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Tax UpdatePeriod Ending 02 March 2017

Chartered Accountants Australia and New Zealand

Tax Update

Period ending 02 March 2017

Presented by:

Chartered Accountants Australia and New Zealand Tax Trainers

Tax Update March 2017

Copyright © 2017 Chartered Accountants Australia and New Zealand 2

This package covers developments for the period 02 February to 02 March

2017.

Disclaimer

This paper represents the opinion of the author(s) and not necessarily those of Chartered Accountants Australia and New Zealand 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. Chartered Accountants Australia and New Zealand 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.



© Chartered Accountants Australia + New Zealand 2016

Session Outline

• Legislation

• Income

• Deductions

• Tax Offsets

• Indirect tax

• Taxation of superannuation

• Tax administration

• International tax

• Tax controversy

• State Taxes

LEGISLATION ..........................................................................6

Bills proposed for introduction 9

DPT, increased penalties, transfer pricing guidelines 10

Disclosure of backpacker tax information – Bill introduced 12

GST to be imposed on low-value imported goods - Bill introduced 14

Commonwealth penalty unit to be increased – Bill introduced 18

Financial advisers’ education and training Bill is now law 19

Innovation measures; ASIC/ATO info sharing – Bill passes Reps 20

Tax Bill (No 2) 2016 receives Royal Assent 21

INCOME ................................................................................. 23

Decision Impact Statement on ElecNet case 23

DEDUCTIONS........................................................................ 25

No deduction or capital loss for guarantee "obligation" 25

Taxpayer denied deduction for work expenses of $60,000 27

ATO compliance approach – mining and petroleum exploration expenditure deductions 29

Deductions for mining and petroleum exploration expenditure 31

No deduction for carried forward losses of $25m 34



TAX OFFSETS....................................................................... 37

Tax offset re spouse super contributions 37

INDIRECT TAXES ................................................................. 38

GST on home care and residential care – ATO seeks views on guidance material 38

ATO moves quickly on Uber GST decision 40

Correcting GST errors – amending Determination made 41

GST: No input tax credit for purchase of gold dore 42

GST and second-hand goods consisting of gold or other precious metal 44

Uber rides subject to GST 45

ATO's interpretation NOW! – Uber BV GST decision 46

GST on low-value imported goods – Draft guideline released 48

TAXATION OF SUPERANNUATION................................... 51

ATO SuperSeeker service decommissioned 51

Common errors on SMSF annual returns 52

Super reforms: $1.6m transfer balance cap and death benefit pensions 53

Super Guarantee non-compliance: Inspector-General of Taxation 55

Super reforms: concessional contributions 56

Superannuation rates and thresholds for 2017-18 58

TAX ADMINISTRATION ....................................................... 60

Tax risk management and governance review guide 60

Extension of time for AAT review granted 62

Alternate assessments not tentative 64

Tax practitioners, cloud computing and the Code of Professional Conduct – TPB Practice Note 67

ATO warns of criminal activity targeting AUSkeys 69

Enhanced ATO record-keeping tool for sole traders 70

Tax Inspector-General announces his 2017 work program 71

Tax Office Website updates 74



Application to give evidence in Nudie Juice tax case by video link refused 76

FCT refutes media reports re ATO systems and Tax Time 2017 78

Application to appeal dismissed 80

ATO identified foreign investment breaches result in forced real estate sales by foreign nationals

82

FCT entitled to recover GIC accrued outside terms of agreement 83

ATO help for agents having lodgment problems after ATO systems outages 85

Financial planners and advisers 86

NFP sector – what attracts ATO attention 87

Tax Inspector-General's submission on taxpayer engagement 89

Appeals update 91

Appeal update 92

Appeal update 93

INTERNATIONAL TAX ......................................................... 95

Overseas income not exempt 95

Increasing transparency of beneficial ownership of companies 97

Simplified transfer pricing record keeping options 100

TAX CONTROVERSY ......................................................... 102

Personal services income diverted to SMSFs: ATO offer to remit penalties extended 102

Re-characterisation of income from trading businesses 105

R&D claims in building and construction industry – ATO Taxpayer Alerts warn of issues of concern

106

Incorrect R&D claims in agricultural and IT sectors 109

STATE TAXES..................................................................... 112

NSW land tax: primary production exemption 112



LEGISLATION

Progress of Legislation

Bill Introduction

to the House

Passed

House

Introduction

to the Senate

Passed

Senate

Date of

Royal

Assent

Tax and

Superannuation Laws

Amendment (2016

Measures No 1) Bill

2016

10 Feb 2016 3 Mar 2016 16 Mar 2016 4 May 2016 5 May 2016

Tax Laws Amendment

(New Tax System for

Managed Investment

Trusts) Bill 2015

3 Dec 2015 10 Feb 2016 22 Feb 2016 4 May 2016 5 May 2016

Income Tax Rates

Amendment

(Managed Investment

Trusts) Bill 2015


Medicare Levy

Amendment

(Attribution Managed

Investment Trusts) Bill

2015


Income Tax

(Attribution Managed

Investment Trusts -

Offsets) Bill 2015


Tax Laws Amendment

(Tax Incentives for

Innovation) Bill 2016

16 Mar 2016 2 May 2016 3 May 2016 4 May 2016 5 May 2016

Tax and

Superannuation Laws

Amendment

(Medicare Levy and

Medicare Levy

Surcharge) Bill 2016

2 May 2016 2 May 2016 2 May 2016 3 May 2016 4 May 2016

Treasury Laws

Amendment (Income

Tax Relief) Bill 2016

1 Sep 2016 10 Oct 2016 10 Oct 2016 12 Oct 2016 20 Oct 2016

International Tax

Agreements

Amendment Bill 2016

1 Sep 2016 12 Oct 2016 13 Oct 2016 13 Oct 2016 20 Oct 2016

http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5536%20Recstruct%3Abillhome







































Bill Introduction

to the House

Passed

House

Introduction

to the Senate

Passed

Senate

Date of

Royal

Assent

Treasury Laws

Amendment

(Enterprise Tax Plan)

Bill 2016

1 Sep 2016

Budget Savings

(Omnibus) Bill 2016 31 Aug 2016 14 Sep 2016 14 Sep 2016 15 Sep 2016 16 Sep 2016

Income Tax Rates

Amendment (Working

Holiday Maker

Reform) Bill 2016

12 Oct 2016 17 Oct 2017 07 Nov 2016

Treasury Laws

Amendment (Working

Holiday Maker

Reform) Bill 2016

12 Oct 2016 17 Oct 2016 07 Nov 2016 24 Nov 2016 02 Dec 2016

Superannuation

(Departing Australia

Superannuation

Payments Tax)

Amendment Bill 2016


Passenger Movement

Charge Amendment

Bill 2016


Treasury Laws

Amendment (2017

Measures No 1) Bill

2017

16 Feb 2017 02 Mar 2017

Treasury Laws

Amendment (GST

Low Value Goods) Bill

2017

16 Feb 2017

Treasury Laws

Amendment

(Enterprise Incentives

No 1) Bill 2017

Corporations

Amendment

(Professional

Standards of Financial

Advisers) Bill 2016

23 Nov 2017 07 Feb 2017 08 Feb 2017 09 Feb 2017 22 Feb 2017























http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr5768%22







Bill Introduction

to the House

Passed

House

Introduction

to the Senate

Passed

Senate

Date of

Royal

Assent

Treasury Laws

Amendment

(Combating

Multinational Tax

Avoidance) Bill 2017

09 Feb 2017

Treasury Laws

Amendment (Working

Holiday Maker

Employer Register)

Bill 2017

16 Feb 2017

Crimes Amendment

(Penalty Unit) Bill

2017

16 Feb 2017

















2017 Autumn Sittings

• Treasury Laws Amendment (GST Low Value Goods) Bill 2017:

– GST will apply to low value goods (up to $1,000) supplied to Australian

consumers by offshore businesses

• Treasury Laws Amendment (Enterprise Incentives No 1) Bill 2017:

– Gives taxpayers option to self-assess effective life of certain intangible assets

– Amends tax incentives for early stage investors.

Bills proposed for introduction

Legislation

Bills proposed for introduction

2017 Autumn Sittings

Federal Parliament's 2017 Autumn Sittings run from 7 February to 30 March 2017. Legislation proposed for introduction in those sittings includes the following Bills. Bills marked # are proposed for introduction and passage in the Autumn sittings.

Treasury Laws Amendment (GST Low Value Goods) Bill 2017 # - would impose the obligation to charge and remit GST on offshore businesses that import goods to Australian consumers where the imported goods have a value of $1,000 or less. Would apply from 1 July 2017. Would implement a 2016-17 Budget measure.

Treasury Laws Amendment (Enterprise Incentives No 1) Bill 2017 - would (i) provide taxpayers with the new option, for certain intangible assets acquired on or after 1 July 2016, to self-assess the tax effective life of the asset or use the existing statutory effective life; and (ii) amend the tax incentives for early stage investors, to ensure that investors who access the tax concessions for early stage investors through an interposed trust are not subject to a subsequent capital gain equal to the amount of the exempt gain in the early stage innovation company. Would implement a 2015-16 MYEFO decision.

9/02/2017




Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill

• Bill introduced into Parliament

• Expands Pt IVA to include 40% diverted profits tax for significant global

entities – from 1 July 2017

– Tax imposed by Diverted Profits Tax Bill 2017

• Increases admin penalties for significant global entities that fail to lodge

returns, certain other documents – from 1 July 2017

• Updates transfer pricing rules to include 2016 OECD BEPS amendments to

OECD Transfer Pricing Guidelines – from 1 July 2016.

DPT, increased penalties, transfer pricing guidelines

Legislation

DPT, increased penalties, transfer pricing guidelines

Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill

The Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 was

introduced in the House of Reps on 9 February 2017. It proposes to make the following

amendments:

Diverted Profits Tax: The Bill would amend the ITAA 1936, the Taxation Administration Act

1953 and associated Acts to introduce a new diverted profits tax (DPT). This would be done

by expanding the scope of Pt IVA. The Treasurer says the DPT would target multinationals

that enter into arrangements to divert their Australian profits to offshore related parties in

order to avoid paying Australian tax. If the DPT applies, the Diverted Profits Tax Bill 2017,

also introduced on 9 February 2017, would impose tax on the amount of the diverted profit at

a rate of 40%. The DPT aims to ensure that the tax paid by significant global entities (annual

global income of $1 billion or more and Australian income of more than $25 million) properly

reflects the economic substance of their activities in Australia and aims to prevent the

diversion of profits offshore through contrived arrangements. The DPT will not apply to

managed investment trusts or similar foreign entities, sovereign wealth funds and foreign

pension funds. The government expects the DPT to raise $100 million in revenue a year from

2018-19. Approximately 1,600 taxpayers potentially fall within the scope of the new law. Date

of effect: This measure will apply in relation to tax benefits for an income year that starts on

or after 1 July 2017 (whether or not the tax benefits arise in connection with a scheme that

was entered into, or was commenced to be carried out, before 1 July 2017).





Increasing penalties for significant global entities: The Bill proposes to increase the

administrative penalties that can be applied by the FCT to significant global entities to

encourage them to better comply with their taxation obligations, including lodging tax

documents on time and taking reasonable care when making statements. Under the

changes, the amount of administrative penalty that applies for significant global entities that

do not lodge a return, notice, statement or other approved form with the FCT on time would

be increased by 100 times. The base penalty amount will be multiplied by 500 if an entity is a

significant global entity at the relevant time. At the current $180 value of a penalty unit, this

would result in a maximum penalty of $450,000 (currently $4,500), which would apply where

the lodgment is more than 16 weeks late. [Note that in the 2016-17 Mid-Year Economic and

Fiscal Outlook, the government announced an increase in the value of a Commonwealth

penalty unit to $210, with effect from 1 July 2017. That would take the maximum penalty to

$525,000.] Date of effect: The amendments would generally apply from 1 July 2017.

Transfer pricing rules updated: The Bill proposes to amend the ITAA 1997 to update the

reference to OECD transfer pricing guidelines in Australia's transfer pricing rules in Division

815 to include the 2016 OECD BEPS amendments to the guidelines. Date of effect: The

amendments would apply to income years commencing on or after 1 July 2016.

9/02/2017




TLA (Working Holiday Maker Employer Register) Bill 2017

• Contains measures to protect employer registration info re backpackers

• Date of effect: 2 December 2016.

Disclosure of backpacker tax information: Bill introduced

Legislation

Disclosure of backpacker tax information – Bill introduced

The Treasury Laws Amendment (Working Holiday Maker Employer Register) Bill 2017 was

introduced in the House of Reps on 16 February 2017. It proposes to give effect to the government's

commitment that:

The information collected by the FCT concerning the employer registration information of

employers of working holiday makers will not be able to be made publicly available; and

The FCT will only be able to disclose protected information to the Fair Work Ombudsman for

an entity that is actually or is reasonably suspected of non-compliance with a taxation law.

The Bill would amend the A New Tax System (Australian Business Number) Act 1999 and Taxation

Administration Act 1953. The amendments are designed to ensure that this information is kept on a

confidential basis to address any concerns about the privacy of the information. The amendments

would make the law consistent with how the FCT has administered the law since the

commencement of the Treasury Laws Amendment (Working Holiday Maker Reform) Act 2016 . That

is, the FCT has chosen not to make public any registration information of working holiday maker

employers.




The Bill would reverse the changes made by Sch 4 to the Treasury Laws Amendment (Working

Holiday Maker Reform) Act 2016, which expanded the information the FCT can disclose to the Fair

Work Ombudsman without breaching secrecy provisions. This means the FCT would only be able to

disclose to the Fair Work Ombudsman that an entity is actually or is reasonably suspected of non-

compliance with a taxation law. This is consistent with the secrecy provisions that applied to

disclosures of such information prior to 1 January 2017 and with how the FCT has administered the

law since the commencement of the Treasury Laws Amendment (Working Holiday Maker Reform)

Act 2016. That is, the FCT has not disclosed to the Fair Work Ombudsman any protected

information that is only authorised because of the expanded exception to the secrecy provisions.

Date of effect

The amendments would apply from 2 December 2016.

Previous announcement

Changes to the employer register were announced by the Treasurer on 30 November 2016.

16/02/2017




Treasury Laws Amendment (GST Low Value Goods) Bill 2017

• GST will apply to low value imported goods (up to $1,000) supplied to

Australian consumers by offshore businesses

• Date of effect: 1 July 2017.

GST Low Value Goods Bill introduced

Legislation

GST to be imposed on low-value imported goods - Bill introduced

The government has introduced legislation which will impose GST on supplies of imported low-value

goods, ie those worth less than A$1,000. The measures are scheduled to commence on

1 July 2017.

The Bill, the Treasury Laws Amendment (GST Low Value Goods) Bill 2017 , was introduced into

the House of Reps on 16 February 2017.

Context and background

GST is imposed on goods which are subject to a taxable importation. It is the importer who pays

GST in this case. However, currently, goods brought into Australia from overseas below a threshold

of $1,000 do not attract duty or GST. This is because such goods are a category of goods specified

to be non-taxable importations.

Additionally, goods brought into the country by the supplier from overseas fall outside the current

definition of "connected with Australia" in s 9-25 of the GST Act. This means that the supply is not

captured by the normal rules in Div 9.

The combined effect of these rules is that consumers can purchase low-value goods without the

consumption being subject to GST if they bring the goods to Australia.

The low-value goods measures use a very similar approach (and similar terminology) to the Netflix

tax legislation. The proposed system takes the payment responsibility from the customer and gives it

to the supplier, ie a vendor registration method. This requires overseas suppliers to register if their

GST turnover exceeds $75,000 and makes them responsible for the GST. This is intended to

overcome the logistical problems of making the customer pay.




Note though that, alternatively, the liability for the GST on such goods may fall on the operator of an

electronic distribution platform (or "EDP") – as is the case for the Netflix tax – but may also fall on

goods forwarders, ie transport and freight companies, who are termed "redeliverers" in the

legislation (and which does not apply to Netflix supplies as no physical movement of goods is

required).

Note also that the GST legislation in fact refers to the "indirect tax zone", rather than "Australia". This

is the same as the term "Australia", except that it excludes the areas where GST does not apply

(such as the external Territories). For ease of reference, the term Australia is used rather than the

indirect tax zone (as there is no real practical difference).

Broad overview

The broad details of the measures as set out in the Bill are as follows:

GST will be imposed on supplies of goods valued at $1,000 or less at the time of supply to

Australia if the goods are, broadly, purchased by what are termed "consumers" and are

brought to Australia with the assistance of the supplier (ie, the vendor);

Only supplies made to private consumers will be caught. Importations by businesses will not

be subject to the rules;

The liability for the GST will rest with the vendor, but may extend to the operator of an

electronic distribution platform (if the sale is made through that platform) or the redeliverer;

Supplies will be caught regardless of the value of the supply, eg even a $10 supply will be

liable;

GST would be calculated in the usual manner, ie it is imposed at a rate of 10% on the value of

the supply;

There is scope for GST to be imposed on the end consumer by a reverse charge if they claim

to be a business (and so no GST is charged by the overseas supplier) but in fact use the

goods wholly or partly for private purposes;

Non-resident suppliers will be offered the option of limited registration; and

Such importations will be deemed non-taxable importations to prevent double taxation (ie for

the purposes of customs entry).

Note, though, that there is no change to the Customs Act or any related legislation.

These rules are largely contained in new Subdiv 84-C, entitled "offshore supplies of low value

goods".



What goods are subject to the proposed measures?

There are three general requirements that must be met before goods will be subject to GST under

the low-value importation rules.

The goods must be brought into Australia and the vendor must assist in the delivery of the goods to

Australia, ie assist in arranging the delivery. If it does not, then the entity that does deliver the go ods

(the "redeliverer") may instead be liable.

The second requirement is that goods must be low value, ie $1,000 or less based on the customs

value. Any more than this and the goods will be subject to the normal (and current) importation rules.

The customs value is determined as though the goods were exported at the time the consideration

for the supply was first agreed – rather than the time the goods were exported/imported into

Australia/considered by a Customs official. There is also scope for the FCT to develop alternative

methods for calculating exchange rates (by legislative instrument), rather than using the fixed

process mandated by the Customs Act. In addition, please see below for the treatment of a single

supply which involves multiple goods, eg a purchase of a product costing less than $1,000 as well

as a product costing more than that (under the heading of "other matters").

The third requirement is that the entity to which the goods are supplied (ie the purchaser/customer)

must use the goods in a private capacity (ie be a "consumer", as defined). In other words, business

purchases will not be subject to GST under the low-value importation rules. This will extend mostly

to those purchasers who are not registered or required to be registered for GST , but also includes

purchases where a registered entity acquires the goods solely for a private purpose. This pretty

much reflects the approach taken for the Netflix tax, ie if the consumer is otherwise entitled to an

input tax credit for the acquisition, then no GST liability arises.

If these rules are satisfied, the supply will be connected with Australia for the purposes of s 9-25 and

so be potentially liable for GST: proposed s 9-25(3A).

Who is liable for GST?

The supplier will be liable for GST, providing that its GST turnover is in excess of $75,000. The GST

turnover is determined by reference to its Australian sales only. For example, if an overseas vendor

has turnover of $1m per annum, but only has sales of $50,000 to Australia, it will not be requir ed to

register and so will not be liable for GST on any of its sales.

If the vendor does not assist in the delivery of the goods to Australia, it will not be liable for GST. If

this is done by a redeliverer, then that entity will be liable for GST on the supply (providing, of

course, that its GST turnover exceeds $75,000). The EM indicates that this is aimed at a class of

business often referred to as mail, post, package forwarders or redeliverers that assist entities to

obtain goods from foreign suppliers.

Finally, if the sale is actually made through an electronic distribution platform (EDP), then

responsibility for the GST on the supply is shifted to the EDP operator. The most obvious examples

of an EDP are the App Store or Google Play. This reflects the approach taken in the Netflix

legislation.

The limited registration option will be available for all categories of suppliers.



There is scope for a customer to reverse charge GST if it acquires low-value imported goods partly

for private purposes and partly for business purposes. Additionally, if a customer falsely represents

that it is acquiring goods for a business purpose (and so no GST is imposed), it may also have to

reverse charge the GST liability (and will also be subject to penalties).

Other matters

As noted above, there may be circumstances where a consumer purchases several goods as part of

one supply. In such a case, the low-value goods test applies to each of the several goods that are

supplied. There are two obvious scenarios to this.

First, where several goods valued under $1,000 are bought together and delivered together, and the

total value is in excess of $1,000. Each product will be treated as a supply of low-value goods,

regardless of the total value of the supply.

Second, where individual goods have a value below $1,000 but there are also goods purchased with

a value of more than this amount. That part of the supply which has a value of more than $1,000 is

treated as a supply that it not a supply of low-value goods. The example provided in the EM is where

a consumer buys a dress valued at $1,300 from a UK supplier, but also buys a shirt valued at $200.

The sale of the dress and the sale of the shirt are treated as separate supplies, despite being

purchased in one transaction.

It would appear, at least to the writer, that this could prove to be something of a logistical nightmare.

When goods arrive at customs, part of the contents have to be carved out as a supply on which GST

has been paid by the vendor and part will require to have GST imposed, to be paid by the

purchaser.

Other points of note include the following.

Under the current rules, international transport services are GST-free, as such costs are

factored into the cost of the goods for entry for home consumption and GST is paid at tha t

point, ie by the importer. Under the new rules, such costs will not be GST -free. In other

words, GST is applied to the value of the goods supplied and any other costs that are

included as part of the supply of goods, eg transport and insurance.

Tax invoices (and adjustment notes) are not required for an offshore supply of low-value goods

to a consumer. Clearly sensible, as the consumer by definition will not be able to claim an

input tax credit.

There will be a safe harbour for overseas suppliers. A supply will not be connected with

Australia if, at the time the consideration for the supply is set, the supplier (or entity liable for

the GST) reasonably believes that the goods will be imported as a taxable importation (ie,

after having taken reasonable steps).

The rules obviously apply to goods ordered online (or by telephone), but equally apply where

a consumer purchases goods in person in a store overseas where there is an arrangement

for the goods to be brought to Australia with the assistance of the vendor.

Tobacco, tobacco products and alcoholic beverages are specifically excluded from the

definition of "goods" for the purposes of the low-value goods rules.

16/02/2017




Crimes Amendment (Penalty Unit) Bill 2017

• Penalty unit increased from $180 to $210, effective 1 July 2017

• Automatic CPI adjustment delayed until 1 July 2020.

Commonwealth penalty unit to be increased – Bill introduced

Legislation

Commonwealth penalty unit to be increased – Bill introduced

The Crimes Amendment (Penalty Unit) Bill 2017 was introduced in the House of Reps on

16 February 2017. It proposes to amend the Crimes Act 1914 to increase the amount of the

Commonwealth penalty unit from $180 to $210, with effect from 1 July 2017. It would also delay the

first automatic adjustment of the penalty unit to the Consumer Price Index (CPI) from 1 July 2018

until 1 July 2020, with indexation to occur on 1 July every three years thereafter.

When the penalty unit was introduced in 1992, its value was set at $100. That value was adjusted to

$110 in 1997, $170 in 2012, and to $180 in 2015. These increases were made broadly in line with

changes in the CPI. In 2015, the Crimes Act was amended to introduce an indexation mechanism to

automatically increase the value of the penalty unit every three years in line with CPI. Pursuant to

these amendments, the first adjustment to CPI will occur on 1 July 2020, with indexation to take

place on 1 July every three years thereafter.

Date of effect

It will apply from 1 July 2017.

Previous announcement

It was announced as part of the 2016-17 Mid Year Economic and Fiscal Outlook (MYEFO) on

19 December 2016.

16/02/2017





Corporations Amt (Professional Standards of Financial Advisers) Act 2017

• Royal Assent as Act No 7 of 2017

• Amends Corporations Act 2001 to require certain financial advisers to meet

specified education & training standards, comply with ethics code:

– Start date: earlier of date set by proclamation or 22 August 2017

• Amends Tax Agent Services Act 2009 to enable information sharing.

Financial advisers' education & training standards – Assent

Legislation

Financial advisers’ education and training Bill is now law

The Corporations Amendment (Professional Standards of Financial Advisers) Bill

2016 received Assent as Corporations Amendment (Professional Standards of Financial Advisers)

Act 2017 (Act No 7 of 2017). The Bill amends the Corporations Act 2001 to:

Require that certain financial advisers meet specified education and training standards and

comply with a code of ethics; apply transitional arrangements to existing financial advisers;

Impose an obligation on an Australian financial services licensee to ensure that its financial

advisers comply with the education standards and are covered by a compliance scheme;

Restrict the use of the titles "financial adviser" and "financial planner";

Amend the content requirements for the register of financial advisers;

Provide for sanctions where a financial adviser or licensee fails to comply with the new

obligations; and

Establish a standards body which will approve foreign qualifications and develop and set the

education standards, an examination and a uniform code of ethics.

The Bill also amends the Tax Agent Services Act 2009 to provide for the Tax Practitioners Board

and monitoring bodies to share information.

2/03/2017






Treasury Laws Amendment (2017 Measures No 1) Bill 2017

• Passed by House of Reps without amendment

• Amends tax incentives for early stage investors to ensure investments via

interposed trust qualify for concessional CGT treatment – from 1 July 2017

• Amends Australian Securities and Investments Commission Act 2001 to

allow ASIC to more readily share confidential info with ATO – from day after

Royal Assent.

Innovation measures; ASIC/ATO info sharing – Bill passes reps

Legislation

Innovation measures; ASIC/ATO info sharing – Bill passes Reps

The Treasury Laws Amendment (2017 Measures No 1) Bill 2017 has been passed by the House

of Reps without amendment and now moves to the Senate. The Bill proposes to amend the ITAA

1997 to ensure the National Innovation and Science Agenda measures contained in Tax Laws

Amendment (Tax Incentives for Innovation) Act 2016 operate in accordance with their original policy

intent. The amendments seek to ensure that investors that invest through an interposed trust are

able to access the capital gain concessions provided by the tax incentives for early stage investors

and venture capital investment measures. The Bill also proposes to amend the Australian Securities

and Investments Commission Act 2001 to allow ASIC to more readily share confidential information

with the FCT.

2/03/2017





Tax and Superannuation Laws Amendment (2016 Measures No 2) Act 2017

• Royal Assent as Act No 15 of 2017

• Key measures:

– Remedial power for FCT to modify law by legislative instrument to ensure

intended purpose of law achieved – 28 Feb 2017

– Primary producer income averaging: replaces permanent choice to opt out of

averaging with 10-year opt-out period – 1 July 2016

– LCT exemption for certain public institutions that import or acquire luxury cars for

public display – 28 Feb 2017.

Tax Bill (No 2) 2016 receives Royal Assent

Legislation

Tax Bill (No 2) 2016 receives Royal Assent

Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016 received Assent as

Tax and Superannuation Laws Amendment (2016 Measures No 2) Act 2017 (Act No 15 of 2017).

The Bill had passed all stages without amendment and amends the:

ITAA 1997 and Taxation Administration Act 1953 to establish a remedial power so the

FCT can make a disallowable legislative instrument to modify the operation of a

taxation law in certain circumstances. Before exercising the power, the FCT must be

satisfied that any appropriate and reasonably practicable consultation has been

undertaken. The remedial power is a discretionary power the FCT can use in limited

circumstances to resolve smaller unintended outcomes. The ATO anticipates that the

power will provide a simpler, streamlined process. This is designed to allow more

timely resolution of unforeseen or unintended outcomes in tax and superannuation

law and create certainty for taxpayers. It will also allow legislative resources to be

prioritised towards more significant changes. The remedial power has legal limitations

and any modifications made using the power must: (i) not be inconsistent with the

intended purpose or object of the law; (ii) have a negligible budget impact; (iii) only

apply where outcomes for an entity will be no less favourable than the existing law.

The FCT will consult publicly as part of exercising the power. Modifications are

subject to parliamentary oversight and will not apply until the 15 sitting day

disallowance period has concluded. The ATO has also placed on its website

information about how to make a submission for the power to be exercised, including

a form for that purpose. Information required includes: What is the issue?


https://www.ato.gov.au/General/ATO-advice-and-guidance/Commissioner-s-remedial-powers/



The background; How is the issue currently being managed? What is the modification

that should be made? How is the proposed modification not inconsistent with the

intended purpose or object of the provision? How is the proposed modification

reasonable? Have all other avenues been explored to address this issue? Date of

effect: This measure commenced on the day after Royal Assent ie on 1 March 2017.

This allows the FCT to make legislative instruments from that date to modify the

operation of a taxation law.

ITAA 1997 to enable primary producers to access income tax averaging 10 income

years or more after choosing to opt out, instead of that opt -out choice being

permanent. Date of effect: This change applies to the 2016-17 income year and later

income years.

A New Tax System (Luxury Car Tax) Act 1999 to provide an exemption from luxury

car tax (LCT) to certain public institutions that import or acquire luxury cars for the

sole purpose of public display. The changes apply to public museums, galleries, and

libraries that are registered for GST and that have been endorsed as deductible gift

recipients. Date of effect: These amendments apply to luxury cars that are imported

or acquired from the day after the Bill receives Royal Assent ie from 1 March 2017.

2/03/2017



INCOME


ElecNet (Aust) Pty Ltd v FCT [2016] HCA 51

• High Court held industry severance scheme not a unit trust under public

trading trust rules

• Workers didn't have units, interests were discretionary

• ATO says decision consistent with FCT's view of law.

ATO Decision Impact Statement on ElecNet case

Income Tax

Decision Impact Statement on ElecNet case

The ATO on 23 February 2017 released a Decision Impact Statement (DIS) on the High Court

decision in ElecNet (Aust) Pty Ltd (as trustee for the Electrical Industry Severance Scheme) v

FCT [2016] HCA 51. In its decision, the High Court unanimously dismissed the taxpayer's appeal

and confirmed that the Electrical Industry Severance Scheme (EISS) was not a "unit t rust" within the

meaning of Div 6C of Pt III of the ITAA 1936 and therefore was not entitled to be taxed like a

company. It did so on the basis of finding that the interests of the electrical industry workers in the

scheme could not be characterised as "units". In arriving at its decision, the High Court also

indicated that the workers' interests were "discretionary" in nature which was contrary to the concept

of a "unit" interest.

ATO view

The ATO considers that the High Court's decision is consistent with the FCT's view of the law on

these issues.

The issue before the Court was whether the severance scheme was a unit trust for the purposes of

Div 6C of Pt III of the ITAA 1936. The Court held that the rights conferred on employees by the Deed

were not such as to support the conclusion that the EISS was a unit trust for the purposes of Div 6C.

In coming to that conclusion, the ATO said that the Court considered the effect of the terms of the

Deed and the construction of the terms of the provisions of Div 6C by reference to their text, context

and purpose. In this respect, the Court found that there was no reason in the text or context of

Div 6C to attribute to the undefined expression "unit trust" any meaning other than the meaning

evident from the language of Div 6C.

https://www.ato.gov.au/law/view/document?DocID=LIT/ICD/M104of2016/00001



The ATO also noted the High Court's concern that characterising the severance scheme as a unit

trust for the purposes of Div 6C may have the unintended and, from the perspective of the

recipients, unattractive consequence that severance payments made to workers under the

scheme may be taxable in the hands of the recipients as unit trust dividends.

Comments

Comments on this ATO Decision Impact Statement are due by 23 March 2017 to: Lyn Freshwater

(ATO contact officer) - Tel: (07) 3213 5554; Email address: [email protected].

2/03/2017

mailto:[email protected]



DEDUCTIONS

© Chartered Accountants Australia + New Zealand 2017© Chartered Accountants Australia + New Zealand 2017

No deduction or capital loss for guarantee "obligation"

• Taxpayers (controllers of trusts) involved in property development

• Income of 2 family trusts increased by $4.3m after capital loss of associated

unit trust disallowed

• Taxpayers claimed they were entitled to $4.3m deduction or capital loss as

trusts guaranteed business loan which lender (another related entity) had

called on guarantors to meet

• AAT found insufficient evidence to support existence of guarantee.

Deductions

Re Carioti and FCT [2017] AATA 62

No deduction or capital loss for guarantee "obligation"


The AAT has affirmed that two family trusts that were involved in a building and construction

business with other related entities were not entitled to a deduction or a capital loss for $4.3m. It did

so on the basis that both the documentary evidence and the oral evidence of the relevant controllers

of the trusts was not sufficiently credible to support the "bona-fides" of the alleged guarantee

arrangement: Re Carioti and FCT [2017] AATA 62 (AAT, File Nos: 2014/1471, 1474, 1484 & 1485,

Frost DP, 25 January 2017).

Background

Following the audit of the applicants and their associated entities who were involved in a building

business, an amended assessment was made in relation to a unit trust for the 2007 income year.

The amended assessment reflected the disallowance of a $4.3m cap ital loss which the FCT

concluded, and the applicants accepted, was not incurred by the unit trust. As a consequence, the

unit trust had an additional $4.3m available for distribut ion to its unit holders. That amount was

distributed as to 50% to one discretionary trust (controlled by the first and second applicants), and

as to 50% to another discretionary trust (controlled by the third and fourth applicants). From those

discretionary trusts, distributions flowed to each of the applicants personally.

http://www.austlii.edu.au/au/cases/cth/AATA/2017/62.html



The FCT then amended the applicants' assessments for the 2007 income year to take account of

those additional distributions. Each of the applicants objected against their amended assessment

and against the assessment of 50% shortfall penalties for recklessness. They claimed their

respective discretionary trusts were entitled either to a deduction, or to a capital loss, equal to the

amount of additional income attributed to it. Specifically, the applicants claimed that each of their

trusts guaranteed a loan which the borrower became unable to service and that, as a result, the

lender (a related entity) had called on the guarantors to meet the debt.

Decision

In affirming the FCT's decision to disallow the taxpayers' objections to their amended assessments,

the AAT found that both the documentary evidence and the oral evidence of the relevant controllers

of the trusts was not sufficiently credible to support the existence of the alleged "deed s of

guarantee". Specifically, the AAT found that there were unusual features of the guarantee deed in

evidence that put into question whether the trusts were genuinely subject to a guarantee obligation.

The AAT also expressed concerns about the evidence of the amount of the loan in question, but

found it sufficient to decide the matter on the evidence as to the existence of the guarantee.

In this regard, the AAT noted that the guarantee deed made no reference to what was involved in

the guarantors "securing" the debt and did not, as would normally be expected, record an

undertaking by the guarantors to perform the obligations of the debtor under the loan agreement in

the event of default by the debtor. Likewise, the AAT noted that the deed said nothing abo ut the

process to be undertaken by the lender to recover from the guarantors in the event of default.

Furthermore, the AAT stated that the only director of the debtor on the date the deed of guarantee

was made (apart from another party who was not at arm's length from the applicants) said he knew

nothing about a guarantee.

In these circumstances, the AAT said there must be considerable doubt as to whether the applicants

"truly did expose themselves to any guarantee obligation under the document in question" . In doing

so, the AAT also noted the well-settled principle that "the evidence of witnesses who have an

interest in the outcome of litigation needs to be approached critically".

The AAT also affirmed the 50% shortfall penalties for recklessness. In this respect, the AAT said the

immediate cause of the applicants' failure to include the distributions in their assessable income was

"not only an error of attribution but one of fundamental entitlement as well" that was due to "extreme

sloppiness". Moreover, it stated that "putting aside the attribution error and focusing on the question

of fundamental entitlement ...the error was caused by gross carelessness". The AAT also found

there were no grounds to remit the penalties in these circumstances.

3/02/2017




Taxpayer denied deduction for work expenses of $60,000

• AAT found that mechanical engineer not entitled to deductions for:

‒ Car expenses – not work related

‒ Self-education costs – no nexus with income-producing activities

‒ Other “work” expenses – not substantiated

• AAT also affirmed 25% shortfall penalty for lack of reasonable care.

Deductions

Re Vakiloroaya and FCT [2017] AATA 95

Taxpayer denied deduction for work expenses of $60,000

Re Vakiloroaya and FCT [2017] AATA 95

The AAT has confirmed that a mechanical engineer with a PhD qualification was not entitled to

deductions for various work related expenses of approximately $60,000 claimed by him in the 2014

tax year - subject to certain minor deductions conceded by the FCT and several further ones allowed

by the AAT. The expenses in question were motor vehicle expenses (around $3,000), self -education

expenses (approx $48,000) and other work expenses (about $7,000): Re Vakiloroaya and FCT

[2017] AATA 95 (AAT, Ref No 2015/6422, Lazanas SM, 31 January 2017).

Motor vehicle expenses

In relation to the motor vehicle expenses, the taxpayer claimed he was required to use his car to

travel to meetings with clients and visit sites and continue with his work duties at home. He also

claimed that he was required to carry "confidential and sensitive documents" to and from a work and

therefore was entitled to a deduction on this basis as well. However, the AAT found the taxpayer did

not prove that his expenses were work-related and were not private in nature. In this regard, the

AAT noted that his employer did not "'reference" any requirement for him to attend any work-related

client meetings or site visits.

In respect of his claim for motor vehicle expenses on the basis that he was carrying "confidential information", the AAT found that, in fact, the information related to patents and other trade secret information which belonged to him and which had nothing to do with his employment or where he was studying. Furthermore, the AAT stated that even if he was carrying confidential information relating to his employer between home and work, he would not be entitled to claim a deduction for his motor vehicle expenses on that basis alone.





Self-education expenses

In relation to the self-education expenses claimed, the taxpayer argued that the expenses (for

physical products such as instrumentation equipment) related to an invention he was working on to

license to another company that was his own business or "industry". In disallowing this claim, the

AAT found the expenses had nothing to do with his employment or his university course and

therefore there was no requisite connection with any income-producing activity. In this regard, the

AAT also noted that an engineer engaged in developing a device was not engaged in a business.

The AAT also noted there was a failure to substantiate certain of the expenses.

Other work-related expenses

In relation to a range of miscellaneous work-related expenses claimed (including mobile phone

charges, internet, professional membership fees, conference fees and depreciation), the AAT found

that virtually all the deductions claimed were not properly substantiated in any way. It further stated

that both the FCT and the AAT itself were not satisfied that a deduction should be allowed on the

basis of the "nature and quality" of any other evidence regarding the incurrence of the expense

pursuant to s 900-195 of the ITAA 1997.

Shortfall penalty

Finally, the AAT said it was not satisfied that the decision by the FCT to impose 25% shortfall

penalties for failing to take reasonable care by was not incorrect - in view of, among other things,

that the taxpayer was a very knowledgeable and highly credentialed professional and academic, and

that the deductions claimed were "significant" in contrast to his assessable income for the re levant

year. Likewise, the Tribunal found there were no grounds for the AAT to exercise its discretion to

remit any part of the penalty.

3/02/2017




Practical Compliance Guideline PCG 2016/17

• PCG 2016/17 sets out ATO compliance approach to deduction claims – 3

focus areas:

– Governance

– Substantiation

– High risk (eg are costs incurred too soon?).

ATO approach – mining and petroleum exploration expenditure

Deductions

ATO compliance approach – mining and petroleum exploration

expenditure deductions

The ATO released Practical Compliance Guideline PCG 2016/17. This lengthy Guideline sets out

how the ATO will administer the law to in relation to the deductibility of expenditure on mining and

petroleum exploration and prospecting activities under s 8‑1 and s 40‑730(1) of the ITAA 1997 in

the context of Taxation Ruling TR 2017/1 Income tax: deductions for mining and petroleum.

The Guideline sets out the factors that the ATO will consider when assessing a taxpayer's risk of

non-compliance and therefore, how likely the ATO would be to review a taxpayer's exploration

expenditure claims. Specifically, the three focus areas of the Guideline are:

Governance - considers project level governance, joint venture arrangements and tax

governance.

Substantiating claims – considers contemporaneous documentation, preparing supporting

analysis, determining whether ss 8-1 or 40-730 applies and "no bright lines".

High risk areas - namely, expenditure that is incurred "too soon" or goes "too far"; long lead

assets and early works; feasibility studies; financing feasibility; activities conducted after a

decision to mine; and project management costs.

According to the Guideline, following the principles in the Guideline will increase both the confidence

of taxpayers and the ATO that deductions for exploration expenditure are claimed correctly.

https://www.ato.gov.au/law/view/document?src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=1&num=0&docid=COG%2FPCG201617%2FNAT%2FATO%2F00001&dc=false&tm=phrase-basic-PCG%202016%2F17



Date of effect

The Guideline has effect from its date of issue ie from 22 February 2017. The ATO says it will adopt

the approach in the Guideline in relation to deductions for exploration expenditure claimed after that

date.

The use and application of the Guideline will be under continuous review over the next three years.

Any revisions to improve its efficacy will be made at the end of the review period or on an "as

necessary" basis. The ATO says iy will consult with taxpayers in relation to proposed material

changes.

23/02/2017




Taxation Ruling TR 2017/1

• TR 2017/1 considers deductibility of exploration expenditure

• Immediate deduction may be available under s 8-1 or s 40-730(1) ITAA 1997

• If both provisions apply to same amount, taxpayer can rely on section giving

largest deduction.

Deductions for mining and petroleum exploration expenditure

Deductions

Deductions for mining and petroleum exploration expenditure

The ATO issued Taxation Ruling TR 2017/1 which deals with the availability of deductions under s

8-1 and s 40-730(1) of the ITAA 1997 for expenditure on mining and petroleum exploration, including

prospecting (ie exploration or prospecting - "EorP"). The Ruling states this also includes deductibility

of expenditure associated with studies to evaluate the economic feasibility of mining minerals or

quarry materials after they have been discovered.

The Ruling also deals with some aspects of s 40-80 which applies where a depreciating asset is first

used for EorP and s 40-25 which allows an immediate deduction for its cost. But note that the Ruling

does not deal with what constitutes "use" of a mining, quarrying or prospecting right, nor whether

such use is "for EorP" as these issues will be dealt with in other public ATO guidance products.

Key points

Key issues canvassed by the Ruling include the following.

1. Div 40 is not a "code" for deductions for exploration expenditure - an immediate deduction

may instead be available under the general deduction provision (s 8 -1) or s 40-730(1).

2. Significance of decision to mine not a "bright line" – the mere point in time at which

expenditure is incurred does not determine its character or nature for the purposes of its deductibility

under s 8-1 or s 40-730(1). For example, the fact that expenditure is incurred during what is

sometimes regarded as the "exploration phase" of mining does not determine the nature or

character of the expenditure as "exploratory" or as seeking to establish the economic feasibility of

mining.

https://www.ato.gov.au/law/view/document?src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=4&num=1&docid=TXR%2FTR20171%2FNAT%2FATO%2F00001&dc=false&tm=phrase-basic-TR%202017%2F1



3. Deductibility under s 8-1 – exploration expenditure incurred in the context of an existing mining

or exploration business will satisfy the positive limbs of s 8-1 where the expenditure has the

necessary connection with the income-earning operations or is incidental and relevant to those

operations. The ATO says whether expenditure is on revenue or capital account is largely a matter

of judgment based on what the expenditure is calculated to effect from a practical and business

point of view. Furthermore, there is no presumption that exploration expenditure is capital in nature

(including expenditure that produces information or evaluation of various mining opportunities in

relation to an existing business to see if they may be commercially or economically viable).

4. Deductibility under s 40-730 – expenditure of a revenue or capital nature may qualify for a

deduction under s 40-730(1) provided it is incurred "on" exploration or prospecting activities for

minerals (as defined in s 40-730(4)) and not be excluded by s 40-730(2) or (3). For expenditure to

be "on" EorP for minerals, there must be a direct or close link between the 2. For example, interest

and finance charges on money borrowed to finance EorP are not deductible under s 40 -730(1) as

the amounts do not have the required link. Further, exploration expenditure cannot form part of the

cost of a depreciating asset and fall within the exclusion in s 40-730(3) where it is deductible under

another provision (for example s 8 1) or where it is not of a capital nature.

5. Meaning of exploration and prospecting

Ordinary meaning - EorP in s 40-730(4) includes its ordinary, natural meaning ie the discovery

and identification of the existence, extent and nature of minerals and includes searching in

order to discover the resource, as well as the process of ascertaining the size of the

discovery and appraising its physical characteristics. This definition also includes activities

that are so incidental to, or so closely connected with, actual exploration or prospecting, that

are reasonably to be considered part of it (eg environmental or heritage protection stu dies or

activities connected with obtaining native title approvals where they are undertaken in

preparation for, or as part of, an exploration program).

Economic feasibility studies - s 40-730(4)(c) extends the meaning of EorP to include feasibility

studies to evaluate the economic feasibility of mining minerals or quarry materials after they

have been discovered. These studies are directed at answering for a miner the question of

"whether to mine". Note also considerations of "how to mine" including the technical

feasibility of a possible project and its likely costs, can be relevant parts of a "whether to

mine" enquiry.



6. Meaning of "operations in the course of working a mining property" and "development

drilling for petroleum”"

Operations in the course of working a mining property - a deduction is not available under s

40-730(1) for expenditure on EorP that is also "on" operations in the course of working a

mining property or "on" development drilling for petroleum. Where expenditure serves the

activities in the exclusion and some other object or objects indifferently, so that it cannot be

dissected or otherwise reasonably apportioned, the exclusion will apply if the expenditure is

at least to some non trivial extent "on" the activities in the exclusion.

Mine extensions, expansions and augmentations - there is no presumption that activities which

answer the description of EorP in s 40-730(4) and which occur in relation to a mining

property where there is an established mine, are operations in the course of working that

mining property. Everything depends on what the activities are directed at achieving. An

activity that is genuinely exploratory in its ordinary sense or is, or is part of, assessing

whether or not a new mine, mine extension or expansion would be economically feasible, is

to be distinguished from an activity that is directed towards development of that mine. The

latter, but not the former, will be an operation in the course of working a mining property.

Petroleum field extensions, expansions and augmentations - there is no presumption that

activities which answer the description of EorP in s 40-730(4) and which occur in relation to a

petroleum field where there are existing operations to recover petroleum, are operations in

the course of working a petroleum field. Where an activity is directed towards "getting at"

petroleum (including the development of the petroleum field to recover petroleum), then it will

be operations in the course of working a petroleum field. If, however, the activity is genuinely

exploratory in its ordinary sense or is part of assessing whether or not an extension or

expansion would be economically feasible, then it will not be operations in the course of

working a petroleum field.

Note that the Ruling contains 20 examples to illustrate these principles relating to the availability of

deductions under s 8-1 and s 40-730(1) of the ITAA 1997 for expenditure on mining and petroleum

exploration, and prospecting.

The ATO has also issued Practical Compliance Guideline PCG 2016/17 which deals with the

ATO's "compliance approach" to mining and petroleum exploration expenditure deductions.

Date of effect

The Ruling applies to years of income commencing both before and after its date of issue.

Previous Rulings

The Ruling replaces Taxation Ruling TR 98/23 (Mining exploration and prospecting expenditure)

which was withdrawn from 28 October 2015. TR 2017/1 was originally released as Draft TR

2015/D4. The final Ruling is substantially the same as the Draft. However, one major change has

been incorporated to include activities connected with obtaining native title approvals in the ordinary

meaning of "exploration and prospecting".

23/02/2017




Re RGGW and FCT [2017] AATA 238

• Taxpayer: 50% partner in shopping centre development business

• Complex ownership structure – interposed trusts, share sale transactions

• Deductions for $25m carried forward losses denied

• Continuity of ownership, same business tests failed in relevant recoupment

years

• Shortfall penalties downgraded from intentional disregard to recklessness

(various uplift components retained).

No deduction for carried forward losses of $25m

Deducations

No deduction for carried forward losses of $25m

Re RGGW and FCT

The AAT has confirmed that a company that was a partner in a shopping centre development

business was not entitled to deductions for carried forward losses of over $25m incurred in the 1990

to 1995 income years from carrying out those activities. This was because the AAT found that the

company did not satisfy the relevant "continuity of ownership" and "same business" tests that

applied in relation to the 1996 to 2003 income years in which it sought to recoup the losses: Re

RGGW and FCT [2017] AATA 238 (AAT, File Nos: 2015/4095-4102, Frost DP, 20 February 2017).

Background

The taxpayer was a company that formed part of a complex family corporate structure which

included interposed trusts and subsidiary companies. In the 1990 to 1995 years of income, it was a

50% partner in a shopping centre development business. However, by the time the development

was completed, the combination of increasing interest rates, overruns in the cost of development

and the receipt of lower than expected rental income resulted in the company being in a difficult

financial position, with the resulting appointment of a receiver and manager to the partnership. The

taxpayer later sought to claim a deduction for carried forward losses of $25m from the venture which

it sought to recoup in the following 1996 to 2003 income years.





The issue for consideration by the AAT was whether the taxpayer satisfied the relevant "continuity of

ownership" test that applied for the 1996 and 1997 income years, the 1998 and 1999 income years

and the 2000 to 2003 income years in order to be entitled to a deduction for the carried forward

losses. In the alternative, the taxpayer was required to satisfy the respective "same business" test

that then applied to the relevant years.

[Note that for the 1996 and 1997 income years, the continuity of ownership test (under s 80A of the

ITAA 1936) required the same persons to beneficially own more than 50% of the shareholding in the

company in the year in which the loss was incurred and the year in which it was sought to be

recouped. For the 1998 and 1999 income years, the test (under ss 165-12 and 165-165 of the ITAA

1997) required the same persons to beneficially own more than 50% of the shareholding in the

company in the year in which the loss was incurred and the year in which it was sought to be

recouped, as well as any intervening period. For the 2000 to 2003 income years, this test (under

amended ss 165-12 and 165-165) applied in the same manner but with the additional requirement

that the exact same interests must be owned by the same persons over the relevant period.]

Decision

In confirming that the taxpayer had not discharged the burden of proving that it satisfied the relevant

"continuity of ownership" test or the "same business" test for the years in question, the AAT first

found that, for the 2000 to 2003 income years, the requirements in amended s 165-12 and s 165-

165 were clearly not met because whatever interests were held by the re levant shareholders during

any of the loss years were fundamentally different from interests held in any of the 2000 to 2003

income years. In arriving at this finding, the AAT also took into account the lack of specific records of

the shareholding at the relevant times and gaps in the documentation and other evidence. At the

same time, the AAT dismissed the taxpayer's claims that the amendments to ss 165-12 and 165-165

did not apply to the years in question as the legislation clearly stated they were to app ly to income

years ending after 21 September 1999.

Likewise, the AAT found that the relevant continuity or ownership test that then applied for the other

years (namely, the 1996 to 1997 years and the 1998 to 1999 years) had not been satisfied either for

similar reasons.

The AAT also noted the taxpayer's concern that the burden of proof it bears in the circumstances

places "a weight upon the taxpayer similar to that placed upon Atlas, who carried the whole weight

of the heavens as well as the globe of the earth upon his shoulders". However, the AAT said this

does "not excuse a taxpayer from the obligation to make good its case on some satisfactory basis

other than speculation, guesswork or corner-cutting". The AAT further noted that "even allowing for

the fact that the first claimed loss year (1990) is now over a quarter of a century ago, it is surely not

unreasonable to expect that a case put forward in support of tax losses of almost $5m should be

supported by more than assertions and broad-brush submissions" - especially as the taxpayer was

part of a large and sophisticated corporate group that would have been expected to keep proper

accounting and corporate records.



The AAT then found that the taxpayer had not established the requirements of the "same business"

test (as it applied differently to the different years in question). In this regard, the AAT noted that the

company's original stated objective in the loss years was "investment in shopping centre and

building construction" but by the time of the recoupment years, its stated objective was "investment

in units in a trust", with no element of property development. Furthermore, it noted that from the time

of the sale of the shopping centre in 1993, there was no evidence of any business activity being

carried on until some three years later when the taxpayer had begun to invest in a number of service

stations to be leased to a major oil company and from which it derived rent.

Finally, the AAT found that the shortfall penalties imposed for "intentional disr egard of the law"

should be reduced to penalties for "recklessness" - albeit retaining various uplift components.

However, the AAT noted an anomaly in the calculation of the penalty in these circumstances which

resulted in a 100% increase in the uplift factor for certain years. However, the AAT left this matter for

the FCT to address in the recalculation of the penalties.

2/03/2017



TAX OFFSETS


ATO reminder of change from 1 July 2017

• From 1 July 2017, spouse's income threshold will rise from $13,800 to

$40,000

• Current 18% tax offset of up to $540 will remain

• Taxpayers won’t be entitled to tax offset if:

– Spouse exceeds non-concessional contributions cap for the relevant year, or

– Spouse’s total super balance is $1.6m or more at 30 June 2017.

Tax offset re spouse super contributions

Tax Offests

Tax offset re spouse super contributions

Currently, an individual can claim a tax offset up to a maximum of $540 for contributions they make

to their spouse's eligible super fund if, among other things, the total of the spouse's assessable

income, total reportable fringe benefits and reportable employer super contributions i s under

$13,800.

The ATO has reminded taxpayers that from 1 July 2017, the spouse's income threshold will increase

to $40,000. The current 18% tax offset of up to $540 will remain and will be available for any

individual, whether married or de facto, contributing to a recipient spouse whose income is up to

$40,000. As is currently the case, the offset gradually reduces for incomes above $37,000 and

completely phases out at incomes above $40,000.

Individuals will NOT be entitled to the tax offset when:

The spouse receiving the contribution has exceeded their non-concessional contributions cap

for the relevant year, or

The spouse has a total superannuation balance equal to or more than the general transfer

balance cap ($1.6 million for 2017-18) immediately before the start of the financial year in

which the contribution was made.

The ATO says the intent of this change is to extend the current spouse tax offset to more couples to

allow them to support each other in saving for retirement.

23/02/2017

https://www.ato.gov.au/Individuals/Super/Super-changes/Change-to-spouse-tax-offset/



INDIRECT TAXES


GST on home care and residential care

• ATO draft guidance documents to help home & residential care suppliers work

out if their services are GST-free

• Also explains how GST applies to sub-contracted services.

Indirect Taxes

ATO seeks views on guidance material

GST on home care and residential care – ATO seeks views on guidance

material

The ATO has prepared two draft guidance documents to help home care and residential care

suppliers work out when the services they supply are GST-free, and how GST applies to

subcontracted services. The two documents are:

GST and home care – consultation. The purpose of the guidance is to assist home care

service providers: (i) working out when (and to what extent) supplies of care and related

services are GST-free, and (ii) to understand how GST applies to subcontracted services.

This draft guide looks at government funded care, consumer directed care, additional

services a care recipient pays for, non-government funded home care services. The guide

says home care services are generally only GST-free where the contractual recipient of the

supply is an individual who receives the services. If someone contracts with another entity to

deliver home care for them, the supply to that entity is not generally GST-free. However, the

supply is GST-free to the extent that the underlying service to the care recipient is GST-free

where the supply is made to, for example, an insurer settling a claim under an insurance

policy or an operator of a statutory compensation scheme.

https://www.ato.gov.au/Newsroom/smallbusiness/GST-and-excise/GST-on-home-care-and-residential-care/?sbnews20170124



GST and residential care – consultation. Covers government funded residential care

services, non-government funded residential care services other than in a retirement village,

non-government funded residential care services in a retirement village, accommodation,

subcontracting services. The draft guide explains when the supply of residential care

services to an aged or disabled person is GST-free where the supplier does not receive any

funding directly from government for its residential care services and does not operate a

retirement village and, in the alternative, where it does operate a retirement village.

Accommodation is GST-free if it is supplied in the course of supplying GST-free residential

care services. To be supplied "in the course of supplying GST-free residential care services",

the guide says the accommodation must be integral to the supply of the care, and the

resident is accommodated at the facility so that they can receive the care services which they

require.

The ATO is seeking the views of suppliers or interested parties on the draft guidance documents.

Comments on the documents are due by 5pm Friday, 17 February 2017.

3/02/2017




ATO states its views on Uber case

• ATO says ride-sourcing drivers must:

– Keep records

– Have ABN, register for GST

– Pay GST on full fare received from passengers

– Lodge BASs

– Declare ride-sourcing income.

ATO moves quickly on Uber GST decision

Indirect Tax

ATO moves quickly on Uber GST decision

Not surprisingly, the ATO has moved quickly to state its views on the implications of the Federal

Court decision in the Uber case. The Court held that the uberX service supplied by one of its drivers

constituted the supply of "taxi travel" within the meaning of s 144-5(1) of the GST Act, effectively

meaning that Uber drivers need to register for GST.

The ATO said the Federal Court agreed that ride-sourcing is taxi travel within the meaning of the

GST law. As a result, the ATO says those providing ride-sourcing must: (i) keep records; (ii) have an

ABN; (iii) register for GST, regardless of how much they earn [ie the $75,000 GST registration

threshold does not apply - Uber drivers must register from dollar one]; (iv) pay GST on the full fare

received from passengers; (v) lodge activity statements; (vi) include income from ride -sourcing in

their tax returns.

The ATO says drivers are also entitled to claim income tax deductions and GST credi ts (for GST

paid) on expenses apportioned to the ride-sourcing services they have supplied. Where the ATO

matches people who provide ride-sourcing through data matching, it says it will continue to write to

them to explain their tax obligations.

23/02/2017

https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Ride-sourcing-is-taxi-travel/




Correcting GST Errors Amendment Determination 2017 (No 1)

• Amends GST: Correcting GST Errors Determination 2013 to:

– Clarify that errors from earlier tax period can’t be corrected by seeking

amendment of later GST return

– Ensure credit errors from earlier tax period can only be corrected in later tax

period if later GST return lodged within review period for earlier assessment

• Date of effect: 1 March 2017.

Correcting GST errors – amending Determination made

Indirect Tax

Correcting GST errors – amending Determination made

The Correcting GST Errors Amendment Determination 2017 (No 1) was registered on 22

February 2017. It was made under s 17-20(1) of the GST Act and amends the Goods and Services

Tax: Correcting GST Errors Determination 2013 (the Correcting GST Errors Determination):

To clarify that a taxpayer cannot correct an error from an earlier tax period by req uesting an

amendment of a GST return of a later tax period; and

To ensure that credit errors from an earlier tax period can only be corrected in a later tax

period if the GST return for the later tax period is lodged within the period of review for the

earlier assessment in which the error was made.

The Correcting GST Errors Determination adopted the wording from para 17-20(2A)(b) of the GST

Act (that was inserted in 2012) for the time limit to correct credit errors. However, the FCT became

aware that under clause 5(b) of the Correcting GST Errors Determination prior to this amendment,

credit errors may in certain circumstances be corrected outside the 4-year period of review. This is

because the credit error time limit refers to when the later tax period starts rather than when the GST

return for the later tax period is lodged. Hence, the amendment to the Correcting GST Errors

Determination was required.

Date of effect

The Determination commences on 1 March 2017 and applies to a tax period, in which a taxpay er

corrects an error or errors from an earlier tax period that starts on or after 1 March 2017.

23/02/2017

https://www.legislation.gov.au/Details/F2017L00143




Re Eastwin Trade Pty Ltd and FCT [2017] AATA 140

• Taxpayer traded in gold dore (not precious metal for GST purposes)

• Claimed input tax credits of >$13m

• Failed to discharge onus of proving acquisitions made

• AAT agreed with FCT that:

– No valid tax invoices

– No consideration

– Alleged suppliers not GST-registered.

GST: No input tax credit for purchase of gold dore

Indirect Tax

GST: No input tax credit for purchase of gold dore

A taxpayer has been denied claims for input tax credits totaling over $13 million, on the basis that

the relevant acquisitions did not qualify as creditable acquisitions. (Eastwin Trade Pty Ltd v FCT

[2017] AATA 140, PW Taylor SC, 10 February 2017.)

Background

The taxpayer traded in gold dore. This is gold in a semi-pure state which, in this case, was produced

in a cylindrical crucible. It can be contrasted with gold that qualifies as “precious metal” for the

purposes of the GST Act – which is gold in an investment form of at least 99.5% fineness.

Supplies of gold as precious metal are input taxed: s 40-100 of the GST Act. In contrast, a supply of

gold dore is a taxable supply (assuming the requirements of Div 9 are satisfied, ie regist ration,

enterprise etc).

In 2014, the taxpayer sold large quantities of gold dore (some $143.9 million) and allegedly

purchased similarly large quantities of dore ($143.3 million). The taxpayer completed three BAS’s on

a net basis, namely applying GST on the net amount of payments into and out of its bank account in

the periods. This resulted in significant understatement of the sales, purchase and GST amounts

shown on the face of various invoices.

Nature of dispute

Following an audit, the FCT issued amended assessments in which GST was imposed on the sales

(and there was no dispute about this). However, the Commissioner did not allow the taxpayer to

claim input tax credits for the purported acquisitions. This resulted in the taxpayer having a $13

million tax shortfall and being subjected to penalties totalling $7.8 million.





The grounds for disallowing the input tax credit claim were twofold:

(1) The taxpayer did not hold valid tax invoices; and

(2) The taxpayer had not made creditable acquisitions, specifically that it had not acquired gold

dore in the manner it contended.

The FCT put forward many reasons for this, which can be summarised as follows:

The vendor from which the gold has been purchased had never been registered for GST;

The manner in which the goods were acquired had many serious anomalies (eg delivery of

goods late at night in suburban car parks, little or no independent corroborating evidence,

statements by individuals who could not be contacted etc);

Vague and non-specific documentation; and

A lack of precision of what precisely was acquired and when it was acquired.

Overall, the FCT contended that the invoices were sham documents.

The taxpayer contended that it has made creditable acquisitions and that it held valid tax invoices for

them.

Decision

After a forensic examination of the evidence that the taxpayer provided, the AAT concluded that the

taxpayer had not satisfied it that the gold dore was acquired in the manner in which it contended.

Accordingly, the claim for input tax credits was not allowed and the assessments were affirmed.

The AAT considered that the following matters were relevant:

The taxpayer had not established who the asserted supplier was;

The purchase invoices were: (i) plainly inaccurate; (ii) not provided contemporaneously with

the deliver transactions; and (iii) only provided during the course of (and possibly as a result

of) the Tax Office audit;

The substantial uncertainty about the typical sequence of events in the gold delivery

transactions; and

The “dubious authenticity” of various email correspondence.

The penalty imposed was left untouched, with the Tribunal considering that “there is no possible

basis” for exercising the discretion to remit it.

23/02/2017




Draft GST Determination GSTD 2017/D1

• Considers para (b) of definition of "second-hand goods" in s 195-1 GST Act

• Under para (b), goods aren’t second-hand goods to the extent that they

consist of gold, silver, platinum or other substance which would be precious

metal "if it were of the required fineness"

• FCT thinks further requirement – "in an investment form" – needs to be

added to para (b) so the exclusion makes sense

• Proposed date of effect: prospective.

GST and second-hand goods consisting of precious metal

Indirect Tax

GST and second-hand goods consisting of gold or other precious metal

The ATO released Draft GST Determination GSTD 2017/D1, which sets out its views on when

goods consisting of gold, silver, platinum or other precious metal qualify as "second-hand goods" for

the purposes of the GST legislation.

Paragraph (b) of the definition in s 195-1 of the GST Act excludes "goods to the extent that they

consist of gold, silver, platinum, or any other substance which, if it were of the required fineness,

would be precious metal". The Draft states that this definition must be read as if the term "and in an

investment form" had been inserted after the word "fineness". To do so means that para (b) then

reflects the same wording and intention of the definition of "precious metals" (as contained in para

(a)).

Date of effect

When the final Determination is issued, it will apply from the start of the first following tax period.

However, it will have retrospective effect if the FCT believes that any affected taxpayers have been

involved in "fraud, evasion, tax avoidance schemes (whether or not a declaration has been made

under s 165-40), or any other artificial or contrived arrangements involving the manipulation of the

form or fineness of gold, silver, platinum etcetera".

COMMENTS are due by 22 March 2017.

23/02/2017

https://www.ato.gov.au/law/view/document?src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=1&num=0&docid=DGD%2FGSTD2017D1%2FNAT%2FATO%2F00001&dc=false&tm=phrase-basic-GSTD%202017%2FD1




Uber B.V. v FCT [2017] FCA 110

• Federal Court held Uber drivers supply "taxi travel" for GST purposes

– Taxi operators must be GST-registered, regardless of turnover.

Uber supplies "taxi services" for GST purposes

Indirect Tax

Uber rides subject to GST

The Federal Court has held that the uberX service supplied by one of its drivers constituted the

supply of "taxi travel" within the meaning of s 144-5(1) of the GST Act: Uber B.V. v FCT [2017] FCA

110 (Federal Court, Griffiths J, 17 February 2017).

At the heart of the case was the question whether persons who are Uber drivers are required to be

registered for GST purposes. The issue is one of statutory construction. Enterprises with a turnover

of less than $75,000 do not need to register for GST but there is a special rule or exemption, created

by s 144-5 in the GST Act, which has the effect that taxi and limousine operators are required to be

registered, regardless of turnover. Specifically, s 144-5(1) requires a person who is carrying on an

enterprise to be registered for GST purposes "if, in carrying on your enterprise, you supply taxi

travel".

The phrase "taxi travel" is defined in s 195-1 of the GST Act as meaning "travel that involves

transporting passengers, by taxi or limousine, for fares". In simple terms, the Court said the core

issue was whether, in carrying on the enterprise of providing uberX services to passenger s (known

as "uberX Riders"), uberX drivers (known as "uberX Partners") supply "taxi travel" as defined. If so,

they must register for GST purposes.

After extensive review of the matter and issues of statutory construction, the Federal Court came to

the view that the uberX Partner in question was supplying taxi travel as defined in ss 144 -5(1) and

195-1 of the GST Act when he was operating as an uberX Partner. The Court considered that, at the

relevant time, he was supplying travel that involved transporting passengers by taxi for fares. The

fact that his car did not have a taximeter installed in it was not determinative of the question, the

Court said.

23/02/2017

http://www.austlii.edu.au/au/cases/cth/FCA/2017/110.html





Episode 21 released on Uber GST decision

• In Uber B.V. v FCT [2017] FCA 110, Federal Court held Uber drivers supply

"taxi travel" for GST purposes

• ATO says case "compulsory reading" on key interpretation issues, eg:

– Legal meaning

– Text first and last

– Examine context

– Approach to GST

– Composite expressions.

ATO's interpretation NOW!

Indirect Tax

ATO's interpretation NOW! – Uber BV GST decision

The ATO has released Episode 21 of its interpretation NOW!. It reflects on the Federal Court

decision in Uber BV v FCT [2017] FCA 110 on GST and taxi travel. The Court held that the uberX

service supplied by one of its drivers constituted the supply of "taxi travel" within the meaning of

s 144-5(1) of the GST Act, with the consequence that Uber drivers must register for GST.

The ATO says the case is "compulsory reading" on a range of key interpretation issues and Episode

21 discusses eight of them eg:

Legal meaning - The task is to give the words the legal meaning parliament is taken to have

intended them to bear. Usually, this will be the literal or grammatical meaning. Sometimes,

however, purpose or context will point to some different meaning. The process of

interpretation is always objective – never a search for subjective motivations or collective

intention.

Text first and last - Interpretation must begin with the text, and so also it must end. As High

Court mantra insists, it is a "text-based activity". The text, however, "must be considered in its

context".

Examine context - Look at context early – no need to wait for ambiguity or other problems to

emerge. iNOW! describes the basic procedure as "text > context > text".

Approach to GST - Context pointed to a "broad and non-technical approach" to apply to the

GST law. It is expressed in flexible and general language, so we "should avoid

interpretations which are unduly technical or overly meticulous and literal". That GST is a

"practical business tax" is simply part of the context; it's not some special interpretational rule

just for GST.

https://www.ato.gov.au/law/view/document?DocID=rtf/inow201702




Composite expressions - Was the definition of "taxi travel" a composite expression? "No"

said the judge (at [132]), because the phrase "taxi or limousine" differentiated between

vehicle types. By contrast, composite expressions (like "external affairs") demand an

integrated approach to interpretation. They are not to be read by isolating each term against

a dictionary.

Dictionaries – The ATO says dictionaries can be consulted to confirm the ordinary meaning

of words, as in Uber BV. We are told, however, "not to make a fortress out of a dictionary"

[Sea Shepherd [2013] FCAFC 68 (at [36]), Thiess [2014] HCA 12 (at [23])] – they are no

substitute for interpretation. Look at them of course, but measure what you find against

context and purpose. It is the mechanistic use of dictionaries that gets us into trouble.

The ATO's iTip from Uber is that interpretation principles provide "helpful guidance rather than

talismanic formulae or inflexible rules of law".

2/03/2017




Draft Law Companion Guideline LCG 2017/D2

• Draft guideline on Treasury Laws Amendment (GST Low Value Goods) Bill

2017 measure to impose GST on low value imported goods (up to $1,000)

• Draft discusses:

– Calculating GST on supply of low value goods

– Rules on double taxation, correcting errors, change in GST treatment of supply

– Interaction with other rules

• ATO to issue separate guidance on who's responsible for GST (eg where

multiple EDP operators or redeliverers involved in supply).

GST on low value imported goods

Indirect Tax

GST on low-value imported goods – Draft guideline released

The ATO released Draft Law Companion Guideline LCG 2017/D2. It discusses the amendments

proposed by Treasury Laws Amendment (GST Low Value Goods) Bill 2017 , which was introduced in

Parliament on 16 February 2017. The Bill seeks to ensure that GST is payable on supplies of low-

value imported goods (worth less than A$1,000) that are purchased by consumers in Australia.

Note that the GST legislation refers to the "indirect tax zone", rather than "Australia". This is the

same as the term "Australia", except that it excludes the areas where GST does not apply (such as

the external Territories). For ease of reference, the term Australia is used rather than the indirect tax

zone (as there is no real practical difference).

The Draft discusses:

How to calculate the GST payable on a supply of low-value goods;

The rules to prevent double taxation of goods, and to correct errors or deal with changes in

the GST treatment of a supply;

How the rules interact with other rules under which supplies are connected with Australia.

The Draft does not fully discuss how to determine whether an operator of an electronic distribution

platform (EDP) or a redeliverer, instead of the actual supplier, is treated as the supplier for GST

purposes. It is the entity that is treated as the supplier that will need to determine if the supply is

connected with the indirect tax zone.

https://www.ato.gov.au/law/view/view.htm?docid=%22COG%2FLCG20172%2FNAT%2FATO%2F00001%22




The ATO states in the Draft that it intends to issue separate guidance about determining which entity

is responsible for GST on supplies of low-value imported goods. This is expected to address issues

such as when an EDP operator or redeliverer will be responsible for GST – and the rules where

more than one EDP operator or redeliverer is involved in the supply.

The Draft in large part draws very heavily on the EM to the Bill. However, there are additional

examples included. There are also some important details that were not included in the EM – which

are highlighted below.

Currency conversion

Under proposed s 84-79(4)(e) of the GST Act, there will be two ways of working out the equivalent

value in Australian currency of goods sold in a foreign currency:

The way provided in s 161J of the Customs Act 1901; or

In the manner determined by the FCT.

The Draft indicates that the ATO is creating a draft legislative instrument which specifies that the

Australian dollar amount to be used in working out the customs value for the purposes of the new

provision can be calculated by using the relevant currency exchange rate published by the Reserve

Bank of Australia for the day on which the consideration is first agreed.

Supplies not connected with Australia

Even if a supply satisfies the requirements for a supply of low-value goods, the supply will not be

connected with Australia under proposed s 84-83 if:

The supplier has taken reasonable steps to obtain information about whether or not the

goods will be imported as a taxable importation; and

After taking these steps, reasonably believes that the goods will be imported as a taxable

importation.

The test has two elements - reasonable belief and reasonable steps. The Draft provides further

details as to how this can be satisfied, as well as some helpful examples.

Australian consumer law requirements

Generally speaking, Australian consumer law requires retailers to provide a price that is inclusive of

GST, where GST is applicable. This may be difficult for offshore suppliers – how will they be certain

that a supply of goods will be liable for GST with any certainty?

The Draft offers the possibility of some relief, when it states that if it is initially considered less likely

that GST will apply to Australian recipients, then the supplier can instead display a message that

notes the potential for additional taxes to apply.

However, when an offshore supplier is aware that they are offering low-value goods for sale

into Australia to consumers, the price displayed should be a GST-inclusive price. Indicators

that this is the case would include situations where a website is advertising consumer goods in

Australian dollars, or through the use of a ".com.au" domain name or where location services show

the recipient is in Australia.



Supplies of low-value goods that are not subject to GST at the border

Under s 42-15, an importation of goods will be a non-taxable importation to the extent that:

The supply was an offshore supply of low-value goods that was a taxable supply (under s 9-

5);

The supply was connected with Australia only because the new provisions applied to the

supply; and

Prior to the time by which a taxable importation would have been made, notification is

provided to the Comptroller-General of Customs in the approved form that the supply was a

taxable supply.

It is expected that the requirement to notify Customs for the purposes of s 42-15 will be met where

the relevant fields are completed on the import declaration for the goods.

To switch off the taxable importation, this notification must be provided by the time at which the

taxable importation would otherwise have been made. Using the terms in the customs legislation,

this means the notification must be provided prior to goods being delivered into home consumption

in accordance with an authority to deal, by including the information in the import declaration, or in

an amended import declaration.

Supplies incorrectly treated as taxable supplies

If the supplier (or entity treated as the supplier) discovers that the supply should not have been a

taxable supply, either because of information about the nature of the goods or of the recipient, an

adjustment event will arise.

If the supplier has already included the GST payable on such a supply in its assessed net amount in

a return, the amount will be "excess GST" for the purposes of Div 142. This applies so that an

amount of excess GST is only refundable to the supplier if either it has not been passed on to the

recipient, or the recipient has been reimbursed for the excess GST that has been passed on. Once

the reimbursement has been made to the recipient, the supply ceases to be a taxable supply and

the supplier can make a decreasing adjustment.

If the excess GST has not been passed on to the recipient, s 142-10 does not apply and the

supplier may request an amended assessment or the supplier may claim a refund in a later tax

period (if the conditions set out in Legislative Determination GSTE 2013/1 (Correcting GST Errors

Determination) are satisfied).

Comments

Comments are due by 24 March 2017. ATO contact: Anita Carter; Tel: 07 3213 6695; email:

[email protected].

2/03/2017

mailto:[email protected]



TAXATION OF SUPERANNUATION


ATO SuperSeeker

• SuperSeeker online service for individuals now decommissioned

• Individuals can find/manage super via myGov

Taxation of Superannuation

Service decommissioned

ATO SuperSeeker service decommissioned

The ATO has decommissioned its SuperSeeker online service for individuals. The service previously

enabled individuals to conduct an online search for superannuation on the ATO's Lost Members

Register. The ATO had originally planned to decommission SuperSeeker from April 2017 but due to

its recent system outages, which began on 12 December 2016, it has now decided that

SuperSeeker will not be revived.

The ATO has suggested replacing any links to SuperSeeker with links to the ATO's Check your

super using myGov page. According to the ATO, individuals can find and manage their super using

the secure ATO online services through myGov.

3/02/2017

https://www.ato.gov.au/Super/APRA-regulated-funds/In-detail/News/Monthly-communiques/January-2017/

https://www.ato.gov.au/calculators-and-tools/check-your-super/

https://www.ato.gov.au/calculators-and-tools/check-your-super/




ATO reminder

• SMSF trustees reminded that bank account nominated in SMSF Annual

Return:

– Must be operated by trustees

– Can't be common account used across multiple clients

• Another account (eg. tax agent's) can be entered at Label 7B for tax refunds

• If Label 7B not completed, refunds paid to Label 7A account

• SMSFs receiving (unrelated) employer contributions must include ESA at

Label 7C.

Common errors on SMSF annual returns


Common errors on SMSF annual returns

The ATO has reminded SMSF trustees that the fund's bank account nominated in the SMSF Annual

Return must be an account operated by the SMSF trustees. These account details should be unique

to each SMSF and cannot be a common account used across multiple clients, such as the tax

agent's trust account or the personal bank account of the trustee. The ATO says that it uses these

details at Label 7A (Superannuation payments) to make super and SuperStream payments directly

to the SMSF.

The ATO notes that a different a bank account can be entered at Label 7B for payments of income

tax refunds. If Label 7B is not completed, the ATO will pay tax refunds to the bank account

nominated at Label 7A. The ATO says that a tax agent's financial institution details can only be

added into Label 7B (Income tax refunds), and should not be added into Label 7A (Superannuation

payments).

SMSFs that receive employer contributions (other than from a related-party employer) need to

include the registered Electronic Service Address (ESA) of the SMSF at Label 7C. The ATO says

that an SMSF should only have one ESA and be linked to the ABN of the SMSF - not the member.

The Tax Office publishes a register of messaging solution providers for ESA purposes. Other

common ESA errors when completing Label 7C include:

ESAs with incorrect spelling, spaces and transposed characters (ie ESAs that don't match

with those issued by the ESA provider);

Using an email address or a postal address;

Using only dots (…), dashes (-) or other characters (!, @, ?).

16/02/2017

https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/Common-errors-on-SMSF-annual-returns/

https://www.ato.gov.au/Super/SuperStream/Self-managed-super-funds/Electronic-service-address/





• Draft ATO Guideline on treatment of super death benefit income streams

from 1 July 2017 under $1.6m pension transfer balance cap

• Reversionary death benefit income stream – credit arises in recipient's

transfer balance account 12 months after original member's death:

– Although credit deferred, tax consequences of receiving income stream not

delayed

• Non-reversionary income stream – credit arises in recipient's transfer balance

account on later of 1 July 2017 or on becoming entitled to income stream.

Super reforms: $1.6m pension cap & death benefits


Super reforms: $1.6m transfer balance cap and death benefit pensions


The ATO released Draft Law Companion Guideline LCG 2017/D3 on the treatment of

superannuation death benefit income streams under the $1.6m pension transfer balance cap from

1 July 2017.

Where a deceased member's superannuation interest is cashed to a dependant beneficiary in the

form of a death benefit income stream, a credit will arise in the dependant beneficiary's transfer

balance account. The amount and timing of when a transfer balance credit arises under s 294-25(1)

of the ITAA 1997 for a death benefit income stream will depend upon whether the recipient is

a reversionary or non-reversionary beneficiary.

Reversionary vs non-reversionary pensions

The Draft Guideline states that a reversionary death benefit income stream is an income stream that

reverts to the reversionary beneficiary automatically upon the member's death. That is, the income

stream continues with the entitlement to it passing from one person (the deceased member) to

another (the dependant beneficiary) pursuant to the rules of the fund. On the other hand, a non-

reversionary death benefit income stream is a new superannuation income stream created and paid

to a dependant beneficiary where the trustee exercises a power or discretion to determine an

amount in the beneficiary's favour.

https://www.ato.gov.au/law/view/document?DocID=COG/LCG20173/NAT/ATO/00001



Transfer balance credit - reversionary

For a reversionary death benefit income stream, a credit will arise in the reversionary beneficiary's

transfer balance account 12 months after the death of the original superannuation member. If the

reversionary income stream commenced before 1 July 2017, the credit will arise on the later of

1 July 2017, or 12 months after the death of the original member.

The credit that will arise in the reversionary beneficiary's transfer balance account is equal to the

value of the superannuation interest on the starting day when it first becomes payable to the

reversionary beneficiary (ie at the date of death); or just before 1 July 2017 if the income stream

commenced before that time.

Transfer balance credit - non-reversionary

For a non-reversionary income stream, a credit will arise in the recipient's transfer balance account

on the later of 1 July 2017, or when the person becomes entitled to be paid the income stream. The

credit is the value of the superannuation interest at the time it commences (or just before

1 July 2017 if it commenced before that time). The ATO notes that this value for non-reversionary

pensions may include any investment earnings that accrued to the deceased member's interest

between the date of death and when the death benefit income stream commences.

Example

Nathaniel commenced a pension worth $1.4m on 1 October 2017. The rules of the pension do not

provide that it may revert to another person on Nathaniel's death. Nathaniel passed away on

1 January 2018. The value of the superannuation interest supporting the pension at the time of

Nathaniel's death, 1 January 2018, is $1.3m. Nathaniel had no other superannuation interests.

Malena is Nathaniel's spouse and only beneficiary and is advised on 15 June 2018 that she is

entitled to all of Nathaniel's remaining superannuation interest. During the period between

Nathaniel's death and the death benefit income stream commencing to be paid to Malena, $1,000 of

investment earnings accrued to the interest bringing its value to $1,301,000. The value of the

superannuation interest supporting the death benefit income stream when it commences on

15 June 2018 is $1,301,000. A transfer balance credit arises in Malena's transfer balance account

on 15 June 2018 and the transfer balance credit is equal to the value of the superannuation interest

supporting the death benefit income stream on 15 June 2018 ($1,301,000).

Commutation of excess transfer balance

To reduce an excess transfer balance so that it does not exceed the general transfer balance cap

($1.6m for 2017-18), an individual can choose to either commute (fully or partially):

The death benefit income stream; or

A superannuation income stream that the individual already has in retirement phase.

If an individual choose to commute their own existing superannuation income stream, the commuted

amount can remain within the superannuation system as an accumulation interest. However, if the

individual chooses to commute the death benefit income stream, the commuted amount cannot be

retained as an accumulation phase interest and the commuted amount must be cashed out as a

lump sum death benefit.

16/02/2017




Tax-Inspector General's submission to Senate Committee

• IGT submitted:

– Challenges in administration of SG system remain, as evidenced by ongoing

complaints

– Most complaints concern unpaid SG entitlements, employee frustrations in

recovering amounts

– Early detection, management of unpaid SG needed to minimise adverse impacts.

Super guarantee non-compliance


Super Guarantee non-compliance: Inspector-General of Taxation

The Inspector-General of Taxation (IGT), Mr Ali Noroozi, released his submission to the Senate

Economics References Committee's inquiry into Super Guarantee non-payment.

Mr Noroozi said that challenges still exist in the administration of the SG system, as evidenced by

ongoing complaints received by the IGT in this regard. The majority of these complaints are raised

by employees who have not been paid their SG entitlements and experience frustrations in

recovering these amounts, he said.

The IGT noted that the government and ATO have implemented a number of the recommendations

from his 2010 Review into the ATO's administration of the superannuation guarantee charge (SGC).

However, the IGT acknowledged that there are no clear and simple solutions to address the problem

of unpaid SG. Rather, the submission seeks to outline the challenges and offer potential solutions

for the Committee's consideration.

Whilst the IGT believes that there are further improvement opportunities, Mr Noroozi said such

options need to be examined against other competing considerations such as an increase in

compliance cost for small businesses, superannuation funds and the ATO. Notwithstanding the

challenges, the IGT said that the early detection and management of unpaid SG is an imperative in

order to minimise its adverse impacts.

The Senate Economics References Committee is due to report on its inquiry by 22 March 2017.

2/03/2017

http://igt.gov.au/news-and-media/submission-to-the-inquiry-into-superannuation-guarantee-non-payment/




Law Companion Guideline LCG 2016/11

• Guideline on concessional contributions - unfunded defined benefit interests

& constitutionally protected funds

• From 1 July 2017, contributions & amounts allocated re interests in CPF:

– Included in concessional contributions

– Won't result in excess concessional contributions

– Will limit ability to make further concessional contributions to other funds

• (Finalises Draft LCG 2016/D11 - revised in several respects).

Super reforms: concessional contributions


Super reforms: concessional contributions

Law Companion Guideline LCG 2016/11

The ATO has released a final consolidated version of Law Companion Guideline LCG 2016/11

explaining how concessional contributions will be calculated for unfunded defined benefit interests

and constitutionally protected funds (CPFs) from 1 July 2017. It was previously issued as Draft LCG

2016/D11 and has been revised in several respects.

Defined benefit interests

As part of the super reform legislation, an additional amount will be included in an individual's

concessional contributions under s 291-165 of the ITAA 1997 from 1 July 2017 to reflect the full

amount of accrued benefits (funded and unfunded) for defined benefit interests. The ATO says the

additional amount of concessional contributions will be the amount by which the "defined benefit

contributions" for the interest exceed the "notional taxed contributions" for the interest. For schemes

that are unfunded or partially unfunded, an individual's defined benefit contributions will typically be

greater than their notional taxed contributions. Therefore, a member of an unfunded scheme will

typically have an additional amount to include in concessional contributions from 1 July 2017.

Defined benefit contributions are calculated for this purpose via the modified rules for Div 293

purposes in s 293-115 and Sch 1A to the ITA Regs. The grandfathering transitional rules

that may apply to determine notional taxed contributions for defined benefit interests held on

12 May 2009 are ignored for this purpose. The provisions also apply to defined benefit interests in

CPFs (see below).

https://www.ato.gov.au/law/view/document?DocID=COG/LCG201611/NAT/ATO/00001



Importantly, by operation of new s 291-370 of the ITAA 1997, such defined benefit contributions to

unfunded schemes and CPFs will not, on their own, result in excess concessional contributions.

Instead, s 291-370 will effectively limit an individual's ability to make further concessional

contributions to other funds (such as an SMSF). The ATO Guideline sets out seven examples to

illustrate the operation of the provisions.

Constitutionally protected funds

Until 30 June 2017, contributions made and amounts allocated to a superannuation interest in a

CPF are specifically excluded from concessional contributions: s 291-25(2)(c)(iii) of the ITAA 1997.

This exclusion has been removed so that contributions made and amounts allocated after

1 July 2017 in respect of interests in a CPF will be included in a taxpayer's concessional

contributions under s 291-25 of the ITAA 1997.

Once again, such contributions and allocated amounts on their own will not result in excess

concessional contributions but will instead limit an individual's ability to make further concessional

contributions to other funds: s 291-370 of the ITAA 1997. Note that the grandfathering transitional

rules that apply to defined benefit interests held on 12 May 2009 will not apply to defined benefit

interests in a CPF.

Example

Kayla has a defined benefit interest in a constitutionally protected fund (CPF). During 2016-17, Kayla

has no notional taxed contributions for the CPF as there are no notional taxed contributions for

CPFs for that financial year. Kayla makes a salary sacrifice contribution of $15,000 to another

superannuation fund which is not a CPF. For 2016-17, Kayla's amount of concessional contributions

is $15,000.

During 2017-18, on the advice of an actuary, the trustee of the CPF calculates Kayla's notional taxed

contributions as $30,000 and her defined benefit contributions as $35,000 for that financial year.

(Note that the grandfathering transitional rules that limit the amount of notional taxed contributions to

the amount of an individual's cap do not apply to interests in CPFs). Kayla also makes a deductible

personal contribution of $15,000 to another superannuation fund (which is not a CPF) for which she

has claimed a deduction. Subject to the modification explained below, Kayla's amount of

concessional contributions for 2017-18 would be $50,000 ($15,000 + $30,000 + ($35,000 - $30,000).

Kayla's concessional contributions cap for 2017-18 is $25,000. As the amount of concessional

contributions in relation to Kayla's interest in the CPF of $35,000 ($30,000 + ($35,000 - $30,000))

cannot create an excess and is greater than Kayla's concessional contributions cap for the financial

year, the amount of those concessional contributions is equal to her concessional contributions cap.

Therefore, Kayla has excess concessional contributions of $15,000 ($40,000 modified concessional

contributions - $25,000 concessional contributions cap) for 2017-18.

2/03/2017




2017-18 financial year

• CGT cap amount for non-concessional contributions: $1.445m

• General contributions cap: no indexation

• Non-concessional contributions cap: $100,000 ($300,000 under bring-

forward rule over 3 years); Concessional cap: $25,000

• SG maximum contribution base: $52,760 per quarter

• Co-contribution: lower - $36,813; higher - $51,813

• Benefits – lump sum low rate cap: $200,000; untaxed plan cap: $1.445m;

ETP cap: $200,000; genuine redundancy/early retirement payments: base

amount - $10,157; service amount - $5,078.

Superannuation rates and thresholds


Superannuation rates and thresholds for 2017-18

The latest average weekly ordinary time earnings (AWOTE) details (reported in ABS Catalogue no:

6302.0) enable the calculation of certain superannuation rates and thresholds for 2017-18 in

accordance with Subdiv 960-M of the ITAA 1997.

Contribution caps

The CGT cap amount for non-concessional contributions is $1.445m for 2017-18 (up from $1.415m).

The general contributions caps are not subject to indexation for 2017-18 as they were reset for this

period by the super reforms legislation. For 2017-18, the general concessional contributions cap has

been reset at $25,000 for all taxpayers, regardless of age. For 2016-17, the concessional cap is

$30,000 (or $35,000 for those aged 49 years or over on 30 June 2016).

The non-concessional contributions cap (which is set at four times the concessional cap from 2017-

18) is $100,000 for 2017-18 (or $300,000 under the bring-forward rule over three years, subject to

transitional rules). For 2016-17, the non-concessional cap is $180,000 (or $540,000 over three

years).

Government co-contributions

The Government co-contribution "lower income threshold" is $36,813 for 2017-18 (up from $36,021

for 2016-17); "higher income threshold" is $51,813 (up from $51,021).

http://www.abs.gov.au/ausstats/[email protected]/mf/6302.0?OpenDocument

http://www.abs.gov.au/ausstats/[email protected]/mf/6302.0?OpenDocument



Super guarantee

While the super guarantee is frozen at 9.5% until 1 July 2021, the "maximum contribution base" will

rise to $52,760 per quarter from 2017-18 (up from $51,620 for 2016-17). An employer is not required

to provide the minimum super guarantee support for that part of an employee's ordinary time

earnings (OTE) above the quarterly maximum contribution base (ie $52,760 for 2017-18). This

quarterly maximum represents a per annum equivalent of $211,040 for 2017 -18.

Super benefits 2017-18

The following indexed thresholds apply for 2017-18:

Superannuation lump sum low rate cap - $200,000 (up from $195,000).

Untaxed plan cap - $1.445m (up from $1.415m).

ETP cap amount - $200,000 (up from $195,000).

Genuine redundancy and early retirement payments - tax-free amounts: base amount -

$10,157 (up from $9,936); service amount - $5,078 (up from $4,969).

2/03/2017



TAX ADMINISTRATION


Tax risk management and governance review guide

• Businesses can use ATO’s Tax risk management and governance review

guide to:

‒ Develop/improve their tax governance & internal control framework

‒ Test their framework against ATO best practice benchmarks

‒ Show reviewers & stakeholders effectiveness of internal controls.

Tax Administration

ATO guide updated

Tax risk management and governance review guide

The ATO has released a tax risk management and governance review guide to help businesses

develop and test their governance and internal control frameworks (as they relate to tax), and

demonstrate the effectiveness of their internal controls to reviewers and stakeholders.

The guide sets out principles for board-level and managerial-level responsibilities, and examples of

evidence that entities can provide to demonstrate the design and operational effectiveness of their

control framework for tax risk.

It was developed primarily for large and complex corporations, tax consolidated groups and foreign

multinational corporations conducting business in Australia. The principles outlined can be applied to

a corporation of any size if tailored appropriately, the ATO says. When appropriate, the ATO

assesses the tax governance processes of large business entities that it has under review, however,

it says the aim of this guide is to help businesses understand what the ATO believes better tax

corporate governance practices look like, so a business can:

Develop or improve its own tax governance and internal control framework;

Test the robustness of the design of its framework against ATO best practice benchmarks;

Understand how to demonstrate the operational effectiveness of its key internal controls to its

stakeholders, including the ATO.

https://www.ato.gov.au/Business/Large-business/In-detail/Key-products-and-resources/Tax-risk-management-and-governance-review-guide/



For directors, the guide covers areas such as: Corporate governance and risk management; Justified trust and key controls (eg periodic internal control testing, document control frameworks); Three lines of defence; Board-level controls; Internal controls testing; Managerial-level controls; Directorship responsibilities and liability.

The guide also discusses board and managerial-level responsibilities, and tax control frameworks for

medium and small corporations.

3/02/2017




Extension of time for AAT review granted

• Company granted extension for review of GST objection decision

• Applied for extension nearly 1 year late. However, AAT satisfied that:

‒ Acceptable explanation for delay (controller had “lack of understanding”, hard to

get lawyer due to financial problems)

‒ No prejudice to FCT

‒ Amount of tax payable is in dispute.

Tax Administration

Re New Access Investment Group Pty Ltd and FCT [2017] AATA 63

Extension of time for AAT review granted

Re New Access Investment Group Pty Ltd and FCT [2017] AATA 63

The AAT has granted a company an extension of time to apply for review of objection decisions.

Objections to GST assessments and administrative penalties were lodged in March 2015. The

objections were disallowed in September 2015. The time for applying to the AAT for a review of

those decisions expired towards the end of November 2015. It was not until 22 September 2016 that

the company applied for an extension of time.

Initially an application was not made because of a lack of understanding on the part of the person

who controlled the company (Mr Y) and because the company's financial situation made it difficult to

obtain legal representation. In addition, Mr Y gave evidence that he did not remember seeing a fact

sheet sent by the ATO to the company's previous tax representatives outlining the company's review

rights. Once the company was able to engage a solicitor, there was a further four-month delay

because the solicitor believed that the ATO would consent to an extension of time, hav ing notified

the ATO that the company would challenge the objection decision if debt recovery proceedings were

commenced.




The AAT decided to grant an extension of time on the basis that:

There was an acceptable explanation for the delay in applying for review. In reaching this

conclusion, the AAT accepted Mr Y's evidence;

The ATO conceded that there was no prejudice caused by the delay; and

There were complex issues between the parties as to the amount of tax that was properly

payable - the AAT accepted the evidence of the company's solicitor on this point, noting that

she had experience working in the ATO.

The AAT commented that it was unwise to assume that the ATO would automatically consent to an

extension of time or that the AAT would grant an extension.

3/02/2017




Alternate assessments not tentative

• FCT gave trustee 2 sets of assessments re same income:

‒ “Primary” assessment on basis that beneficiaries (including minor) presently

entitled to net income of trust

‒ “Alternative” assessment on basis of no present entitlement

• Total tax shortfall – $23.5m

• Federal Court held assessments valid – alternative assessments can be

issued to trustee re same income (1 amount is recoverable).

Tax Administration

Whitby Land Company Pty Ltd (Trustee) v DCT [2017] FCA 28

Alternate assessments not tentative

Whitby Land Company Pty Ltd (Trustee) v DCT

The Federal Court has found that assessments were not tentative and provisional and therefore

were valid: Whitby Land Company Pty Ltd (Trustee) v DCT [2017] FCA 28 (Federal Court, Jagot J,

30 January 2017).

Background

The taxpayer was a company which was the trustee of a discretionary trust (the Whitby Trust). The

beneficiaries were the five children of the company’s director. One of the children was a minor and

thus under a legal disability.

For the 2011 to 2014 income years, the DCT notified the taxpayer that it was liable to pay tax

assessed in two different amounts, calculated by two different methods.

The “primary assessments” for each year were calculated on the basis that the four adult

beneficiaries were each presently entitled to equal shares totalling 80% of the net income of the

Whitby Trust (relying on s 99A ITAA 1936) and the beneficiary who was a minor was presently

entitled to a 20% share of the net income of the trust, but was subject to a legal disability (relying on

s 98 ITAA 1936). The primary assessments were issued in April 2014 following an audit of

transactions undertaken by the Whitby Trust.




The “alternative assessments” were made by reference to the same 80% and 20% proportions, but were on the basis that none of the beneficiaries were presently entitled to a share of the net income of the trust for each relevant year. The alternative assessments were issued in October 2015. The total tax shortfall over the four income years was just over $23.5 million. The DCT also imposed administrative penalties.

When issuing the alternative assessments, the DCT explained in a letter to the taxpayer that if the

primary assessments were invalid then the alternative assessments were original assessments, but

if the primary assessments were valid then the alternative assessments affirmed or amended the

primary assessments. The DCT asserted in the letter that “on any view, these are valid

assessments”.

The DCT sent further letters to the taxpayer stating that he would apply Law Administration Practice

Statement 2006/7 which deals with the collection of tax where there are primary and alternative

assessments.

The taxpayer sought relief under s 39B of the Judiciary Act 1903 (Cth) on the basis that the primary

and alternative assessments were invalid as they were tentative and provisional. The taxpayer

argued that the assessments were tentative because, for each year, they imposed two separate and

different liabilities to income tax in its single capacity as a trustee. As a result, the taxpayer owed

different debts in each relevant year in circumstances where payment of one did not abate the other,

and each debt was an independent debt owed to the Commonwealth and was payable to the DCT

(with interest accruing on each debt).

The DCT, on the other hand, argued that a trustee’s liability to pay income tax is of a “representative

character” and the relevant provisions in the ITAA 1936 (in this case ss 98 and 99A) envisage that a

trustee might be liable to multiple assessments in respect of different beneficiaries’ entitlements to a

share of the net income of the trust. As such, the primary and alternative assessments were

comparable to assessments to two or more taxpayers in relation to the same income in the same

income year, which are not liable to be set aside as tentative or provisional.



Decision

Jagot J considered the interaction between the provisions of the ITAA 1936 dealing with the taxation

of trusts (in particular ss 98 and 99A) and the provisions of the ITAA 1936 concerning assessments

and amended assessments (in particular ss 166 and 169). In finding for the DCT , her Honour

advanced various propositions.

1. Section 166 ITAA 1936 is concerned with the making of an assessment on the “taxable

income” of any taxpayer. Under ss 4-10(4) and 9-5 item 6 of the ITAA 1997, however, the

liability of a trustee in that capacity to income tax is not worked out by reference to the net

income of the trust for the income year, under the process established by ss 98, 99 and 99A

ITAA 1936, and not by reference to taxable income. Accordingly, in making the assessments

in this case, the DCT was not exercising his power under s 166.

2. Sections 98, 99 and 99A ITAA 1936 contemplate that a trustee will be assessed and liable to

pay tax in respect of the different beneficiaries depending on the status of the beneficiary. As

a result, the position of a trustee in this context is different from that of an individual or

corporate taxpayer who is liable to be assessed and pay income tax on their taxable income

for the year.

3. The assessments specified the amount of tax income assessed and the amount of tax payable

thereon. Nothing in the evidence otherwise undermined the definite character of the liability

imposed. It was merely that one set of assessments assumed a present entitlement of the

beneficiaries and the other set assumed no such present entit lement.

4. The DCT has taken a view of the facts and made assessments for each year based on that

view (the primary assessments). The alternative assessments were not issued for the

purpose of double recovery, but performed a protective function lest the DCT’s view about

the operation of the trust be incorrect. The difficulties to which such concurrent

liabilities may give rise were not seen as a sufficient reason to lead to a different result

in DCT v Richard Walter Pty Ltd (1995) 29 ATR 644 and the same conclusion applied in this

case.

In conclusion, Jagot J was not persuaded that “the statutory scheme precludes the approach the

DCT has taken or, of necessity, renders that approach tentative or provisional in the sense that the

assessments are no assessments at all”.

3/02/2017




Cloud computing & Code of Professional Conduct

• Code of Conduct may be breached if cloud arrangements inadequate & client

info unprotected

• TPB says registered agents may wish to consider:

‒ Details of limitation of liability arrangements

‒ Whether provider can unilaterally change terms of agreement

‒ How data integrity is maintained.

Tax Administration

Tax Practitioners Board Practice Note TPB (PN) 1/2017

Tax practitioners, cloud computing and the Code of Professional

Conduct – TPB Practice Note

The Tax Practitioners Board (TPB) has released its Practice Note TPB (PN) 1/2017 - Cloud

computing and the Code of Professional Conduct. Cloud computing, at a broad level, is the provision

of information technology resources as a service through a network (including sto ring, managing and

processing data), typically over the internet, instead of using a local server or a personal computer.

The Board says that when entering into cloud arrangements, various factors will need to be

considered, depending on the nature of the particular cloud arrangement and also the circumstances

of the registered tax practitioner. However, as a starting point, the Practice Note says registered tax

practitioners may wish to consider a number of general factors including:

What are the details of any limitation of liability arrangements (eg clauses contained in the

terms and conditions of the cloud provider agreement(s) or terms of use)?

Whether the provider is allowed to unilaterally change relevant terms of the agreement (that is,

without input from the registered practitioner), including in relation to how or where data is

stored or managed?

How is the information being transferred between systems and data integrity being

maintained?

How is the information being stored?

Whether information is being held offshore (that is, information that is stored or processed in

equipment not located in Australia) and, if so, the consequences (including relevant

additional legislative and regulatory requirements that the information may be subject to)?

What processes does the cloud provider have in place in relation to the backup and archiving

of information (such as multiple backup servers)?

https://www.tpb.gov.au/tpbpn-012017-cloud-computing-and-code-professional-conduct



Concerning the Code of Professional Conduct, the Practice Note says practitioners need to be

mindful of Code Item 6 which provides that a registered practitioner must not disclose any

information relating to a client's affairs to a third party without the client's permission, unless there is

a legal duty to do so. A third party is any entity other than the client and the registered practitioner.

This includes entities that maintain offsite data storage systems (including "cloud storage"),

recognising that there is a distinction between data storage that a third party cannot effectively

access (for instance, through the use of encryption) and disclosure to a third party. It is only

necessary that the information relates to the affairs of a client. Therefore, the information does not

have to belong to the client, or have been directly provided by the client to the registered

practitioner.

The Practice Note says registered practitioners must obtain permission from each client prior to

divulging client information to a third party (including cloud service providers).

The Practice Note was originally in draft form on 13 October 2016, based on the Tax Agent Services

Act 2009 as at 5 March 2016.

3/02/2017




ATO warns of criminal activity targeting AUSkeys

• ATO has detected identity theft re AUSkeys linked to businesses

• AUSkeys used to access portals, lodge BASs, change account details for

refunds

• ATO took quick preventative action – affected AUSkeys cancelled

• Tax practitioners asked to check Access Manager permissions to shield

practice from identity theft.

Tax Administration

ATO warns of criminal activity targeting AUSkeys

The ATO has advised that it has detected criminal activity where identity thieves have fraudulently

obtained AUSkeys linked to businesses. They have used these to access the portals, lodge activity

statements and change account details for refunds. The ATO said it was able to take preventative

action quickly and the affected AUSkeys have been cancelled.

The ATO has warned tax practitioners to check their Access Manager permissions to protect their

practice from identity theft.

3/02/2017

https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Check-your-Access-Manager-permissions/




Enhanced ATO record-keeping tool for sole traders

• ATO announces record-keeping enhancements to myDeductions

• Sole traders with simple tax affairs can now record business income,

expenses & vehicle trips on smart phone or device

• Ability to upload data directly into tax return will be available in later release.

Tax Administration

Enhanced ATO record-keeping tool for sole traders

Sole traders can get a head start on tax this year with new record-keeping functionality

enhancements to myDeductions in the free ATO app, Small Business Minister Michael

McCormack has announced. He said the improvements mean sole traders with simple tax affairs

can now record business income, expenses, and vehicle trips on their smart phone or devi ce in

addition to employee work-related expenses.

Mr McCormack said the record-keeping tool is the quick and easy way for sole traders to get into

good record keeping habits by capturing transactions “on the go”. This also means sole traders won't

have the hassle of lost and faded receipts at tax time. The Minister said sole traders can easily email

their detailed records to their tax agent or enter the data straight into myTax at tax time. The ability to

upload data directly into a tax return will be made available in a later release, he said.

More details are on the ATO app myDeductions webpage.

3/02/2017

http://mfm.ministers.treasury.gov.au/media-release/005-2017/

https://www.ato.gov.au/General/Online-services/In-detail/myDeductions/myDeductions/




Tax Inspector-General

• Planned reviews:

‒ GST refunds – taxpayers concerned about refund delays

‒ PAYGI – interaction with income tax system

‒ Future role of tax professionals in tax system.

Tax Administration

2017 work program announced

Tax Inspector-General announces his 2017 work program

The Inspector-General of Taxation (IGT), Ali Noroozi, has released details of his 2017 work program.

The IGT intends to commence at least three reviews in the 2017 calendar year:

Future of the Tax Profession - The IGT said he is conducting this review in response to a

request from the FCT. The IGT has, in recent years, examined the state of the ATO's

services and support for tax practitioners. This new review wil l be forward-looking and will

examine the future role of tax professionals in the tax system particularly in light of increased

use of digital technology and ATO service delivery initiatives. In doing so, the IGT will also

examine concerns raised by tax practitioners with the IGT on issues affecting their industry.

The IGT will consult extensively with the tax profession, the ATO and the TPB to identify

opportunities to improve the tax system as a whole.

Delayed GST refunds – Since 2012, the ATOs discretion to withhold GST refunds for

verification has been governed by s 8AAZLGA of the Taxation Administration Act 1953. The

provision allows the ATO to retain a refund until it is no longer reasonable to require

verification. The IGT said complaints data and submissions to the work program have

indicated that the ATO's administration of this provision may, in some instances, result in

inappropriate and unfair delays in GST refunds being issued. This review will examine the

ATO's administrative approaches, the impact on taxpayers and the need for any

administrative or policy improvements.

PAYG Instalments system – The IGT said submissions and complaints received suggest the

system is generating confusion and misunderstanding for certain taxpayers who are required

to make these payments. The interactions between the PAYGI and income tax systems as

well as the related correspondence will be explored to identify potential opportunities for

improvement.

http://igt.gov.au/our-reviews/our-work-program/



Further potential reviews

The IGT has also identified four additional reviews which may also commence in the 2017 calendar

year depending on time and resourcing considerations as well as competing priorities:

ATO Advice and Guidance - The IGT said stakeholders have raised concerns regarding the

ATO's approach to providing advice and guidance. In particular, they have noted fewer public

rulings being issued and the ATO's use of practical compliance guidelines and website

materials both of which provide less certainty for taxpayers. The ATO's use of Taxpayer

Alerts was also identified as another area of concern, especially when and how these will be

issued and the uncertainty they create when there is no subsequent ATO guidance or action.

In relation to private rulings, the concerns related to timeliness, the ATO's unwilling ness to

rule on certain issues and, in some instances, issuing "letters of comfort", which do not

provide the same level of certainty. The ATO has informed the IGT that it has more recently

undertaken an internal review of its public advice and guidance processes. The IGT will

monitor these issues and if concerns persist, a review in this area may be conducted.

Fraud or evasion opinions - The IGT said stakeholders have raised concerns about the

ATO's use of fraud or evasion opinions based on which the ATO may examine and amend

assessments outside of standard periods of review (typically four years). Significant

compliance and evidentiary burdens may be imposed on taxpayers wishing to dispute such

amended assessments because of the considerable time that may have elapsed since those

assessments were initially made, the IGT said. Complaints and concerns raised with the IGT

have claimed that the ATO's processes for forming fraud or evasion opinions are not

sufficiently robust and may lead to unfair outcomes. The IGT's review would examine the

ATO's administrative processes, evidence gathering and engagement with taxpayers. The

IGT has been advised that the ATO is currently undertaking an internal review of its use of

fraud or evasion opinions across all business lines. The IGT will consider any improvements

resulting from such a review and determine whether to commence his own investigation.

Research & Development - The IGT said stakeholders have raised concerns about the

ATO's approach to R&D Tax Incentive claims. The major concerns relate to the interactions

between the ATO and AusIndustry and, in particular, the eligibility of R&D activities being

questioned during ATO compliance activities where the taxpayer believed that AusIndustry

had, at least, tacitly approved such eligibility in the past. The IGT noted there has been a

recent review of the R&D Tax Incentive which was completed in 2016. Moreover, in

considering these issues, the IGT would only be empowered to examine the relevant actions

of the ATO and not that of AusIndustry. Accordingly, to the extent that concerns persist, the

IGT said he may either consider the issue within the constraints of his jurisdiction or,

alternatively, may engage with other agencies, such as the Commonwealth Ombudsman, to

examine the issue holistically.

Influencing willing participation in the tax and super systems - The FCT has also requested

that the IGT undertake a review to identify strategies and opportunities for the ATO to work

with others to encourage willing participation in the tax and superannuation systems. The

review would focus particularly on youth and school programs.



Areas not included

The IGT also noted areas not included in his 2017 work program eg debt collection and super

guarantee; settlements and litigation; transfer pricing (re the MAAL and proposed DPT – the IGT

said it seemed appropriate to allow the ATO time to consult and implement its administrative

approach); compliance approach to large business; digital by default.

3/02/2017




ATO advice under development

• ATO website lists advice under development for:

– income tax

– CGT

– international issues

– GST

– FBT.

Tax Office Website updates

Tax Administration

Tax Office Website updates

From the ATO website:

Advice under development - income tax issues - New items include a proposed Draft

Ruling on corporate residency and CM&C in Australia in response to Bywater Investments

Limited & Ors v FCT; and a consultation paper on scholarships (Comments due by

31 March 2017). Updated topics include: capital allowances (composite items);

environmental protection activities; corporate limited partnership "credits"; deductions for

mining and petroleum exploration; deductibility of legal expenses; withholding provisions

relating to natural resource income; deduction for work-related travel expenses; personal

services income (meaning of personal services business; attribution and deductions); non-

share dividends paid by ADIs; and meaning of "alteration, extension or improvement" in

Div 43 of the ITAA1997.

Advice under development - international issues - Updated topics include: distributions

from foreign companies; foreign hybrid limited partnership; direct control interests

(partnerships and trusts); transfer pricing rules and debt/equity tests; transfer pricing benefit

from an outbound/inbound interest free loan; thin capitalisation (arm's length debt test);

internal derivatives by multinational banks; thin capitalisation attribution of ADI equity capital

and controlled foreign entity equity; transfer pricing safe harbours; and significant global

entities lodging general purpose financial statements.

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Advice-under-development---income-tax-issues/

https://www.ato.gov.au/general/consultation/what-we-are-consulting-about/matters-under-consultation/matters/?anchor=I201665#I201665

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Advice-under-development---international-issues/



Advice under development - capital gains tax issues - Topics include: trust capital gains; capital

gains from a non-resident beneficiary on a non-fixed trust; capital gain or loss - residency

assumption; capital gains - discount or capital loss offset.

Advice under development - GST issues - Updated topics include: Australian consumers;

GST cross border supplies - supplies of online advertising; GST and prepared meals;

proposed amendments to Ruling GSTR 2006/9 following FCT v MBI Properties Pty Ltd

[2014] HCA 49; and GST on digital products and services - electronic distribution platforms.

Advice under development - FBT issues - Safe harbours for FBT and remuneration. The

minor use of exempt vehicles proposal and minor benefits and entertainment proposal are

still in progress. The expected completion date for the safe harbours has been extended

to June 2017 to allow further time to develop and implement the concepts identified by the

working group.

Advice under development - superannuation issues - Updated topics include: deductions

for superannuation funds (proposed Addendum to Ruling TR 93/17 yet to be completed); and

the 6 Draft Law Compliance Guidelines in response to the major superannuation reforms

from 1 July 2017.

Advice under development - petroleum resource rent tax issues - Updated PRRT topics

include: deductibility of social infrastructure expenditure; closing down expenditure; and

reversion of licence.

2016 completed issues - Unpaid present entitlement (bad debts) in Determination TD

2016/19; and deductibility of expenditure on commercial website in Ruling TR 2016/3.

Consolidation rulings under Project Refresh - The ATO says it is considering

consolidating a number of rulings under its Project Refresh.

Ruling rewrites under Project Refresh - Lists the Rulings being considered for rewriting

under Project Refresh.

Ruling updates under Project Refresh - Lists the Rulings being considered for updating

under Project Refresh.

Public ruling withdrawals under Project Refresh - The ATO says a number of public

rulings might be withdrawn under its Project Refresh.

9/02/2017

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Advice-under-development---capital-gains-tax-issues/

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Advice-under-development---GST-issues/

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Advice-under-development---FBT-issues/

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Advice-under-development---superannuation-issues/

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Advice-under-development---petroleum-resource-rent-tax-issues/

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/2016-completed-issues/

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Project-Refresh/Consolidations---Project-Refresh/

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Project-Refresh/Rewrites---Project-Refresh/

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Project-Refresh/Updates---Project-Refresh/

https://www.ato.gov.au/General/ATO-advice-and-guidance/Advice-under-development-program/Project-Refresh/Withdrawals---Project-Refresh/




DCT v Binetter [2017] FCA 69

• Case involved Nudie Juice entities

• Federal Court refused application for taxpayer (Nudie co-founder and CEO)

to give evidence from USA via video link

• Concluded there was no impediment to taxpayer travelling to Australia to give

evidence, even though liquidators could exercise their legal rights to stop him

returning to USA.

Application for evidence in tax case by video link refused

Tax Administration

Application to give evidence in Nudie Juice tax case by video link

refused

DCT v Binetter

The Federal Court has held there was no evidence of any impediment to a taxpayer (Mr

Andrew John Binetter) travelling to Australia and then returning to the United States after giving

evidence in a complex tax proceeding.

Mr Binetter lives in New York with his family. The substantive issue in the case concerns tax issues

arising from the sale of the Nudie Juice business. The companies in the substantive proceeding (the

"Nudie entities") seek their costs in the proceedings and compensation for what is said to be loss

and damage suffered by them by reason of freezing orders obtained by the FCT on

29 January 2015. The proceedings had been commenced by the FCT to recover monies said to be

owed under certain income tax assessments for part of the year of income ended 30 January 2015

but objections to the assessments were subsequently allowed by the FCT in March 2016. On

29 January 2015, however, the FCT had obtained freezing orders in respect of $45.2 million of funds

of the Nudie entities. Those freezing orders continued until 29 March 2016 when they were

discharged by order of the Court. The proposed evidence to be given by Mr Binetter in support of the

claims by the Nudie entities in support of the substantive application concerned mat ters such as: (i)

the background to the proceedings; (ii) the sale of the Nudie Juice business for $82 million plus GST

on 30 January 2015 and the disbursements of the sale proceeds; (iii) the working capital adjustment

made to the sale price of the Nudie Juice business some time after completion; (iv) the freezing

orders granted. The FCT opposed the application for Mr Binetter's evidence to be given by video link

because he wished to cross-examine him on a number of matters.



The Court observed that the evidence of Mr Binetter would be "of central importance to the

determination of the claims by the Nudie entities although much will be relatively uncontroversial".

Mr Binetter claimed that a number of factors would prevent him from travelling to Australia to give

evidence eg (i) the medical situation of his wife and son, (ii) his significant responsibility for

managing a US business of which he is CEO, (iii) the fact that when he was last in Australia, the

liquidators of a number of corporations obtained orders against him requiring him to surrender his

passport, and as a result he was unable to leave the country for a number of months until his

passport was returned, (iv) those liquidators are continuing legal proceedings in Australia, and Mr

Binetter was concerned that if he returned to Australia to give evidence, he may be the subject of

similar steps being taken by the liquidators to prevent him from leaving Australia. The Court however

said that such factors did not justify an order that Mr Binetter give evidence by video link from New

York.

DCT v Binetter [2017] FCA 69, Federal Court, Pagone J, 8 February 2017

9/02/2017





Says ATO systems will be ready for Tax Time 2017

• FCT denies reports Tax Time 2017 under threat due to recent system

outages

• ATO “absolutely confident” taxpayers can lodge returns and receive refunds

on time from 1 July 2017.

FCT refutes media reports

Tax Administration

FCT refutes media reports re ATO systems and Tax Time 2017

The FCT issued a statement saying that claims made in the media on 8 February 2017 that Tax

Time 2017 is under threat due to the ATO's recent system outages "are completely without

foundation". Mr Jordan said the ATO is "absolutely confident" that taxpayers will be able to lodge

their returns and receive refunds on time from 1 July.

The FCT said: "Initial indications are there has been a failure by Hewlett Packard Enterprise (HPE)

to provide contracted services in a reliable way and ensure stability of our systems. The cause of the

failures will be informed by the review led by PwC that I commissioned a fter the first outage

in December 2016. As I said at that time, I want to know what happened in forensic detail so that we

can assure the community they will not face this kind of disruption in their dealings with us, that

businesses who rely on our services can go about running their business without interruption."

https://www.ato.gov.au/Media-centre/Commissioners-online-updates/Commissioner-s-statement---ATO-systems/



The FCT assured the community that the ATO is taking this seriously and it has the highest priority.

He went on:

"I have already met a number of times with the most senior HPE representatives in the region and

corresponded with their CEO to ensure they are aware of the disruption and damage this kind of

event causes and remind them of their contractual arrangements.

Our immediate priority is to provide stable services to the community, business, our key

stakeholders and government.

Our ATO technicians are working with HPE's global team of experts to fully replace the affected

hardware. …

We are committed to offering contemporary and reliable services to the community. The

development and release of many new service offerings under our Reinvention program have not

contributed to these system outages. Initial indications are that the outages have been caused by

faulty hardware.

I commit to you we will get to the bottom of this, fix it for the longer term and maintain contemporary

and reliable services to the community."

9/02/2017




Anglo American Investments Pty Ltd v DCT [2017] NSWCA 17

• Case involved entities connected with Vanda Gould

• Taxpayer alleged assessments invalid due to FCT using confidential Cayman

Islands documents

• NSW Supreme Court held no conscious maladministration

• Court of Appeal dismissed application for leave to appeal

• Taxpayer's case failed on merits – didn't apply for judicial review of

assessments.

Application to appeal dismissed

Tax Administration

Application to appeal dismissed

Anglo American Investments Pty Ltd v DCT

The NSW Court of Appeal has unanimously dismissed a taxpayer's application for leave to appeal a

decision at first instance in which the Supreme Court found that the taxpayer (and related entities)

could not defend the DCT's debt recovery action on the basis of claiming that the ATO had engaged

in "conscious maladministration" in obtaining and using documents from the Cayman Islands for the

purpose of raising the assessments that gave rise to the debt: Anglo American Investments Pty Ltd v

DCT [2017] NSWCA 17 (Court of Appeal NSW Supreme Court, McColl, Meagher and Payne JJA,

15 February 2017).

Background

The ATO had conducted an investigation into the tax affairs of the taxpayer and its related entities,

and sought and obtained certain information from the taxation authorities in the Cayman Islands.

The DCT subsequently issued notices of assessment to the taxpayer for the income tax years in

question, plus penalties. The taxpayers did not commence review or appeal proceedings under Pt

IVC of the TAA in relation to those assessments, nor did they seek relief under s 75(v) of the

Constitution or s 39B of the Judiciary Act 1903 (Cth).

At first instance in the debt recovery action by the DCT in DCT v Anglo American Investments Pty

Ltd & Ors [2016] NSWSC 975, the taxpayer claimed the assessments were not valid because the

acts of relevant ATO employees were unlawful, done in bad faith, and constituted "conscious

maladministration in obtaining and using the documents from the Cayman Islands". However, the

Supreme Court struck out the taxpayer's defence on the basis that, taken at its highest, the taxpayer

could not establish "conscious maladministration".

http://www.austlii.edu.au/au/cases/nsw/NSWCA/2017/17.html




Decision

The Court of Appeal unanimously dismissed the taxpayer's application for leave to appeal on the

basis that the taxpayer's case was bound to fail on its merits because a claim of "conscious

maladministration" can have no reasonable prospect of succeeding in debt recovery proceedings

where no application for judicial review has been made by a taxpayer against a notice of

assessment under Pt IVC of the TAA (as in this case).

The Court of Appeal also emphasised that s 175 of the ITAA 1936 provided that "the validity of any

assessment shall not be affected by reason that any of the provisions of this Act have not been

complied with". The Court also noted that 350-10(1) in Sch 1 to the TAA provided that the production

of a notice of assessment was conclusive evidence that the assessment was properly made and the

amounts and particulars of the assessment are correct, except if challenged in Pt IVC proceedings .

The Court of Appeal also observed that had the taxpayer sought a declaration, certiorari or an

injunction about the making of the income tax assessments under s 75(v) of the Constitution or

s 39B of the Judiciary Act 1903 (which it did not), then the Court, as a State Court, would have

jurisdiction to grant the remedies available to the Federal Court in such actions, but only by reason

of the relevant provisions of the Jurisdiction of Courts (Cross-vesting) Act 1987.

16/02/2017




Forced real estate sales by foreign nationals ordered

• Treasurer announces forced sale of 15 properties held by foreign nationals

• Total number of forced sales: 61 (plus 36 sold during ATO investigations)

• Combined value of properties: $107 million

• 388 penalty notices issued for breaches of foreign investment framework

• Over $2m in penalties imposed.

ATO identified foreign investment breaches

Tax Administration

ATO identified foreign investment breaches result in forced real estate

sales by foreign nationals

The Treasurer has announced that he has ordered the forced sale of a further 15 Australian

residential properties held by foreign nationals in breach of the foreign investment framework, taking

the total number of forced sales to 61, with a combined value of $107 million.

The 15 latest properties are located in Victoria and Queensland, with a combined purchase price of

more than $14 million. The foreign owners come from a range of countries including China, India,

Indonesia, Iran, Malaysia, the United Kingdom and Germany.

Mr Morrison said a further 36 foreign nationals have sold properties during the course of ATO

investigations, showing improved compliance with the rules and a strengthening of the enforcement

program.

The foreign nationals in the latest group of forced disposals purchased their properties without

Foreign Investment Review Board (FIRB) approval and in some cases held multiple established

properties in breach of the rules. The ATO identified these breaches through data -matching

programs as well as using information provided by the public.

The Treasurer said the ATO has detected more than 570 foreign nationals who have breached the

rules. This has resulted in forced sales, self-disposals, variations to previously approved FIRB

applications and retrospective approvals with strict conditions. Breaches of these conditions will

result in civil penalties or criminal prosecution.

Overall, the ATO has issued 388 penalty notices to foreign nationals in breach of the rules, attrac ting

penalties of more than $2 million.

16/02/2017

http://sjm.ministers.treasury.gov.au/media-release/006-2017/




Caratti v FCT [2017] FCA 70, Bazzo v FCT [2017] FCA 71

• FCT agreed not to take recovery action against 2 taxpayers for "Tax Debts"

of $10m and $13m until disputes resolved

• Agreement defined "Tax Debt" to include "applicable GIC" up to specified

date, subject to adjustments

• Federal Court held FCT entitled to recover GIC amounts accruing after

specified date ($1.4m and $1.2m).

FCT can recover GIC accrued outside terms of agreement

Tax Administration

FCT entitled to recover GIC accrued outside terms of agreement

Caratti v FCT; Bazzo v FCT

In two related cases, the Federal Court has held that the FCT was entitled to recover from the

taxpayers GIC amounts of $1.4m and $1.2m respectively. This was despite the fact that the

taxpayers had entered a deed of agreement with the FCT whereby he agreed not to commence

proceedings for recovery of the "Tax Debt" of $10m and $13m, respectively, until the resolution of

the dispute between the parties under the objection and appeals process. This Tax Debt was

defined to include "applicable GIC" that had accrued up to a specified date and any adjustments

required to the "Tax Debt" after resolution of the dispute.

In finding the FCT was entitled to recover the GIC amounts (ie the $1.4m and the $1.2m in

question), the Court found that the agreement between the parties only applied to GIC that accrued

to the specified date (as stated in the agreement) and did not include the GIC amounts that accrued

after that date. This was despite the taxpayers' arguments that the terms of the deed, and in

particular its reference to any "adjustments" required under the objection and appeals proce ss,

meant the GIC in question was not recoverable until finalisation of the dispute under the appeals

process as the GIC was "inherently adjustable" as part of that process.



However, the Court found that the subject matter of the agreement was only that total "Tax Debt" of

$10m and $13m (plus any adjustments under the objection and appeal process) and that the FCT

could therefore calculate and recover any amount beyond that total despite it being the subject of Pt

IVC proceedings. It did so on the basis of finding that the preferable construction of the agreement

meant that the daily increase in the amount of the GIC that occurred after the specified date did not

form part of the "Taxation Debt" as defined - notwithstanding that the GIC liability could well have to

be adjusted after final resolution of the dispute.

Caratti & Ors v FCT [2017] FCA 70, Federal Court, Robertson J, 10 February 2017; Bazzo & Anor v

FCT [2017] FCA 71, Federal Court, Robertson J, 10 February 2017

16/02/2017







ATO help

• 21 December 2016 and 15 January 2017 due dates deferred

• Tax agents can apply for additional deferrals

• Clients not penalised, 85% on-time lodgment requirement not affected if

agents lodge within deferred periods

• ATO “will not apply sanctions this year” if less than 85% lodged on time “as a

consequence of the outages”.

Tax agent lodgment problems following ATO systems outages

Tax Administration

ATO help for agents having lodgment problems after ATO systems

outages

The ATO has advised tax agents that if they need help meeting their lodgment program after the

unplanned systems outages in December 2016 and February 2017, additional services and support

are available.

The ATO said it understands that the outages created lodgment backlogs for some practitioners, so

it deferred the 21 December 2016 and 15 January 2017 due dates to help. If practitioners lodged

within these deferred periods, the ATO said their clients will not be penalised and agents' 85% on -

time lodgment requirement will not be affected.

If agents require additional deferrals, they can:

Submit an ATO assessed deferral application;

Phone 13 72 86 Fast Key Code 5.

The ATO said it will review deferral requests in light of the impacts of the outages.

The ATO said it understands that as a consequence of the outages, some agents may not be able to

meet the 85% on-time lodgment requirement. Where this is the case, the ATO said it "will not apply

sanctions this year".

9/02/2017

https://www.ato.gov.au/tax-professionals/newsroom/your-practice/support-services-are-available/?tpissue-04-2017




Time running out for transitional registration with TPB

• TPB reminds AFS licensees & reps they have until 30 June 2017 to register

using transitional option

– this option has modified registration requirements

• From 1 July 2017, all requirements applying to tax (financial) advisers must

be satisfied by applicant

Financial planners and advisers

Tax Administration

Financial planners and advisers

Chair of the Tax Practitioners Board (TPB), Mr Ian Taylor, has reminded financial planners and

advisers who have not yet registered with the TPB that time is running out to take advantage of the

transitional registration option which ends on 30 June 2017.

Financial planners and advisers who are providing tax (financial) advice as part of their advice to

clients for a fee or reward must be registered with the TPB as a tax (financial) adviser in order to

provide this service legally. This applies to:

Australian financial services (AFS) licensees;

Authorised representatives (ARs):

Individual ARs;

Corporate authorised representatives (CAR) - where an AR operates through a CAR

structure, both will need to be registered;

Employee representatives who may be required to be registered for the purpose of a company

or partnership having a sufficient number of registered individuals - being registered tax

(financial) advisers or tax agents.

Mr Taylor said there are two options for registration as a tax (financial) adviser - transitional

registration (only available until 30 June) and standard registration.

23/02/2017

https://www.tpb.gov.au/news-media/media-releases/tpb-reminds-financial-planners-and-advisers-time-running-out-transitional

https://www.tpb.gov.au/news-media/media-releases/tpb-reminds-financial-planners-and-advisers-time-running-out-transitional




What attracts ATO attention

• Certain behaviours alert ATO to possible abuse of NFP concessions, eg:

– Private ancillary funds – late lodgment, related-party transactions, breach of

guidelines

– Charities & DGRs – not applying income/assets solely for purpose for which

established (eg private benefits to individuals)

– Incorrectly self-assessing tax-exempt status

– Incorrectly claiming franking credit refund, FBT rebate/exemption.

NFP sector

Tax Administration

NFP sector – what attracts ATO attention

The ATO says it uses various sources of information and undertakes a range of compliance

activities to detect and deal with not-for-profit (NFP) organisations not meeting their tax and super

obligations.

According to the ATO, there are certain behaviours and activities that alert it to possible abuse of the

tax and super systems.

Private ancillary funds:

Late lodgment of annual return.

Related party transactions.

Non-compliance with the regulatory guidelines.

Charities and deducible gift recipients:

Not applying income and assets solely for the purpose for which the organisation is

established for example private benefits to individual.

Making incorrect claims for franking credit refund.

Incorrectly advertising that donations to an organisation are tax deductible when the

organisation is not endorsed as a deductible gift recipient.

https://www.ato.gov.au/Non-profit/Your-organisation/In-detail/Building-confidence-in-the-NFP-sector/



Self-assessing income tax exempt non-profits:

Incorrectly self–assessing income tax exempt status.

Not meeting the requirements of an exempt category.

FBT - Incorrectly claiming FBT rebates and exemptions that don't meet the requirements of the

law.

Taxable non-profit entities - Incorrectly classifying member and non-member income and

expenses which may result in an understatement of assessable income.

The ATO provides a range of information on its website to help NFPs meet their obligations.

23/02/2017




Tax Inspector-General's submission released

• IGT submitted:

– Australia's reliance on tax practitioners very high for OECD country

– Many new players within tax sphere, eg software developers whose products

feed directly into ATO systems

– As ATO rolls out technology to enable taxpayers to manage own tax affairs,

sufficient take-up will depend on ready access to adequate hardware, software,

robust internet connections.

House of Reps Committee on engaging with tax system

Tax Administration

Tax Inspector-General's submission on taxpayer engagement

The Inspector-General of Taxation (IGT), Mr Ali Noroozi, has released his submission to the House

of Representatives Standing Committee on Tax and Revenue's Inquiry into Taxpayer Engagement

with the Tax System.

The IGT submission is structured around the four themes specified in the inquiry's terms of

reference:

The impact of the cash economy on the tax system, mechanisms to ensure tax compliance

and strategies used by comparable countries;

How taxpayers currently interact with the tax and superannuation system, including through

tax agents and other intermediaries, and the different compliance burdens;

The contemporary use of information and communication technology by the ATO and

comparative tax administrators to deliver services; and

Behavioural insights from other service delivery agencies including possible ways to better

inform taxpayers to help them make decisions in their best interests.

The IGT believes that the ATO's enforcement activities should be further augmented by educational

programs and campaigns along similar lines to the recommendations made by the ATO's 1998 Cash

Economy Taskforce. The IGT is also looking forward to the findings and recommendations of the

Black Economy Taskforce.

http://igt.gov.au/news-and-media/inquiry-into-taxpayer-engagement-with-the-tax-system-submission/

http://www.aph.gov.au/Parliamentary_Business/Committees/House/Tax_and_Revenue/Taxpayerengagement/Terms_of_Reference

http://www.aph.gov.au/Parliamentary_Business/Committees/House/Tax_and_Revenue/Taxpayerengagement/Terms_of_Reference



The IGT's submission observed that Australia has some of the highest leve ls of reliance on tax

practitioners of any OECD country. In 2015-16, the ATO reported that 74.2% of all individuals and

over 95% of business taxpayers used the services of a tax practitioner. In addition to the traditional

tax intermediaries, the IGT said there are increasingly new players providing services and products

within the tax sphere. Most notable of the new intermediaries are software developers whose

products are being developed to feed directly into ATO systems to align with initiatives, such as

Standard Business Reporting (SBR) and Single Touch Payroll (STP). The customer support from

these providers and the associated cost will no doubt influence the experience of taxpayers and their

advisers in managing their affairs, the IGT said. Similarly, as the ATO continues to roll out

technology to enable taxpayers to effectively manage their own tax affairs, the IGT believes that

sufficient take-up will depend on ready access to adequate hardware, software and robust internet

connections.

2/03/2017




High Court appeals

• FCT v Seven Network Limited [2016] FCAFC 70:

– FFC held payments by Seven Network to IOC for Olympic broadcasting rights

not royalties under Swiss DTA

– FCT's application for special leave to appeal to High Court refused

• Doutch v FCT [2016] FCAFC 166:

– FFC held connected entity's fuel disbursements receipts were ordinary income,

part of taxpayer's aggregated turnover (for purpose of SBE turnover test)

– Taxpayer seeks special leave to appeal to High Court.

Appeals update

Tax Administration

Appeals update

Seven Network Ltd (IOC payments); Doutch (CGT small business concessions)

The High Court has refused the FCT's application for special leave to appeal against the Full

Federal Court decision in FCT v Seven Network Limited [2016] FCAFC 70. The Full Federal Court

decision, which now stands, unanimously dismissed the FCT's appeal from the decision of Bennett J

in Seven Network Limited v FCT [2014] FCA 1411, effectively holding that payments made by Seven

Network to the IOC for broadcasting rights to the Olympic Games were not royalties under Article

12(3) of the Australia-Switzerland DTA, and that it was therefore not required, under s 128B of the

ITAA 1936, to withhold amounts from the payments. Seven had disputed the FCT's contention re

withholding with respect to $97.7m of the total $122m payment that was made.

Doutch case - CGT small business concessions

The taxpayer has applied to the High Court for special leave to appeal against the decision of

the Full Federal Court in Doutch v FCT [2016] FCAFC 166. The Full Federal Court had unanimously

dismissed the taxpayer's appeal and confirmed that fuel disbursements receipts received by a

related entity were ordinary income that was derived "in the ordinary course of carrying" on his

mining business. As a result, he failed to meet the "small business entity" $2m turnover test for the

purpose of qualifying for the CGT small business concessions in respect of a capital gain he made

from the sale of certain mining tenements.

16/02/2017





• Taxpayers appeal to Federal Court from AAT decision that trusts not entitled

to $4.3m deduction or capital loss re guaranteed business loan

• No evidence of guarantee.

Appeals update

Deducations

Appeal update


The taxpayers have appealed to the Federal Court against the decision in Re Carioti and FCT

[2017] AATA 62. The AAT had affirmed that two family trusts that were involved in a building and

construction business with other related entities were not entitled to a deduction or a capital loss for

$4.3m. It did so on the basis that both the documentary evidence and the oral evidence of the

relevant controllers of the trusts was not sufficiently credible to support the "bona -fides" of the

alleged guarantee arrangement.

2/03/2017






Chevron Australia Holdings Pty Ltd v FCT (No 4) [2015] FCA 1092

• Full Federal Court begins hearing taxpayer's appeal from decision to uphold

FCT's transfer pricing assessments

• Case involves credit facility agreement with US subsidiary

• Trial judge held non-arm's length dealing; dominant purpose to obtain

scheme benefit.

Transfer pricing: Full Federal Court appeal begins

International Tax

Appeal update

Chevron Australia Holdings Pty Ltd v FCT (No 4) [2015] FCA 1092

Monday, 27 February 2017 marked the first day of hearings of the taxpayer's appeal to the Full

Federal Court against the decision of Robertson J in Chevron Australia Holdings Pty Ltd v FCT (No

4) [2015] FCA 1092. The case is being heard by Chief Justice Allsop, Justice Perram and Justice

Pagone. The hearings were scheduled for 27 February to Friday, 3 March 2017.

The Federal Court had dismissed the taxpayer's appeal in a matter concerning arm's length

consideration, transfer pricing, and Australia-US double tax agreement issues in relation to a large

borrowing by the taxpayer from its US subsidiary which the taxpayer argued was to refinance its

existing Australian dollar denominated debt.

The taxpayer is Chevron Australia Holdings Pty Ltd (CAHPL) and the proceedings concerned the

financial years 2004-2008, inclusive. The Federal Court said that central to the proceedings was a

Credit Facility Agreement dated 6 June 2003 under which the taxpayer borrowed the equivalent in

A$ of US$2.5 billion from a United States based subsidiary of CAHPL, ChevronTexaco Funding

Corporation (CFC).





The FCT argued the parties were not dealing at arm's length. By determinations and assessments

issued in 2010 and 2012, relying on Div 13 of the ITAA 1936 for all years, on Subdiv 815-A of the

ITAA 1997 for some of the years and on the associated enterprises article of the 1982 Australia -US

double tax agreement, the ATO denied a significant proportion of the interest deductions claimed.

The ATO also applied a 25% penalty on the basis that CAHPL entered into the facility for the sole or

dominant purpose of obtaining a "scheme benefit".

The Federal Court ruled that CAHPL's challenges to the amended assessments under Div 13 of the

ITAA 1936 failed and, in the alternative, that CAHPL's challenges to the amended assessments

under Div 815 of the ITAA 1997 also failed.

2/03/2017



INTERNATIONAL TAX


Re Wilson and FCT [2017] AATA 119

• In 2010-11, electrician sub-contracted to US Army

• Worked in Afghanistan for 4 months

• Claimed earnings exempt under s 23AF ITAA 1936

• Key issue: did taxpayer work on “approved project”?

• AAT said no:

– Although it was eligible project, not approved in writing by Minister (as required

by s 23AF(11)).

Overseas income not exempt

International Tax

Overseas income not exempt

Re Wilson and FCT

Income earned by a taxpayer working for the US Army in Afghanistan has been held by the AAT not

to be exempt under s 23AF of the ITAA 1936.

The taxpayer was an electrician and mechanic who, during the 2010-11 income year, was

subcontracted by his American employer to work for the US Army in Afghanistan. He travelled there

on at least four occasions, including for one period of at least four months. He had a role in "outside

plant construction" that was a critical part of the future power distribution network.

The taxpayer claimed that his 2010-11 earnings were exempt from income tax under s 23AF. That

section exempts personal services income (including salary and wages) that is attributable to a

period of qualifying service on an "approved project". The period must be continuous for 91 days or

more.

An "approved project" is an "eligible project" which the Trade Minister, being satisfied that the project

is or will be in the national interest, has approved in writing. There are various categories of "eligible

project", including for (a) the design, supply or installation of any equipment or facilities, (b) the

construction of works or (c) the development of an urban or regional a rea.



The AAT decided that the s 23AF exemption did not apply because the taxpayer had not worked on

an approved project. Although the particular project satisfied both (a) and (b) of the definition of

eligible project, it was not an approved project. This was because the Trade Minister (or their

delegate) had not approved the project in writing for the purposes of s 23AF. In this context, the AAT

pointed out that although the Trade Minister has a discretion whether to approve an eligible project,

the approval must be in writing.

The AAT also commented that there was no evidence indicating the Trade Minister (or their

delegate) considered the project the taxpayer worked on to be in the national interest.

Re Wilson and FCT [2017] AATA 119, AAT, Ref No 2016/3489, Tavoularis SM, 1 February 2017

9/02/2017





Consultation paper

• At 2016 UK Anti-Corruption Summit, Australia committed to increasing

transparency of beneficial ownership of companies

• Consultation paper on proposed beneficial ownership register now released

• Treasury seeks feedback on info to be collected, compliance costs etc

• Submissions due by 13 March 2017.

Increasing transparency of beneficial ownership of companies

International Tax

Increasing transparency of beneficial ownership of companies

The Minister for Revenue released for public consultation a paper entitled "Increasing Transparency

of the Beneficial Ownership of Companies". She said this consultation reaffirms the government's

announcement at the UK Anti-Corruption Summit in May 2016 to consult on options for a beneficial

ownership register for companies.

The consultation paper seeks views on increasing the transparency of the beneficial ownership o f

companies for relevant authorities, to better assist these authorities to combat illicit activities. The

government is seeking feedback on what information needs to be collected in order to achieve this

objective and how it should be collected, stored and kept up to date. It is also seeking feedback on

the expected compliance costs for affected parties.

Internationally, there is a focus on increasing transparency of beneficial ownership information within

the global financial system. International bodies such as the G20 view transparency as playing a key

role in combating illegal activities such as money laundering, bribery and corruption, insider

dealings, tax fraud and terrorism financing. This was reflected in the G20 High -Level Principles on

Beneficial Ownership Transparency (the G20 Principles), the development of which was a key

outcome for the Australian G20 Presidency in 2014. Other international organisations such as, the

Financial Action Task Force (FATF), the OECD's Global Forum on Transparency and Exchange of

Information for Tax Purposes and the World Bank also have a strong interest in progressing work

towards increasing beneficial ownership transparency. The EU is also keenly pushing such

transparency. Developments such as the Panama Papers have been instrumental in raising

awareness of beneficial ownership issues.

http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2017/Beneficial-ownership-of-companies



In Australia, a definition of beneficial owner which focuses on ownership and control has been

developed as part of the Anti-Money Laundering legal framework. In considering potential reforms to

increase the transparency of the beneficial ownership of companies, the paper says the concept of

beneficial owner could be a broad one which includes:

The natural person(s) who have a controlling ownership interest; or

The natural person(s) who can exercise control of a company through other means; or

The natural person(s) who controls the activities of a company by virtue of their position in

that company.

Discussion questions

Some of the questions for discussion posed in the consultation paper include:

Should listed companies be exempt from any new requirements to report on its beneficial

owners in light of existing obligations on such companies? If so, should an exemption apply

to companies listed on all exchanges or only to specific exchanges?

Does the existing ownership information collected for listed companies allow for timely

access to adequate and accurate information by relevant authorities?

What beneficial ownership information should be captured?

How should a beneficial owner who has a controlling ownership interest in a company be

defined?

Should the process for identification of beneficial owners operate in such a way that reporting

must occur on all entities through to and including the ultimate beneficial owner?

What details should be collected and reported for each natural person identified as a

beneficial owner who has a controlling ownership interest in a company?

What obligations should there be on a company to make enquiries to ascertain who their

beneficial owners are and collect the required information? What obligations should there be

on the beneficial owners themselves?

Who would be best placed to operate and maintain a central register of beneficial ownership?

Why?

Who should have an obligation to report information to the central register? Should it be the

company only or also the persons who meet the test of being a relevant "beneficial owner"?

Should beneficial ownership information be automatically exchanged with relevant authorities

in other jurisdictions?

Should further obligations be introduced in order to increase the transparency of the

beneficial owners of shares held by nominee shareholders?



Comments

Submissions are due by 13 March 2017. The submissions to the consultation paper are intended to

inform the government's decision about reforms to improve transparency of beneficial ownership of

companies.

16/02/2017




Practical Compliance Guideline PCG 2017/2

• Contains simplified transfer pricing record keeping options for:

– Small taxpayers (Aust economic group turnover <$25m)

– Distributors (Aust economic group turnover <$50m)

– Intra-group services

– Low-level inbound or outbound loans

– Materiality

– Management & admin services

– Technical services

• Options available if certain criteria, including thresholds met.

Simplified transfer pricing record keeping options

International Tax

Simplified transfer pricing record keeping options

The ATO released Practical Compliance Guideline PCG 2017/2 which deals with simplified

transfer pricing record keeping options. The options in the Guideline reflect the types of transactions

or activities the ATO believes are low risk in the context of international related party dealings. The

Guideline specifies the criteria for taxpayers to self-assess their eligibility to use one or more of the

following eight simplification options:

Small taxpayers – basic qualification is that turnover for the year is under $25 million for the

taxpayer's Australian economic group, plus other criteria must be met eg taxpayer has not

made substantial losses, does not have related-party dealings with entities in specified

countries (which include Bahamas, Liechtenstein, US Virgin Islands, Cayman Islands,

Jersey, Seychelles, Bermuda, Panama);

Distributors – basic qualification is that turnover for the year is under $50 million for the

taxpayer's Australian economic group, plus other criteria must be met eg does not have a

profit-before-tax ratio of less than 3%, taxpayer has not made substantial losses, does not

have related-party dealings with entities in specified countries;

Intra-group services - basic qualification is that taxpayer has international related-party

dealings of either: (i) $1 million or less combined value of services received and provided –

the de minimis rule; or (ii) greater than $1 million, plus other conditions must be met eg

taxpayer has a mark-up on costs of the relevant services of: (i) 7.5% or less for services it

receives; (ii) 7.5% or more for services it provides;

Low-level inbound loans – basic criteria is that the taxpayer has a combined cross-border

loan balance of $50 million or less for its Australian economic group at all times throughout

the financial year, plus other criteria must be met;

https://www.ato.gov.au/law/view/document?DocID=COG/PCG20172/NAT/ATO/00001



Materiality – total international related party dealings represent less than or equal to 2.5% of

total turnover for the Australian economic group, and other criteria are met;

Management and administration services – income from, and expenditure on, management

and administration services must not be more than 50% of the total international related party

dealings of the Australian economic group, plus other criteria must be met eg have a mark-up

on costs of the relevant services of: (i) 5% or less for services it receives; (ii) 5% or more for

services it provides;

Technical services – income from, and expenditure, on technical services must not be more

than 50% of the total international related party dealings of the Australian economic group,

plus other criteria must be met eg have a mark-up on costs of the relevant services of: (i)

10% or less for services it receives; (ii) 10% or more for services it provides; and

Low-level outbound loans – taxpayer has a combined cross-border loan balance of $50

million or less for its Australian economic group at all times throughout the financial year, plus

other criteria must be met eg for each of its outbound loans, the taxpayer's interest rate is no

less than the following rate for each of the income years which the loan is in effect: (i) 4.91%

in its 2015 income year; (ii) 4.37% in its 2016 income year; (iii) 4.34% in its 2017 income

year.

Exclusions apply for each of the above simplification options whereby the option does not reduce the

documentation requirements for specified transactions.

If a taxpayer meets the criteria for one or more of the eight simplification options, it will be eligible to

apply that option to its international related party dealings.

The options in the Guideline are available to companies, trusts and partnerships where they meet

the eligibility criteria. Where taxpayers choose to use a simplified record keeping option, they need

to inform the ATO of their election through a disclosure in their International Dealings Schedule

(IDS).

The ATO says if taxpayers apply one or more of the options in the Guideline, it will not allocate

compliance resources to review the covered transactions or arrangements specified in tha t option for

transfer pricing purposes, beyond reviewing the taxpayer's eligibility to use the option they have

applied.

Taxpayers need to keep contemporaneous documentation substantiating their eligibility for the

option they have applied. The ATO says this documentation should simply and sensibly explain how

they met the relevant eligibility criteria.

The transfer pricing simplification options contained in the Guideline will be available on an ongoing

basis subject to review, which will be finalised in September 2017. Should any changes to a

simplification option occur as a result of the review, they will take effect on a prospective basis.

Date of effect

Generally, depending on what simplification option is selected, from 1 July 2013 and 1 July 2015 (or

1 January 2013 and 1 January 2015 for substituted accounting period taxpayers).

23/02/2017



TAX CONTROVERSY


Diverting personal services income to an SMSF

• TA 2016/6 (issued in April 2016) warns about arrangements to divert PSI to

SMSF to avoid paying tax at personal marginal rates

• ATO’s voluntary disclosure offer (to remit penalties) extended to 30 April

2017.

Tax Controversy

ATO extends voluntary disclosure offer

Personal services income diverted to SMSFs: ATO offer to remit

penalties extended

The ATO's offer to remit penalties in relation to arrangements involving the diversion of personal

services income to SMSFs has been extended from 31 January to 30 April 2017.

Since April 2016, the ATO has been reviewing arrangements where individuals purport to divert

personal services income (PSI) to a SMSF. The arrangements, described in Taxpayer Alert TA

2016/6, involve individuals (typically SMSF members at or approaching retirement age) performing

services for a client but do not directly receive any (or adequate) consideration for the services.

Instead, the client remits the consideration for the services to a company, trust or other non -

individual entity. That entity then distributes the income to the individual's SMSF, purportedly as a

return on an investment in the entity (including an unrelated third party). The SMSF treats the

income as subject to concessional tax (15%) or as exempt current pension income.

https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/Diverting-personal-services-income-to-an-SMSF/



Other variations of the arrangement include the income being remitted by the entity to the SMSF via

a written or oral agreement between the entity and SMSF, instead of as a return on an investment.

The SMSF may also record the income from multiple entities or through a chain of entities.

Alternatively, the entity may distribute the income to more than one SMSF of which the individual or

associates are members.

ATO view

The FCT considers that such arrangements may be ineffective at alienating income such that it

remains the assessable income of the individual under s 6-5 of the ITAA 1997 or as PSI. The ATO

also warns that the amounts received by the SMSF may constitute non-arm's length income of the

SMSF under s 295-550 of the ITAA 1997 (taxable at 47%).

Other compliance issues include:

The amounts received by the SMSF may be a contribution and generate excess contributions

tax consequences for the individual; and

Superannuation regulatory issues - the arrangement may breach the sole purpose test under

s 62 of the SIS Act. Such breaches of the SIS Act may lead to the SMSF being made non-

complying or the disqualification of an individual as a trustee.



ATO offer to remit penalties extended to 30 April 2017

The ATO has now extended the due date to contact it in relation to TA 2016/6 from 31 January to

30 April 2017. With all the superannuation changes taking place, including the super reforms

legislated in November 2016 and review of non-arm's length LRBAs (due by 31 January 2017), the

ATO has acknowledged that people may not have had sufficient time to consider its voluntary

disclosure offer.

Individuals and trustees who are not currently subject to ATO compliance action, and who come

forward before 30 April 2017, will have administrative penalties remitted in full. However, shortfall

interest charges still apply.

Where individuals and trustees come forward to work with it to resolve issues, the ATO anticipates

that in most cases the PSI distributed to the SMSF by the non-individual entity would be taxed to the

individual at their marginal tax rate. The ATO says issues affecting the SMSF will be addressed on a

case-by-case basis, but it will take the individual's co-operation into account when determining the

final outcome.

3/02/2017




Re-characterisation of income from trading businesses

• ATO reviewing arrangements where trading company divided in contrived way

to re-characterise trading income as passive income

• Income artificially diverted into trust – no tax or lower rate than corporate tax

rate paid on distribution

• Arrangements typically involve stapled structures, are promoted to overseas

investors

• Pt IVA may apply.

Tax Controversy

Taxpayer Alert TA 2017/1

Re-characterisation of income from trading businesses

The ATO on 31 January 2017 released Taxpayer Alert TA 2017/1 - Re-characterisation of income

from trading businesses.

The ATO said it is reviewing arrangements that attempt to fragment integrated trading businesses in

order to re-characterise trading income into more favourably taxed passive income. Its concern

arises where a single business is divided in a contrived way into separate businesses. The income

that might be expected to be subject to company tax is artificially diverted into a trust where, on

distribution from the trust, that income is ultimately subject to no tax or a lesser rate than the

corporate rate of tax. Stapled structures are one mechanism being used in these arrangements, but

the ATO said its concerns are not limited to arrangements involving stapled structures.

The ATO said it is engaging more closely with taxpayers who have proposed these arrangements to

explore the issues of concern and ensure that arrangements of the type outlined in the Alert do not

seek to avoid the payment of corporate tax. Taxpayers and advisors who implement these types of

arrangements will be subject to increased scrutiny. The ATO said it is continuing to develop its

technical position on these arrangements and expects to issue further guidance in respect of its

concerns.

3/02/2017

https://www.ato.gov.au/law/view/view.htm?docid=%22TPA%2FTA20171%2FNAT%2FATO%2F00001%22




Taxpayer Alerts TA 2017/2 and TA 2017/3

• ATO and AusIndustry reviewing arrangements where R&D tax offset claimed

for:

– Building and construction activities (TA 2017/2)

– Ordinary business activities (TA 2017/3).

R&D claims in building and construction industry

Tax Controversy

R&D claims in building and construction industry – ATO Taxpayer Alerts

warn of issues of concern

The ATO and the Department of Industry, Innovation and Science (DIIS) have released two new

Taxpayer Alerts - TA 2017/2 (Claiming the R&D Tax Incentive for construction activities) and TA

2017/3 (Claiming the R&D Tax Incentive for ordinary business activities) - as a warning to those not

being careful enough in their claims or seeking to deliberately exploit the R&D Tax Incentive

program.

The R&D tax incentive encourages companies to engage in R&D benefiting Australia, by providing a

tax offset for eligible R&D activities. ATO DCT Michael Cranston said the Alerts relate to particular

issues identified in the building and construction industry where specifically excluded expenditure is

being claimed as R&D expenses. The alerts provide clarification for a wide range of businesses who

had been incorrectly claiming ordinary business activities against the R&D tax incentive.

The Alerts are designed to clarify what can and cannot be claimed, and help businesses to avoid

mistakes such as ordinary business activities being self-assessed as R&D activities, Mr Cranston

said. He said that while "most do the right thing, we are seeing some businesses in these industries

and their advisors improperly applying for the tax incentive where the activities and expenditure

claimed don't match with legislative requirements".

https://www.ato.gov.au/Media-centre/Media-releases/Early-warning-for-taxpayers-making-R-D-claims/

https://www.ato.gov.au/Media-centre/Media-releases/Early-warning-for-taxpayers-making-R-D-claims/



For example, Mr Cranston said the ATO has seen an increase in claims for ordinary business

activity expenses, or for large parts of projects that do not correspond to the scale or scope of

experimental activities. Ordinary business activities are not generally carried out with a purpose of

generating new knowledge. He said the ATO often sees issues including claims that encompass

whole of projects (where project, management, environmental and commercial risks are mistaken for

technical risks) and where the activities use existing knowledge and expertise.

Mr Cranston warned that the ATO is undertaking "a range of compliance activities to address

businesses and advisors deliberately doing the wrong thing and will take legal action against those

who wilfully misuse the R&D Tax Incentive".

TA 2017/2

TA 2017/2 deals with claiming the R&D Tax Incentive for construction activities. The Alert says the

arrangements under review concern claimants of the R&D Tax Incentive who are involved in either:

acquiring buildings, or extensions, alterations or improvements thereto (the acquirer); or whose

business it is to construct, extend, alter or improve buildings (the builder).

These types of arrangements exhibit a number of features, including:

A contract is entered into between the acquirer and the builder to construct, extend, alter or

improve a building or buildings (construction).

The contract is a standard construction contract and is not for the provision of R&D services

and does not specify that R&D will be carried out by the builder.

The acquirer or the builder registers one or more activities associated with the construction of

the building for the R&D Tax Incentive, identifying the structure or construction techniques as

purportedly involving untested or novel elements.

Some or all of the activities registered are broadly described and non-specific. For example,

whole construction projects may be registered rather than the specific activities which are

being undertaken.




TA 2017/3

TA 2017/3 deals with claiming the R&D Tax Incentive for ordinary business activities. The ATO says

the types of arrangements under review exhibit some or all of the following features:

A company registers one or more activities for the R&D Tax Incentive.

Some or all of the activities registered are broadly described and non-specific. For example,

projects may be registered instead of the specific activities undertaken.

Some or all of the activities registered are ordinary business activities that are not eligible for

the R&D Tax Incentive.

Some or all of the activities were undertaken in the course of their ordinary business activities

and recharacterised as R&D activities at a later time.

The company claims the R&D Tax Incentive for expenditure that is not on eligible R&D

activities.

The ATO says it has observed a number of cases where the company's ineligible ordinary business

activities have not been distinguished from any eligible R&D activities. It also observed that often,

some of the expenses included in the calculation of the R&D Tax Incentive claim are not for amounts

that relate to eligible R&D activities, eg ordinary production costs of products sold to the market in

the ordinary course of business.

The ATO says it will be contacting companies directly to advise them of its concerns with their

registered activities and/or their R&D Tax Incentive claims if:

"Advisors who may apply high risk practices" are involved in the preparation of the

registration application and/or claim.

The registration of R&D activities continues with the use of broad descriptions that fail to

distinguish them from ordinary operational business activities.

The level of expenditure claimed for the R&D Tax Incentive is high for the industry or stage of

business.

9/02/2017





Taxpayer Alerts TA 2017/4 and TA 2017/5

• ATO and AusIndustry reviewing arrangements where R&D tax offset claimed

for:

– Ordinary agricultural activities (TA 2017/4)

– Regular software development activities (TA 2017/5).

R&D claims in agricultural & IT sectors

Tax Controversy

Incorrect R&D claims in agricultural and IT sectors

The ATO and Department of Industry, Innovation and Science (DIIS) are continuing their joint efforts

to curb the incorrect use of the R&D Tax Incentive program with the release on 21 February 2017 of

a further two Taxpayer Alerts. Taxpayer Alert TA 2017/4 examines claiming the R&D tax incentive

for agricultural activities, while Taxpayer Alert TA 2017/5 looks at software development activities.

Agricultural activities

The ATO Deputy Commissioner Michael Cranston said these new alerts related to behaviours

noticed in the agricultural, software and IT industries where ordinary business activities were being

incorrectly claimed as R&D activities and R&D expenditure. For example, within the agricultural

sector, the ATO is seeing some operators claiming ordinary farming activities which produce crops

as R&D activities and expenditure.

https://www.ato.gov.au/law/view/document?LocID=%22TPA%2FTA20174%2FNAT%2FATO%22&PiT=99991231235958

https://www.ato.gov.au/law/view/document?LocID=%22TPA%2FTA20175%2FNAT%2FATO%22&PiT=99991231235958



The ATO says it has observed a number of cases where companies have registered agricultural

activities with AusIndustry which are, or appear to be, ineligible for the R&D Tax Incentive. The

reasons these types of activities have been found to be ineligible include:

The activities form part (or all) of the entity's ordinary business activities, such as the

production of agricultural goods, and are not for the purpose of generating new knowledge or

for the dominant purpose of supporting core R&D activities.

The activities involve the application of established products and existing methodologies and a

competent professional in the field could have known or worked out the outcomes without

conducting an experiment. For example, applying different irrigation or pruning methods,

commissioning new equipment or applying soil improvers in different concentrations.

The activities are not experimental and are not undertaken to prove a hypothesis right or

wrong. This is evidenced by the scale of the activities which is disproportionate with the scale

of any data collection, observation and evaluation.

The ATO says it has also observed that often some of the expenses included in the calculation of

the R&D Tax Incentive claim are not for amounts that relate to eligible R&D activities eg ordinary

production costs of products sold to the market in the ordinary course of business.

Software development

Mr Cranston said there were also examples in the IT sector where the ATO has seen companies

trying to claim ordinary business activities, such as the regular development of new software, as

research activities.

In TA 2017/5, the ATO notes that eligibility under the R&D Tax Incentive is based on specific R&D

activities rather than on entire projects. Companies undertaking software development projects

sometimes assume or assert that software development activities are by their nature eligible R&D

activities. However, the ATO says it is extremely unlikely that all of the work involved in a software

development project will meet the legislative criteria for eligible R&D activities. While a project may

involve some experimental activities, that does not qualify the entire project as an eligible R&D

activity. The application of a software development lifecycle does not automatically mean that

eligible experimental activities are taking place, nor that the outcome of any technical issues being

solved are not using existing knowledge, information or expertise, the ATO said.

In the ATO's view, a test or trial that does not set out to test causal relationships between technical

variables to experimentally resolve an outcome that cannot be determined with existing knowledge

or expertise, will not be an eligible core R&D activity under the R&D Tax Incentive. Examples o f

these types of activities include, but are not limited to: Bug testing, Beta testing, System testing,

Requirements testing, User Acceptance Testing.



ATO concerns

ATO concerns include:

Activities may not fit within the stringent requirements of the laws that govern the R&D Tax

Incentive. Expenditure claimed may not relate to eligible R&D activities. The ATO has the

following concerns here:

A software development project has been registered on a whole of project basis,

without distinguishing eligible R&D activities from ineligible activities. For example,

developing and rolling out a new online customer platform may be incorrectly

identified as a single eligible R&D activity.

The activities do not have the purpose of generating new knowledge.

There is no clearly identified technical uncertainty being addressed by the activity.

Project management, commercial or economic risks are mistaken for technical risks.

For example, a bank develops a mobile banking application and the delivery of the

application is quite certain on the basis of current knowledge, information and

experience. There is, however, a risk that existing or future customers may not

embrace the application. The ATO says this risk is commercial in nature only and

hence the relevant activities do not constitute eligible R&D activities.

The activities involve the purchase of "off-the-shelf" software and subsequent

modification to integrate it into the existing environment.

Taxpayers may not be applying adequate levels of governance and review to the registered

activities and the claims made for the R&D Tax Incentive.

23/02/2017



STATE TAXES


Chief CSR v Metricon Qld Pty Ltd [2017] NSWCA 11

• Property developer bought rural land for residential subdivision

• Pending development, land mainly used for cattle grazing

• NSW Court of Appeal held primary production land tax exemption applied –

dominant use was cattle grazing

• In assessing dominant use, any competing use of land must be physical use.

NSW land tax: primary production exemption

State Taxes

NSW land tax: primary production exemption

Chief Comr of State Revenue v Metricon Qld Pty Ltd

In confirming that a land development company qualified for the primary production land tax

exemption, the NSW Court of Appeal has made an important ruling that any competing use of the

land considered in applying the dominant use test must be a physical use of the land: Chief Comr of

State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11 (NSW Court of Appeal, Macfarlan JA,

Ward JA and Barrett AJA, 10 February 2017).

Background

The taxpayer is a property developer which owns a number of parcels of rural land in the Tweed

Valley. It purchased the land for over $60m for the purpose of residential subdivision. The taxpayer

had undertaken some preliminary activities necessary to obtain development approval, but pen ding

actual development work on the land, most of it was being used for cattle grazing or, in respect of

some of the parcels, residential use (houses on those parcels being let by the taxpayer). The

taxpayer was assessed for land tax by the Commissioner for the years 2009 to 2013 in respect of

each parcel of land.

In terms of the primary production exemption from land tax under s 10AA of the Land Tax

Management Act 1956 (NSW), there was no dispute that the land was being used for primary

production (cattle grazing) of sufficient commercial scale. The sole issue was whether that use of the

land was the dominant use.





The taxpayer argued that to determine whether primary production was the dominant use, any

comparable or competing use of the land had to be a physical use.

The Chief Commissioner argued for a number of competing land uses to be weighed against the

primary production use for the purposes of the dominant use test. These included intangible use as

a "land bank", use for land development (on the basis of costs incurred in relation to the preliminary

activities referred to above) and residential/rental use.

Supreme Court decision

In Metricon Qld Pty Ltd v Chief Comr of State Revenue (No 2) [2016] NSWSC 332, the NSW

Supreme Court held that the dominant use test was to be applied on the basis that:

A competing use was not limited to physical use of the land, ie an "intangible" use can be a

competing use;

A competing use must be a present use; and

Mere holding of land does not amount to present use.

Accordingly, in concluding that, for exemption purposes, the taxpayer passed the dominant purpose

test, the Court held that:

1. Holding the land for future residential development (land banking) did not constitute a current

use of the land;

2. The preliminary work undertaken by the taxpayer was primarily concerned with an intended

future use;

3. Incurring expenditure to obtain approvals required for future residential development did not

involve a use of the lands, intangible or otherwise;

4. Obtaining income tax deductions for outgoings in respect of the land did not constitute an

intangible use of the land.

Court of Appeal decision

On appeal by the Chief Commissioner, the Court of Appeal (in the leading judgment of Barrett AJA)

found that the concept of "use" in s 10AA is one of physical deployment of the land to obtain a

present benefit or advantage from it.

The expression "dominant use" has regard to quantification of a primary production use specified in

the provision as against uses that are not specified (competing uses). To illustrate the implications

for the quantification process of allowing so-called intangible uses to be competing uses, the Court

posited the following scenario: the owner of the land leases it to another person who devotes it

entirely and exclusively to agriculture by raising crops. If it accepted that there are two uses of the

land - the lessee uses it for "agriculture" and the lessor uses it for "leasing" - a need arises to

compare those uses determine which is dominant:



"The difficulty confronting any attempt to compare those two uses comes from their intrinsically

different qualities. It is by no means clear that any meaningful method of comparative quantification

is available. … The difficulty is perhaps better exemplified when regard is had to the nature, intensity

and extent of the rights devoted to each particular use. When considered in that way, the competing

uses are equal because the rights deployed are the full rights of the lessor and the lessee

respectively. On that basis, neither use is dominant. If that were the correct approach, s 10AA would

never apply to leased land fully utilised by the lessee."

The Court went on to find that:

Land banking cannot be regarded as being, of itself, use of the land;

Incurring expenditure and acquiring the services of planners and other consultants to formulate a

scheme of residential subdivision did not involve making use of the land in the required sense; and

The primary judge had been correct to conclude, in relation to three parcels of land on which were

located houses which the taxpayer rented out, that the primary production (cattle grazing) on those

parcels was greater in terms of scale and intensity than the "residential" or "rental" use of the land.

In the result, the Court dismissed the appeal by the Chief Commissioner.

16/02/2017

Documents

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