsequently using Subdivision 166-A when trying to utilise the transferred loss. According to the ATO, if a joining entity (being a widely held company or an eligible Division 166 company) is seeking to transfer a loss to the head company of an income tax consolidated group (including itself) under Subdivision 707-A of the ITAA 1997, and chooses under section 166-15 that Subdivision 165-A is to apply to it for the trial year without the modifications made by Subdivision 166-A, the choice does not prevent the head company from applying Subdivision 166-A in a subsequent income year when the head company seeks to utilise the transferred loss. It says the choice under section 166-15 applies on a year-by-year basis.



ATO ID 2013/8: FBT: employee required to change usual place of residence in order to perform duties of employment. This ID says if an employee changes their usual place of residence to be closer to where they perform the duties of their employment, even though it is not required by their employee, the employee is still considered to be "required" to change their usual place of residence in order to perform the duties of their employment for the purposes of subparagraph 58B(1)(b)(iii) of the FBTAA.

14/02/2013

• Government has released the Inspector-General of Taxation’s (IGT) review into improving the self-assessment system along with responses

• IGT made 33 recommendations and ATO agreed with 15 recommendations in part or in full and disagreed with one

• Government agreed with 11 recommendations in full or in principle, and disagreed with one and notes the others pending further consideration.

IGT review of self-assessment system: report

Tax Administration

IGT review of self-assessment system: report

The Assistant Treasurer David Bradbury has released the Inspector-General of Taxation's Review into improving the self-assessment system, together with the responses by the government and the ATO.

In his 190-page report, the Inspector-General made 33 recommendations to the ATO and the government on ways to improve taxpayer certainty, reduce compliance costs and rebalance taxpayer protections. The ATO agreed with 15 recommendations (in full, in part or in principle) and disagreed with one. The government has agreed with 11 recommendations (in full or in principle), disagreed with one and notes the others pending further consideration. [The Inspector-General had given his report to the Minister on 24 August 2012.]

Recommendations the ATO agreed with included:

The ATO should expand the range of indicators it uses to publicly report on the level of certainty that it provides with minimal compliance cost to taxpayers.

The ATO should make more use of determinations by, for example, considering: (a) the conversion of significant ATO Interpretative Decisions into determinations periodically; and (b) issuing a number of determinations on key factual scenarios as a prelude to developing a public ruling on the broader topic.



The ATO should expand the sources it uses to identify topics for public binding advice, to include common issues arising in pre-assessment and expanded lodgment disclosures, such as reportable tax position schedules and annual compliance arrangements.

The ATO should consult with taxpayers, tax practitioners and their representative bodies on ways to improve its Decision Impact Statements.

The ATO should communicate the reason for withdrawing or changing any precedential documents which convey its approach to the law.

The ATO should consult with taxpayers, tax practitioners and/or their representative bodies every five years on information it seeks in company returns (as well as associated pre-assessment and expanded lodgment disclosure, such as annual compliance arrangements, pre-lodgment compliance reviews, the international dealing schedule and the reportable tax position schedules). This would be in addition to its current practice of consulting on new information as the need for them arises pursuant to a change in the law.

The ATO consultation with tax taxpayers, tax practitioners and/or their representative bodies on individual tax returns should include discussion on the information being sought through expanded lodgment disclosures as well as the tax return itself.

The government disagreed with the recommendation that it should consider introducing legislation to ensure that penalties and interest do not apply where: (i) there is no public ATO advice (binding or non-binding) available on a substantial issue; and (ii) the taxpayer took reasonable care in assessing their liability in relation to that issue. The ATO disagreed with the recommendation that it should re-instate TaxPack to its former scope and declare as public rulings the entire contents of Tax Pack, e-tax and web-based individual income tax return lodgment systems.

The government noted the recommendation that it should consider commissioning an appropriate independent body, such as the Productivity Commission, to publicly report on the cost of taxation related compliance, including taxpayers' costs and the overall cost to the economy.


14/02/2013



• Government has released a consultation paper on the proposal to reform the timing of company tax payments by large companies from quarterly to monthly

• Proposed change would phase in over three years starting from 1 January 2014 for companies with over $1bn turnover

• Comments due by 13 March 2013.

Monthly tax instalments by large companies

Tax Administration

Monthly tax instalments by large companies

The Assistant Treasurer has released a consultation paper on the government's proposal (announced in the MYEFO on 22 October 2012) for three-year process to reform the timing of company tax payments by large companies. The consultation paper sets out the proposed implementation and design details for how to better align the timing of PAYG instalments for large companies with their actual economic activity. The proposed amendments are designed to better align large companies' tax instalments with both their GST payments, and their income and trading conditions by requiring them to make PAYG instalments monthly, rather than quarterly.

Mr Bradbury said the total tax paid by companies would not change, but from 1 January 2014, companies with turnover of $1bn or more would be required to remit their PAYG company tax instalments monthly, not quarterly. Companies with turnover of $100m or more would have a further one-year period to prepare for this change, with monthly payments to start on 1 January 2015. Companies with turnover of $20m or more would have three years to prepare for the change, with monthly payments to start on 1 January 2016. Companies with an annual turnover between $20m and $100m that are not consolidated for income tax purposes, would not be required to move to monthly PAYG instalments if they pay their GST quarterly or annually.

Details

Under the proposed changes, monthly PAYG instalments would apply to large corporate tax entities. For this purpose, "large" would be defined as having base assessment instalment income of $20m or more. Corporate tax entities that meet or exceed the $20m base assessment instalment income threshold, but pay their GST quarterly or annually, will not be required to move to monthly PAYG instalments unless:

They are a head company of a consolidated group; They are a provisional head company of a Multiple Entry Consolidated (MEC) group; or They meet or exceed the $100m base assessment instalment income threshold.

Large corporate tax entities would be moved to monthly PAYG instalments in three stages:



Corporate tax entities that meet or exceed a $1bn base assessment instalment income threshold (see below) would pay their instalments monthly from their first instalment period commencing on or after 1 January 2014.

Corporate tax entities that meet or exceed a $100m base assessment instalment income threshold would pay their instalments monthly from their first instalment period commencing on or after 1 January 2015.

Corporate tax entities that meet or exceed a $20m base assessment instalment income threshold would pay their instalments monthly from their first instalment period commencing on or after 1 January 2016.

After 1 January 2016, corporate tax entities that newly meet or exceed the $20m base assessment instalment income threshold would pay their PAYG instalments monthly from the commencement of their subsequent income tax year.

A corporate tax entity's base assessment instalment income would be so much of that entity's assessable income from their most recent tax assessment as is determined to be instalment income. Further information on the meaning of instalment income is in section 45-120 of Schedule 1 to the TAA.

All corporate tax entities would be required to be monthly PAYG instalment payers, regardless of their GST payment cycle (if any) if:

Their base assessment instalment income is $100m or more; or They are a head company or provisional head company with a base assessment instalment

income of $20m or more.

Once an entity becomes a monthly payer for PAYG instalment purposes, it would continue to receive instalment notices, only on a monthly rather than a quarterly schedule. Instalment notices would remain payable on or before the 21st (or 28th) day of the month immediately following the month in which the notice is issued. Final income tax returns would remain due by the 15th day of the 7th month after the end of the income tax year.

The methodology used to determine a corporate tax entity's instalment rate would remain the same as is currently the case, and the size of instalment payments would still be calculated by applying a corporate tax entity's instalment rate to their instalment income for that period. However, the period in question would change from "annual" or "quarter" to "month". The formula for calculating instalment payments will become:

applicable instalment rate x instalment income for the month

Timeline for the amendments

The government intends to release exposure draft legislation (with explanatory material) as soon as possible after consultation on the paper closes on 13 March 2013. The intention is to provide a three-week period for the public to comment on the exposure draft. The Bill would then be finalised with a view to being introduced and passed during the Winter 2013 Parliamentary sittings [which are scheduled to run from 14 May 2013 to 27 June 2013].

Comments

Comments are due by 13 March 2013 and should be sent to: General Manager, Corporate and International Tax Division, The Treasury, Langton Crescent, PARKES ACT 2600; Email: [email protected]. Enquiries should be directed to Chris Lyon on (02) 6263 3102.


28/02/2013



• ATO has released its Real-time compliance engagement approach for higher consequence taxpayers in large market

• ATO said it uses pre-lodgment compliance reviews for all higher consequence taxpayers that do not have an annual compliance arrangement

• Process involves identifying and assessing material tax risk on a periodic basis in both pre and post lodgment period

• ATO said the reviews do not provide any certainty or sign-off on the lodged returns.

Real-time compliance approach for large taxpayers

Tax Administration

Real-time compliance approach for large taxpayers

The ATO has released its Real-time compliance engagement approach for higher consequence taxpayers in the large market. It says the information outlines the policy behind its approach to higher consequence taxpayers.

According to the ATO, it uses Pre-Lodgment Compliance reviews (PCRs) for all higher consequence taxpayers that do not have an annual compliance arrangement. It says in some cases, it will also apply this risk review process to lower consequence taxpayers to managed identified industry risks. The ATO says the risk review approach typically involve the following:

Identify and assess material tax risk on a periodic basis in a pre and post lodgment period; Focus on understanding key tax decision-making that has lead to a material tax risk; Develop an effective real-time disclosure program, based on objectively-sourced information

and documents from the taxpayer, including reliance on decision making frameworks, policies, processes and systems; and

Apply a level of intensity and differentiation that matches the taxpayer's position within the risk-differentiation framework that allows flexibility in how the risk review is applied.

For PCRs, the ATO says it will send a finalisation letter within six months of lodgment confirming any tax risks identified during the review. It says the letter will also include issues that it considers appropriate to bring to a taxpayer's attention, as well as treatment options. However, the ATO says PCRs, unlike annual compliance arrangements, do not provide any certainty or sign-off of the lodged income tax return.

21/02/2013



• Government has released Board of Taxation’s review of taxation arrangements under the venture capital limited partnerships regime

• Board found improvements could be made to the regime to increase investment in high risk start-up in the venture capital sector

• Government has agreed with all of the Board’s recommendations in full or in principle.

Board of Taxation venture capital recommendations

Tax Administration

Board of Taxation venture capital recommendations

The Assistant Treasurer has released the Board of Taxation's Review of taxation arrangements under the venture capital limited partnerships regime. The government's response to this report was announced as part of the Venture Australia package which forms an element of the government's Industry and Innovation Statement. The Board's report is on its website.

The Board of Taxation's review found that improvements could be made to the operation of the Venture Capital Limited Partnership (VCLP) and Early Stage Venture Capital Limited Partnership (ESVCLP) regimes so they better meet the objective of increasing investment in high risk start-up and expanding businesses in the Australian venture capital sector. Mr Bradbury said the government has agreed with all of the Board's recommendations of these reviews in full or in principle.

As part of the Venture Australia package, the government also announced other changes to the tax treatment of venture capital aimed at increasing investment in Australia's venture capital industry. These changes form part of the government's response to the 2012 Review of Venture Capital and Entrepreneurial Skills. They are:

Lowering the minimum investment capital required for entry into the ESVCLP program from $10m to $5m to facilitate increased funding from "angel" investors;

Administering the VCLP and ESVCLP programs as a single regime to provide clearer entry for investors and managers wishing to use these investment vehicles; and

Phasing out the Pooled Development Fund (PDF) program over a number of years in consultation with stakeholders. The PDF program has been closed to new registrants since 2007.

Changes requiring legislative amendments will take effect on Royal Assent.


21/02/2013



• Tax Practitioners Board has released information re relevant experience for those applying to register or renew their registration as an individual tax agent

• Information covers determining relevant experience, the amount of relevant experience and demonstrating relevant experience

• Board also released information on recognition of prior learning for BAS agents including various certificates.

Experience and prior learning: Tax and BAS agents

Tax Administration

Experience and prior learning: Tax and BAS agents

The Tax Practitioners Board has released information for those applying to register or renew their registration as an individual tax agent. They will need to have enough relevant experience in providing tax agent services. Relevant experience can include work: as a registered tax agent; under the supervision and control of a registered tax agent; as a legal practitioner; of another kind approved by the Board.

The information covers determining relevant experience, the amount of relevant experience, and demonstrating relevant experience.

BAS agents

The Board has also released information on recognition of prior learning for BAS agents. The Board says that, for registration or renewal of registration as an individual BAS agent, it will accept the following if they were obtained through a process of recognition of prior learning:

Certificate IV Financial Services (Bookkeeping); Certificate IV Financial Services (Accounting); Higher awards than a Certificate IV in the field of bookkeeping or accounting.

21/02/2013



Yuncken Pty Ltd v Ian James Ericson trading as Flea’s Concreting & Anor [2012] QSC 51

• ATO has issued a Decision Impact Statement on Hansen Yuncken Pty Ltd v Ian James Ericson trading as Flea’s Concreting & Anor [2012] QSC 51

• Qld Supreme Court had held a garnishee notice issued by FCT does not give it a proprietary interest in debt

• Broadly, ATO said decision was consistent with settled authority re proprietary interest.

ATO Decision Impact Statement

Tax Administration

ATO Decision Impact Statement: Hansen Yuncken

Hansen Yuncken Pty Ltd v Ian James Ericson trading as Flea's Concreting & Anor [2012] QSC 51

The ATO has released a Decision Impact Statement on the Qld Supreme Court decision of McMurdo J in Hansen Yuncken Pty Ltd v Ian James Ericson trading as Flea's Concreting & Anor [2012] QSC 51. In that decision, the Court held that a garnishee notice issued by the FCT under s 260-5 of the Taxation Administration Act 1953 in respect of a debt owed by a third party to a taxpayer, does not give the FCT a proprietary interest in the debt, but rather a statutory charge over the debt while it continues to exist. As a result, in this case where the debt subject to the notice was paid into court and ceased to exist in the circumstances, the FCT had no entitlement to the moneys.

The ATO said that, in so far as His Honour decided the FCT did not have any proprietary interest in the money, the decision was consistent with settled authority. Also, His Honour's conclusion that the garnishee notice created a statutory charge over the debt was also consistent with the authorities, the ATO said. However, the ATO considers His Honour's view that the payment of monies, which was the subject of a garnishee notice, into court extinguishes the obligation of the recipient of the notice to comply with the notice, may be inconsistent with the earlier authorities of DCT v Government Insurance Office of NSW (1992) 23 ATR 378 and Macquarie Health Corp Ltd v FCT (1999) 43 ATR 650.

The FCT considers there "appears to be no basis for distinguishing GIO and Macquarie Health in this matter". It is the FCT's view:

"that payment into court provides a practical mechanism for a recipient of a garnishee notice, in the face of competing claims, to allow proper consideration by the Court as to whom his debt is to be paid. Such payment does not extinguish the debt owed by the notice recipient to the taxpayer particularly in circumstances where the FCT expressly reserve his rights prior to the payment being made into court. Rather, the money is placed into the temporary custody of the court whilst the parties await judicial determination as to who is entitled to the money. The use of this mechanism



simply allows the notice recipient/judgment debtor to avoid exposure to legal claims for its failure to comply with the terms of the Court's order; or the obligations under the FCT's garnishee notice."

It is also it is the FCT's view that the effect of the decision of Hill J in DCT v Donnelly & Ors (1989) 20 ATR 1331 is such that, "by the operation of section 260-5, the FCT had negative rights which accrued and prevented Mr Ericson from accepting payment of the debt, or otherwise disposing of the debt, owed to him by Hansen Yuncken. Conformably with this view and with due respect, it may have been unnecessary for his Honour to explore whether the FCT has proprietary rights in the money that as paid into Court by Hansen Yuncken. Rather, it was open to the Court to proceed on the basis that Mr Ericson was statutorily prohibited from accepting that payment in reduction of the debt owed to him by Hansen Yuncken. The ultimate effect being that the debt owed by Hansen Yuncken had not been extinguished by the payment into Court and as such the FCT's statutory rights persisted."

The FCT says he proposes to raise this issue in future cases to seek clarity on any conflicting authorities. The FCT will continue to permit the payment into court of moneys that is the subject of a garnishee notice and to which there exist competing claims. However, so as to avoid any unnecessary litigation, the FCT says he will only be agreeable to this course of action where all parties expressly agree that the payment into court by the notice recipient is not intended to, nor does it extinguish the liability owed by the notice recipient to the tax debtor. In circumstances where a notice recipient has paid money into court without the knowledge of the FCT, the FCT says he reserves his rights in appropriate instances to:

Seek to enforce his rights under the garnishee notice such that any moneys paid into Court do not affect the FCT's statutory rights under section 260-5; or

Institute proceedings in debt as against the notice recipient for incorrectly paying amounts into court rather than in accordance with the statutory obligation imposed by section 260-5.

Background note

The background to the case is that the third party debtor (Hansen) was the head contractor for a building project in Cairns. The taxpayer (Ericson) was a subcontractor who claimed he was owed $4.8m for work done and who successfully obtained an adjudication order under the Industry Payments Act 2004 (Qld) for the payment to be made. At the same time, the FCT served a garnishee notice on Hansen under section 260-5 for the payment to be made to the FCT instead.

The FCT and Hansen later agreed that Hansen would pay $1.6m directly to the FCT and the balance into court (in view of concerns over competing claims over the money). In doing so, the FCT believed his rights over the moneys paid into court were protected by the garnishee notice. However, Ericson later argued that the FCT had no proprietary right to the moneys and that it remained the taxpayer's money - subject to the competing claims over it by the taxpayer's liquidator and other creditors. The Qld Supreme Court found for Ericson.

28/02/2013



AAT Case [2013] AATA 96, Re Flood v FCT

• AAT has refused a taxpayer’s application for an extension of time to lodge an objection re capital gain on disposal of shares which occurred in the 2005 year

• Taxpayer argued that an extension of time should be granted to allow her to apply a favourable private ruling obtained for the 2010 year to the 2005 year

• AAT said the taxpayer was seeking to achieve a benefit in retrospect and held that the taxpayer had not demonstrated an arguable case and refused to grant an extension.

Extension of time to lodge an objection refused

Tax Administration

Extension of time to lodge an objection refused

AAT Case [2013] AATA 96, Re Flood v FCT

The AAT has refused a taxpayer's application requesting an extension of time to lodge an objection in relation to a capital gain on disposal of shares which occurred in the 2005 year: AAT Case [2013] AATA 96, Re Flood and FCT (AAT, Ref No 2012/3737, Handley SM, 22 February 2013).

Background

For the year ended 30 June 2005, the taxpayer lodged an income tax return prepared by her accountants which included a net capital gain of $9,551 in relation to the disposal of shares. In May 2006, a notice of assessment was issued based on the return as lodged. In December 2011, the taxpayer applied for a private ruling re capital losses on her investment. She received a favourable reply in March 2012 applicable to the year ended 30 June 2010. In April 2012, the taxpayer asked the FCT to apply that ruling to her 2005 assessment and to refund the CGT she had paid. In June 2012, the taxpayer lodged an objection against the 2005 assessment, but the FCT refused to grant her an extension of time to lodge the objection.

The taxpayer contended that due to the favourable findings of the private ruling, she should be able to apply that ruling to the 2005 year. The private ruling related to capital losses from monies forgiven. She also contended that she was not adequately advised in 2005 that she could object to the assessment. The FCT argued that the taxpayer had provided no adequate explanation for the delay and that she had failed to establish any arguable case for the extension of time to lodge an objection.

Decision

The AAT held that the taxpayer had not demonstrated an adequate explanation for the delay in lodging the objection, and that her case was without legal merit. It said the taxpayer was competently advised and represented in 2005 and that the assessment regarding the CGT liability was made correctly.



In addition, the AAT said the taxpayer sought to establish that monies forgiven constituted capital losses against which she could be entitled to offset a capital gain from six years earlier and in doing so, attempted to achieve a benefit in retrospect. The Tribunal said it was satisfied that the capital gain in 2005 related to the disposal of shares and was a separate, distinct and unrelated event to the capital losses arising from the debts forgiven. Therefore, the AAT held the taxpayer had not demonstrated an arguable case and refused to grant an extension of time to lodge an objection.

28/02/2013

Macquarie Bank Limited v FCT [2013] FCA 96

• Federal Court has dismissed a taxpayer’s application for interlocutory injunctive relief that sought to restrain FCT from issuing amended assessments to the taxpayer

• Taxpayer claimed FCT was going to apply, retrospectively, a changed view on the law re Overseas Banking Unit expense allocations

• Court dismissed the application but granted an abridgement of time to enable the matter to come back before the Court.

Taxpayer fails to prevent FCT issuing assessments

Tax Administration

Taxpayer fails to prevent FCT issuing OBU assessments

Macquarie Bank Limited v FCT [2013] FCA 96

The Federal Court has dismissed a taxpayer's application for interlocutory injunctive relief that sought to restrain, until further order, the FCT from issuing amended assessments to the taxpayer. The taxpayer claimed that the FCT was going to apply, retrospectively, a changed view on the law relating to Overseas Banking Unit expense allocations.

The Court said the taxpayer was told, in effect, that the ATO would apply retrospectively the FCT's changed view on the law concerning the allocation of OBU expenses. The Court said the issue related to what is said to be a change of policy or change of view by the FCT as to acceptable accounting methodologies. The Court said the FCT proposed to issue the taxpayer with amended assessments, covering at least five taxation years, and that the time limit for issuing those assessments would expire at the end of February 2013 in the case of the first two income tax years and sometime in April 2013, insofar as the third of those taxation years was concerned. The taxpayer argued that the indication given by the FCT as to his change of view was in breach of ATO Practice Statement PS LA 2011/27, which sets out certain procedures which the ATO is required to undertake if it changes its mind on relevant taxation issues. The Practice Statement deals with the circumstances in which the ATO can adopt a change of view and have it apply prospectively. If the ATO wished that view to apply retrospectively, the taxpayer argued that certain procedures or requirements need to be followed and it claimed they were not in this case.



The Court dismissed the taxpayer's interlocutory application (even though the taxpayer had offered to consent to an extension of the time period for issuing the amended assessments), but granted an abridgement of time to enable the matter to come back before Edmonds J.

Macquarie Bank Limited v FCT [2013] FCA 96, Federal Court, Griffiths J, 12 February 2013

28/02/2013

• Binetter v DCT [2012] FCAFC 126– High Court refused taxpayer’s application for special leave to

appeal

– The Full Federal Court had dismissed taxpayer’s appeal re validity of a s 264 notice issued by FCT.

Appeals update

Tax Administration

Appeals update: Binetter

Binetter v DCT [2012] FCAFC 126

The High Court has refused the taxpayer's application for special leave to appeal against the Full Federal Court decision in Binetter v DCT [2012] FCAFC 126. The Full Federal Court decision, which now stands, had dismissed the taxpayer's appeal from part of the judgment of Robertson J in Binetter v DCT (No 3) [2012] FCA 704 concerning the validity of a section 264 notice issued by the FCT.

The case concerned the ATO's attempt to obtain additional information and evidence concerning certain bank deposits (totalling $3.8m) made into a joint bank account in the name of the taxpayer and her late husband during the 1 July 2001 to 30 June 2009 years of income. A majority of these deposits were made by entities of which the taxpayer and her late husband were directors. The ATO issued a Position Paper to the taxpayer saying the FCT intended to assess her on 50% of the relevant deposits on the basis that the deposits represented payments of director's fees, salary or wages or unexplained income in relation to the taxpayer's and her late husband's services as directors of two companies, Erma Nominees Pty Ltd as trustee for the Erwin Binetter Family Trust, and Ligon 158 Pty Limited as trustee for Caringbah Investment Trust. Amended assessments were issued and the taxpayer objected. The FCT wrote to the taxpayer's solicitors indicating that a number of her objections would be treated as valid and that others were still the subject of investigation. The FCT subsequently sought additional information and evidence from the taxpayer and a section 264 notice was issued.

21/02/2013



• Central Equity Limited & Anor v FCT (2011) 82 ATR 550• Taxpayer has discontinued its appeal to the Full Federal

Court

• Federal Court had held taxpayer was liable for GST on apartments sold under enforceable contracts that were signed before 1 July 2000 but did not settle until later.

Appeals update

Tax Administration

Appeals update: Central Equity Limited

Central Equity Limited & Anor v FCT (2011) 82 ATR 550

The taxpayer has discontinued its appeal to the Full Federal Court against the decision of Gordon J in Central Equity Limited & Anor v FCT (2011) 82 ATR 550. In that decision, which now stands, Gordon J held that a property developer was liable for GST on apartments sold under enforceable contracts that were signed before 1 July 2000 but did not settle until after that date.

The taxpayer had argued that the property was made available at the time of entry into the contract, ie prior to 1 July 2000 (and so no GST was payable). In other words, the supply took place upon entry into the contracts and that settlement was merely ancillary or a step in "perfecting" the rights and obligations that arose upon entry into the contracts of sale. The Federal Court held that the real property was made available on or after 1 July 2000. Gordon J considered that, as at 1 July 2000, the purchasers of the real estate had not in any sense obtained any real or practical ability to use the strata interests in apartments they had contracted to acquire. For this reason, the relevant property had not been "made available" to them for the purposes of section 6(3) and 7 of the GST Transition Act.

28/02/2013





TAX CONTROVERSY

Donoghue v FCT [2013] FCA 84

• Federal Court has granted a taxpayer an interlocutory injunction to prevent FCT from making use of certain information obtained without taxpayer’s consent

• Taxpayer argued the documents were and remain subject to a duty of confidentiality and legal professional privilege

• Court considered that the taxpayer demonstrated a strong prima facie case justifying an interlocutory injunction being granted.

Injunction granted: FCT cannot use documents

Tax Controversy

Injunction granted: FCT cannot use documents

Donoghue v FCT [2013] FCA 84

The Federal Court has granted a taxpayer an interlocutory injunction to prevent the FCT from making use of certain information obtained without the taxpayer's consent: Donoghue v FCT [2013] FCA 84 (Federal Court, Reeves J, 14 February 2013).

Background

The taxpayer engaged a law student and a firm of lawyers that was associated with the law student to provide advice relating to his personal and family financial matters. The Court said after the taxpayer failed to pay the invoices for outstanding fees, he alleged the law student threatened to provide all his financial documentation to the ATO. According to the Court, the taxpayer failed to pay the invoices and the law student emailed to advise that "as discussed" his financial documentation had been provided to the ATO. Subsequently, the taxpayer received notices of income tax assessment for the 2005, 2006, and 2007 years. The ATO also sent a section 264 notice to the taxpayer's wife that required her to give evidence regarding her and her family's tax affairs.

The taxpayer then filed an application for relief under section 39B of the Judiciary Act 1903 seeking that the FCT deliver or destroy documents provided to him by the law student and/or the associated law firm. He also sought to restrain the FCT from using or taking any action on the basis of the documents for the purpose of assessing his taxable income or exercising any power under sections 263 and 264 of the ITAA 1936, or section 353-10 of Schedule 1 to the TAA in respect of himself and his wife. Broadly, the taxpayer argued that the documents were, and remain, subject to a duty of confidentiality and/or subject to legal professional privilege.



The FCT opposed the taxpayer's application and argued two grounds:

The taxpayer could not rely on a claim that the documents were confidential to prevent the FCT from using the information in the documents when they were already in the possession of the ATO; and

Even if legal professional privilege had previously existed in the information in the documents, that privilege was removed when the documents were voluntarily provided to the FCT by a third party.

Decision

The Court said it was not appropriate at the interlocutory stage to conduct a close analysis of various authorities and come to a final conclusion on whether there was a sufficiently strong prima facie case of duty of confidentiality. It said however, from its reading of those authorities, it had "sufficient doubt about the validity of the submissions made on behalf of the FCT to conclude that [the taxpayer] has established a sufficiently strong prima facie case for final relief to justify an interlocutory injunction being granted".

Further, the Court said it also considered that the taxpayer had demonstrated a prima facie case justifying relief on the alternative ground that the documents were subject to legal professional privilege. Having determined both of the above, the Court then considered the balance of convenience criterion. It considered that the FCT would not suffer any substantial inconvenience if the interlocutory injunction was granted, as the FCT had not identified any immediate use for the disputed documents. Therefore, the Court considered that the balance of convenience on the application favoured the taxpayer. In conclusion, the Court held the taxpayer was entitled to interlocutory injunctive relief as he had met all the criteria.

21/02/2013



FCT v Macquarie Bank Ltd & Anor [2013] FCAFC 13

• Full Federal Court has unanimously dismissed FCT’sappeal re a transaction which resulted in a $318m capital gain from selling shares after consolidation

• In dismissing FCT’s appeal, the Full Court found that no “tax benefit” arose in the circumstances under Pt IVA of the ITAA 1936

• Full Court said under the consolidation regime the single entity principle operated to prevent FCT from identifying the subsidiary that sold the shares as obtaining a “tax benefit”.

Pt IVA: FCT loses appeal on gain from sale of shares

Tax Controversy

Pt IVA: FCT loses appeal on gain from sale of shares

FCT v Macquarie Bank Ltd & Anor [2013] FCAFC 13

The Full Federal Court has unanimously dismissed the FCT's appeal and held that a member of a consolidated group was not subject to Part IVA in respect of a capital gain it made from selling shares as there was no "tax benefit" under the scheme. This was mainly because the FCT had identified the subsidiary as the taxpayer who had received the "tax benefit" whereas the Court found that under the consolidation regime, only the head company of the group could be liable for tax and therefore only it could obtain a tax benefit: FCT v Macquarie Bank Limited [2013] FCAFC 13, Full Federal Court, Emmett, Middleton and Robertson JJ, 15 February 2013).

Background

The matter concerned the liability to CGT of Mongoose Pty Limited (Mongoose) in relation to the sale shares it held in Minara Resources Limited (Minara), an Australian listed company. Prior to March 2004, Mongoose was a subsidiary of Mongoose Acquisitions LLC (a US company), the membership interests in which were owned by two limited partnerships (the vendors) also incorporated in the US. Each of the vendors was ultimately owned by MatlinPatterson LLC (a US private equity firm).

In February 2004, Macquarie Bank Limited (Macquarie) and MatlinPatterson agreed for Macquarie to arrange for Mongoose's sale of its shares in Minara. A subsidiary of Macquarie was to act as the agent of MatlinPatterson to effect the sale. Macquarie's subsidiary was to receive a fee consisting of a proportion of the gross proceeds of sale. However, an alternative proposal emerged and as a result in March 2004, Macquarie purchased all of the membership interests in Mongoose Acquisitions from the vendors, for a consideration of $438m (being $2.65 for each share in Minara).

Subsequently, Mongoose sold its shares in Minara for $2.90 per share. As a result, Macquarie derived a gain of $41m, being the difference between the amount it paid for the membership interest in Mongoose Acquisitions and the value of that interest, having regard to the amount received by Mongoose on the sale of its shares in Minara. Macquarie returned the amount as a capital gain. Mongoose, which had acquired its shares in Minara in January 2003 for 97 cents per share, also



derived a gain of $318m between January 2003 and March 2004, when it sold the shares in Minara at $2.90 per share. (The gain was the difference between the price paid by it for the shares ($161m) and the proceeds of sale ($480m).

The question in issue was whether this gain derived by Mongoose was subject to CGT. The FCT formed the view that the steps involving Macquarie and the other entities comprised a "scheme" under Part IVA of the ITAA 1936 and that one or more of the entities had entered into or carried out the scheme for the dominant purpose of obtaining a "tax benefit" on the basis that, if the scheme had not been entered into or carried out, the original proposal would have been carried out and produced a significantly higher incidence of capital gains tax, payable by Mongoose. As a result, the FCT issued two separate Part IVA determinations and assessments under Part IVA. One set was issued to Mongoose and one to Macquarie (albeit, the FCT said he would ultimately rely on only one determination and one amended assessment.)

Importantly, following the acquisition of Mongoose Acquisitions by Macquarie, Mongoose Acquisitions and Mongoose formed a consolidated group under Part 3-90 of the ITAA 1997, of which Macquarie was the head company. This act of consolidation and the cost adjustments to the relevant shares resulted in the assessable gain to Macquarie of $41m (as opposed to the possible gain of $318m to Mongoose).

At first instance, in Macquarie Bank Limited v FCT [2011] FCA 1076, the Federal Court held that the FCT could not rely on the alternative Part IVA determinations and assessments issued to both the head company and the subsidiary to uphold the Part IVA finding and that, in any event, there was no dominant purpose of obtaining a tax benefit essentially because the consolidation rules specifically intended the increased cost base effect.

Decision

In unanimously dismissing the FCT's appeal, the Full Federal Court first stated that the mere joining of a consolidated group is not sufficient of itself to preclude the operation of Part IVA if the criteria in the Part are otherwise satisfied. However, it then found that no "tax benefit" arose in the circumstances because it was not possible under the operation of the consolidation regime (and in terms of the way the FCT had defined the "scheme" and posed his "counter-factual") for Mongoose to have obtained the "tax benefit". This was because the Court held that under the "single entity" principle of the consolidation regime, “only the head company can be liable for tax and therefore only it could obtain a tax benefit".

In arriving at this conclusion, the Court noted, among other things, the following:

There is nothing in Part 3-90 that expressly excludes the operation of Part IVA to the consolidation regime and the mere joining of a consolidated group is not sufficient of itself to preclude the operation of Part IVA in respect of actions taken by that entity if the criteria in Part IVA are otherwise satisfied;

Even though Mongoose is a "taxpayer" under the definition in section 177A, it is impermissible to say that it therefore also has a distinct assessable income under the consolidation provisions for the purpose of applying Part IVA;

The fact that Part 3-90 deems that subsidiaries do not have existences independent from their head companies means that it is not possible to make determinations in respect of or directly assess subsidiaries;

Further, in terms of the FCT's counterfactual (ie if the scheme had not been entered into or carried out, Mongoose would have sold the Minara shares under the Agency Proposal as an independent entity), it was not possible to say Mongoose obtained the tax benefit; and

The words of section 177C do not offer any scope to substitute a different taxpayer for the purpose of determining what would or might have been included in a taxpayer's assessable income if the scheme had not been entered into.



Accordingly, the Court found there was no tax benefit in light of the way in which the scheme and tax benefit were sought to be defined by the FCT. However, the Court did note that the actions of consolidated group subsidiaries that give rise to tax consequences can be brought within the ambit of Part IVA depending on the scheme and counterfactual defined by the FCT. While not needing to determine the matter, the Court also found that Part IVA would not have applied because the dominant purpose test had not been met. In particular, it stated that it did not think a reasonable person would conclude that any of the scheme participants entered into or carried out the scheme for the dominant purpose of enabling the presumed relevant taxpayer in the consolidated group (i.e. Mongoose) to obtain the tax benefit. In particular, the Court found that the majority of section 177D factors were either neutral or supportive of the taxpayers' claim that the dominant purpose of the relevant parties was a commercial one.

In this regard, the Full Federal Court also noted the relevant taxpayers ultimately had a choice of two commercial transactions with different financial consequences and, effectively, chose to take an immediate and certain payment of full proceeds of a sale over the uncertain prospect of a float of the Mongoose holding in a volatile market. Moreover, the Court found that while to some extent tax considerations were clearly relevant to the decision to sell the shares in this manner, there was nothing in the evidence (or that arose from consideration of the section 177D(b) factors) that indicated that the purpose of enabling Mongoose to obtain a tax benefit was the dominant purpose

21/02/2013





TAX REFORM

• Government has announced it would alter the confidentiality of tax information rules for large and multinational businesses

• Proposal would force companies to publicly disclose the Federal taxes they pay, and is aimed at reducing complex tax arrangements to avoid tax

• Government will also explore ways to improve sharing of tax information between ATO and other regulators

• Legislative changes are likely to be introduced this year after consultation.

Winding back tax confidentiality for multinationals

Tax Reform

Winding back tax confidentiality for multinationals

The government has announced it proposes to alter the confidentiality of tax information rules for large and multinational businesses so they would be forced to publicly disclose Federal taxes they pay. The Assistant Treasurer said the move was to implement the government's intention "to improve the transparency of Australia's business tax system".

"Large multinational companies that use complex arrangements and contrived corporate structures to avoid paying their fair share of tax should not be able to hide behind a veil of secrecy," the Assistant Treasurer said. He said protecting taxpayer confidentiality for individuals was essential, "but recent events in Australia and around the world call into question whether large and multinational businesses should have the same level of confidentiality about the taxes they have paid".

Mr Bradbury said the government would also explore ways to improve the sharing of tax information between the ATO and other key corporate regulators including the Foreign Investment Review Board, ASIC and APRA. He said he has therefore asked Treasury, in consultation with the Specialist Reference Group on Ways to Address Tax Minimisation of Multinational Enterprises he announced in December 2012, "to develop the details of how changes could be implemented". In particular:

How the policy could best be designed to cover large and multinational businesses, including whether a threshold test would be appropriate;

Which Federal taxes should be disclosed; and How the tax information should be made publicly available.



In announcing this work, Mr Bradbury said the government "strongly reaffirm[ed] its support for the privacy of individuals' taxpayer confidentiality. The government will not publicly disclose the tax information of individuals or small businesses." Following the first meeting of the Specialist Reference Group later this month, Mr Bradbury said the government will consider the advice from Treasury and views of the community to "assess what changes are appropriate, with a view to introducing any necessary legislative changes this year".


Industry response

Commenting on the government's announcement to "improve the transparency of Australia's business tax system", Paul Stacey, Tax Counsel, Institute of Chartered Accountants Australia, said that Australia is a highly tax compliant country. The overwhelming majority of Australian resident taxpayers, including multinationals operating here, comply with their tax obligations. "Vilifying business for complying with the tax law is hardly conducive for economic growth", Mr Stacey said.

Mr Stacey said there were also difficult practical issues on how the information might be collected. He said the government's proposal presupposes Australian resident taxpayers providing information on multinationals "which either they don't know or the disclosure of which would likely breach legal and commercial confidentiality obligations".

"The government is trying to kick start a consumer activist movement through 'a name and shame' policy", Mr Stacey said. He warned that this approach risks "potential collateral damage" to individual businesses and the broader economy. According to Mr Stacey, tax is just one component of a business's contribution to Australia, and regard should be had "to the wider picture including jobs created, goods and services supplied to consumers".

Source: ICAA media statement, 4 February 2013

07/02/2013



• Government has released draft legislation to implement a new regulatory regime for tax agent services provided by financial planners

• Government has also released a short paper outlining the proposed changes to the Regulations that would implement the new regime in full.

Tax agent services by financial planners: draft leg

Tax Reform

Tax agent services by financial planners: draft legislation

On 29 November 2010, an options paper, Regulation of tax agent services provided by financial planners, was released for public consultation. Following an ongoing consultation process and the announcement of these changes in the 2012-13 Mid-year Economic and Fiscal Outlook (MYEFO), the government released draft legislation on 8 February 2013 to implement this new regulatory regime.

It will be necessary to amend both the Tax Agent Services Act 2009 and the Tax Agent Services Regulations 2009 to give full effect to the announcement. However, the government has not yet finalised the amendments to the Regulations as they will be contingent on the final form of the draft legislation. Nonetheless, to assist in this consultation process, the government also on 8 February 2013 released a short paper outlining the proposed changes to the Regulations that would implement the new regime in full.

The draft legislation and outline paper are on the Treasury website.

Draft legislation

The draft legislation – currently the Tax Laws Amendment (2013 Measures No #) Bill 2013: tax agent services - would amend the Tax Agent Services Act 2009 (TASA) to bring entities that give tax advice in the course of advising on one or more financial products within the regulatory regime administered by the Tax Practitioners Board. This is designed to ensure the consistent regulation of all forms of tax advice irrespective of whether it is provided by a tax agent, BAS agent or an entity in the financial services industry. Consequential and related amendments would also be made to the TASA.

The TASA broadly defines tax agent services by reference to the following service-related elements (that the entity receiving the service can rely on): (i) ascertaining the entity's tax liabilities; (ii) advising the entity about their tax liabilities and potential tax liabilities; or (iii) representing the entity in their dealings with the FCT.



Currently, the government has carved out tax agent services provided by financial services licensees and their authorised representatives from the TASA regulatory regime where the entity providing the service: (i) accompanies it with a statement that they are not a registered tax agent; and (ii) advises the recipient that they should seek the services of a registered tax agent if they wish to rely on the advice. This carve-out, which is provided for in the Tax Agent Services Regulations 2009, will automatically expire on 30 June 2013. From after that date, and in the absence of any amendments, holders of an Australian Financial Services Licence (AFSL) and their representatives would be liable to civil penalties if they provide tax advice for a fee or other reward and are not registered as a tax agent with the Tax Practitioners Board (TPB).

The object of the proposed amendments is to bring entities in the financial services industry that give tax advice within the TASA regulatory regime. The amendments would do this by creating a new type of regulated service in the TASA - that of a Tax Advice (financial product) Service. A tax advice (financial product) service would be defined as a type of a tax agent service. To the extent that an entity giving tax-related factual advice is not providing a tax agent service, then that advice will similarly not be a tax advice (financial product) service - even if it is given in the course of advising on one or more financial products. The key tax-related differences between a tax agent service and a tax advice (financial product) service would be that the latter services can only relate to:

Ascertaining an entity's actual, or potential, tax liabilities, obligations or entitlements under a tax law; or

Advising an entity about their actual, or potential, tax liabilities, obligations or entitlements under a tax law.

In effect, this means that an entity that wishes to represent a taxpayer in their dealings with the FCT will provide more than a tax advice (financial product) service. Entities that wish to provide such a service will therefore have to register with the TPB as a registered tax agent (or a BAS agent if applicable).

In addition, the service must be given in the course of advising on one or more financial products, as defined in the Corporations Act. This would provide a regulatory link to the Corporations Act to ensure that existing registered tax agents and BAS agents, unless they are otherwise advising on financial products, do not inadvertently provide tax advice (financial product) services.

The eligibility framework for individuals, partnerships and companies seeking to be registered tax (financial product) advisers would be the same as for those entities seeking to be registered tax agents and registered BAS agents.

Date of effect

The amendments would generally start from 1 July 2013 with a three-year transitional period to ensure those in the financial services industry have time to adapt to the new regulatory requirements. The consequence of the transitional arrangements would be that the new regulatory regime for tax advice (financial product) services would not commence in full until 1 July 2016.

Proposed amendments to regulations – outline paper

The paper outlining proposed amendments to the Tax Agent Services Regulations 2009 says that the amendments would need to:

Specify the requirements for an individual to be eligible for registration as a registered tax (financial product) adviser (per section 20-5 of the TASA in conjunction with Schedule 1, Part 1, item 4 of the draft legislative amendments);



Establish a system for the TPB to accredit professional associations for the purposes of recognising professional qualifications and experience relevant to the registration of individuals as a registered tax (financial product) adviser;

Prescribe the registration fee for entities applying for registration as a registered tax (financial product) adviser; and

Prescribe the details that the TPB must enter on the register of registered entities.

A new regulation 8A to be inserted into Part 2 of the Regulations would prescribe the requirements for tax (financial product) advisers. Consistent with the approach in existing regulations 7 and 8 that apply to BAS agents and tax agents respectively, the specific requirements would be inserted into a new Part 3 to Schedule 2. This new Part would consist of two Divisions - Division 1 would set out the specific requirements and Division 2 would provide the meaning of relevant experience. These changes would have an application date of 1 January 2015.

The paper says the overarching requirement would be that the individual is either: (i) a financial services licensee, as defined in Chapter 7 of the Corporations Act 2001; or (ii) a representative of a financial services licensee, as defined in paragraph 910A(a) of the Corporations Act. In addition, the individual would need to:

Have successfully completed a TPB approved course in Australian tax law for tax (financial product) advisers and engaged in the equivalent of two years of full time relevant experience in the preceding five years; or

Hold a degree or award that is approved by the TPB from an Australian tertiary institution, or an equivalent institution, in a discipline that is relevant to tax advice (financial product) services; have successfully completed a TPB approved course in Australian tax law for tax (financial product) advisers and engaged in the equivalent of 18 months of full time relevant experience in the preceding five years; or

Have successfully completed a TPB approved course in Australian tax law for tax (financial product) advisers, be a voting member of a recognised tax (financial product) adviser association or a tax agent association and engaged in the equivalent of 12 months of full time relevant experience in the preceding five years.

Relevant experience would include work by an individual for example: (i) as a tax (financial product) adviser registered under the Act; (ii) as a tax agent registered under the Act or as a tax agent registered under Part VIIA of the ITAA 1936; (iii) under the supervision and control of a tax (financial product) adviser registered under the Act; (iv) under the supervision and control of a tax agent registered under the Act or as a tax agent registered under Part VIIA of the ITAA 1936.

14/02/2013



• Government has released draft legislation to consolidate eight existing dependency tax offsets into a single offset for 2012-13 and future income years

• New offset will only be available to taxpayers who maintain a dependant who is genuinely unable to work due to invalidity or care obligations.

Consolidating dependency tax offsets – draft leg

Tax Reform

Consolidating dependency tax offsets – draft legislation

Treasury released draft legislation on 13 February 2013 to implement the government's 2012-13 Federal Budget announcement that it would consolidate eigh of the existing dependency tax offsets into a single, streamlined offset with respect to the 2012-13 and future income years. From 2012-13 onwards, the new Dependant (Invalid and Carer) Tax Offset (DICTO) will only be available to taxpayers who maintain a dependant who is genuinely unable to work due to invalidity or care obligations.

The offsets to be consolidated are the invalid spouse, carer spouse, housekeeper, housekeeper (with child), child-housekeeper, child-housekeeper (with child), invalid relative and parent/parent-in-law tax offsets. Taxpayers who are currently eligible to receive more than one dependency offset amount in respect of multiple dependants who are genuinely unable to work will be able to receive more than one amount of DICTO in respect of these dependants.

Taxpayers eligible to receive the zone, overseas forces or overseas civilians tax offsets will be able to continue to claim their dependency offset amounts under the current arrangements, and will face no change to their offset entitlements.

14/02/2013



• Government has announced it will amend the income tax law to ensure foreign pension funds can access the Managed Investment Trust (MIT) withholding tax regime

• Amendment will apply from the start of the withholding tax regime (ie from 1 July 2008).

Foreign pension funds to get access to MIT regime

Tax Reform

Foreign pension funds to get access to MIT regime

The Assistant Treasurer has announced that the government will amend the income tax law to ensure foreign pension funds can access the Managed Investment Trust (MIT) withholding tax regime. This amendment will apply from the start of the withholding tax regime, 1 July 2008. "The amendment will ensure that the law better aligns with the original policy intent of the MIT withholding regime," said Mr Bradbury.

MIT fund payments are subject to a final withholding tax rate of 15% where the fund payment is made to a resident from a country with an effective exchange of information agreement with Australia. Payments made to residents of non-exchange of information countries are subject to a final tax withholding rate of 30%.


14/02/2013



• Government has announced its Industry and Innovation Statement which seeks to boost Australia’s innovation and competitiveness

• Businesses with annual Australian turnovers of $20bn or more would no longer be eligible for the R&D tax incentive but will still be able to claim under general tax law

• Changes will apply to income years starting on or after 1 July 2013.

Government’s industry plan: cuts to R&D concession

Tax Reform

Government’s industry plan: cuts to R&D concession

The Prime Minister has announced the government's Industry and Innovation Statement, A Plan for Australian Jobs, that seeks to boost Australian innovation, productivity and competitiveness. She said the plan aims to "give Australian firms a fair chance to win work on major resources and infrastructure projects".

Among other things, the plan would:

Establish a new Australian Industry Participation Authority to help businesses build the capabilities and connections to win work on major projects.

Legislate Australian Industry Participation (AIP) arrangements, requiring major projects worth $500m or more to implement AIP Plans to give local industry opportunities to win work on a commercial basis.

Require projects worth $2bn or more that apply for concessions under the Enhanced Project By-Law Scheme to embed Australian Industry Opportunity officers within their global supply offices.

See the government invest more than $500m in establishing up to 10 Industry Innovation Precincts to drive business innovation and growth in areas of Australian competitive advantage.

Provide a new $350m round of the Innovation Investment Fund to stimulate private investment in innovative Australian start-up companies.



Under the proposed changes, businesses with annual Australian turnovers of $20bn or more would no longer be eligible for the R&D Tax Incentive but will be eligible to claim their R&D expenditure under general tax law provisions, eg as deductions at the corporate tax rate for business expenditure.

The change will apply to income years starting on or after 1 July 2013. The Treasurer said the change will affect less than 20 corporate groups.

Mr Swan said Savings from the reforms – estimated at over $1bn from 2014 to 2017 – "will fund government priorities including measures announced in the government's Industry and Innovation Policy Statement".

Source: Prime Minister and Treasurer press releases, 17 February 2013

21/02/2013

Documents

Essential Tax Update - Cahoot Learning€¦ · Essential Tax Update March 2013 Period ending 28 February 2013 Presented by: Institute of Chartered Accountants in Australia