In this case a backpacker (Maximillian Clemens) was found to be non-resident despite travelling and working around Australia for more than half of the year (183 days). This was because his usual place of abode was found to be in Germany, rather than Australia. The judge determined that for Mr Clemens to claim tax residency status in Australia, before leaving home he was required to completely abandon his parents' German residence, and upon arrival in Australia, to reside in a dwelling of some quality and permanence.
Deputy President of the AAT R Deutsch:
"In my view it is not possible to have two or more usual places of abode at the same time. Where there are two competing places of abode it needs to be assessed based on all the available facts as to which one is “usual”. "
(p 37)
"Nonetheless this Tribunal concludes that during the whole of the year ended 30 June 2013, the Applicants’ usual place of abode was his parents' house in Germany. " (p 40)
"While the Parliamentary intentions are not always relevant to examine it is worth noting that the various qualifications to the 183 day rule were enacted by Parliament “in order that there may be no danger of treating as residents persons who are purely visitors”: Explanatory Notes on Amendments contained in the Income Tax Assessment Bill 1930 to amend the Income Tax Assessment Act 1922-29, page 11. Thus, overseas visitors on holidays or working in Australia who are in Australia for more than 183 days would not be residents during their stay under this test, as they would usually have a usual place of abode elsewhere and would not have an intention of taking up residence in Australia." (p 48)
"This lends support to the conclusions I have reached. It is only if the Applicant had completely abandoned his usual place of abode overseas in Germany during the year ended 30 June 2013 that the result might be otherwise." (p 49)
http://www.austlii.edu.au/au/cases/cth/AATA/2015/124.html
Thursday, June 18, 2015
Sunday, June 14, 2015
John Holland Group Pty Ltd vs Federal Commissioner of Taxation [2015] FCAFC 82
A long long time ago, in a galaxy far far away, a man named Mr Lunney attempted to deduct the cost of his train tickets to and from work each day from his assessable income for tax purposes, and was disallowed by the High Court because these costs amounted to "living expenses". The majority of the High Court ruled that once Mr Lunney reached his company's place of work, further travel expenses incurred on that day between different places of work was deductible as it directly related to the production of his assessable income.
The question posed in this case amounts to weather or not a rail maintenance worker can claim that his work 'begins at Perth airport', and hence can deduct the cost of plane tickets to and from work-sites. If so, the ITAA 1997 provides that John Holland Group can deduct the cost of plane tickets which would be deductible in the hands of an employee. The income of John Holland Group employees amounts to consideration paid to him for work performed according to a contract with John Holland Group, which specifies that he begins getting paid on arrival at Perth airport. Was this enough to convince the Full Federal Court that gaining his assessable income included flying to a work-site? Yes.
"The cost of travel for which Mr Lunney claimed a deduction, and which the court did not allow, was not the travel from the company’s office at No. 11 Darling Harbour to the various ports to carry out his work, but from his domestic residence in Narraweena to his employer’s office at No. 11 Darling Harbour. Counsel for John Holland Group and John Holland contended that the equivalent outgoing in this case (which the employees would not be able to deduct) would be the cost of travelling from the employees’ individual residences to Perth airport, but that the employees’ arrival at Perth airport was equivalent to the arrival of Mr Lunney at the office of his employer at No. 11 Darling Harbour. In other words that arrival by the employees at Perth airport was the employees’ arrival at work from which they then travelled to Geraldton to undertake other tasks. The employees were submitted to be “in” their employment from the moment of their arrival at Perth airport and were not travelling “to” their employment at Geraldton. In contrast, the Commissioner contended that the employees were employed, and paid, to undertake activities at Geraldton and that their employment did not include their travel from Perth airport to Geraldton." (p 53)
"Travelling from Perth airport to Geraldton was part of the employment of those employees. Each of the employees commenced their “rostered on” duties on arrival at Perth airport and took the flights because they were directed to do so and were required to do so as part of their employment obligations. The terms of employment of the “workforce” employees provided that the employees commenced their “rostered on” employment duties from their time of arrival at Perth airport." (p 58)
"In my view, there is no reason why Perth Airport should not be a point at which the employees duties and remuneration for performance of those duties both commences and ceases. The contract of employment so provides. The fact that Perth Airport is not an area or premises owned or leased by John Holland, is irrelevant. In this respect, there is no difference between Perth Airport and No 11 Darling Harbour." (p 44)
"From the time the John Holland employees, both Workforce and Staff, checked in at Perth Airport they were travelling in the course of their employment, subject to the directions of John Holland and being paid for it. That situation subsisted until they disembarked the plane at Perth Airport at the end of their rostered-on work time. At no time during that period were they travelling to work; they were travelling on work and the cost of doing so under the statutory hypothesis in s 52(1) FBTAA would be an allowable deduction to them under s 81 of the ITAA 1997." (p 45)
"The case under consideration in Lunney was of “ordinary people” paying fares “to enable them to go day by day to their regular place of employment or business and back to their homes”; it was not about the specific demands occasioned by employment that required, as part of the employment, travel to a remote place. The employees in this case are required to travel as part of their employment to a remote location. Accordingly, the appeal should be allowed." (p 64)
http://www.austlii.edu.au/au/cases/cth/FCAFC/2015/82.html
The question posed in this case amounts to weather or not a rail maintenance worker can claim that his work 'begins at Perth airport', and hence can deduct the cost of plane tickets to and from work-sites. If so, the ITAA 1997 provides that John Holland Group can deduct the cost of plane tickets which would be deductible in the hands of an employee. The income of John Holland Group employees amounts to consideration paid to him for work performed according to a contract with John Holland Group, which specifies that he begins getting paid on arrival at Perth airport. Was this enough to convince the Full Federal Court that gaining his assessable income included flying to a work-site? Yes.
"The cost of travel for which Mr Lunney claimed a deduction, and which the court did not allow, was not the travel from the company’s office at No. 11 Darling Harbour to the various ports to carry out his work, but from his domestic residence in Narraweena to his employer’s office at No. 11 Darling Harbour. Counsel for John Holland Group and John Holland contended that the equivalent outgoing in this case (which the employees would not be able to deduct) would be the cost of travelling from the employees’ individual residences to Perth airport, but that the employees’ arrival at Perth airport was equivalent to the arrival of Mr Lunney at the office of his employer at No. 11 Darling Harbour. In other words that arrival by the employees at Perth airport was the employees’ arrival at work from which they then travelled to Geraldton to undertake other tasks. The employees were submitted to be “in” their employment from the moment of their arrival at Perth airport and were not travelling “to” their employment at Geraldton. In contrast, the Commissioner contended that the employees were employed, and paid, to undertake activities at Geraldton and that their employment did not include their travel from Perth airport to Geraldton." (p 53)
"Travelling from Perth airport to Geraldton was part of the employment of those employees. Each of the employees commenced their “rostered on” duties on arrival at Perth airport and took the flights because they were directed to do so and were required to do so as part of their employment obligations. The terms of employment of the “workforce” employees provided that the employees commenced their “rostered on” employment duties from their time of arrival at Perth airport." (p 58)
"In my view, there is no reason why Perth Airport should not be a point at which the employees duties and remuneration for performance of those duties both commences and ceases. The contract of employment so provides. The fact that Perth Airport is not an area or premises owned or leased by John Holland, is irrelevant. In this respect, there is no difference between Perth Airport and No 11 Darling Harbour." (p 44)
"From the time the John Holland employees, both Workforce and Staff, checked in at Perth Airport they were travelling in the course of their employment, subject to the directions of John Holland and being paid for it. That situation subsisted until they disembarked the plane at Perth Airport at the end of their rostered-on work time. At no time during that period were they travelling to work; they were travelling on work and the cost of doing so under the statutory hypothesis in s 52(1) FBTAA would be an allowable deduction to them under s 81 of the ITAA 1997." (p 45)
"The case under consideration in Lunney was of “ordinary people” paying fares “to enable them to go day by day to their regular place of employment or business and back to their homes”; it was not about the specific demands occasioned by employment that required, as part of the employment, travel to a remote place. The employees in this case are required to travel as part of their employment to a remote location. Accordingly, the appeal should be allowed." (p 64)
http://www.austlii.edu.au/au/cases/cth/FCAFC/2015/82.html
Tuesday, June 9, 2015
Falk vs Commissioner of Taxation
In this case the tribunal ruled that the character of a transaction is more important than any particular name it happens to be given when determining its nature under the income tax assessment act(s).
The Australian Capital Territory (ACT) government labelled a payment given to an employee in respect of legal costs incurred during a dispute between himself and the government as an 'act of grace' payment, but the tribunal ruled that the transaction was clearly made on the condition of Mr Falk dropping all claims against the ACT government in regard to those costs. A payment made on such conditions is difficult be construed as an 'act of grace'. A payment made in compensation of legal costs can only be considered 'ex gratia' (an act of grace) if there is no legal liability on behalf of the payee to make the payment - whereas the key distinction in this case was that the taxpayer dropped current legal proceedings against the ACT government in return for the payment.
The case rested upon the definition of the word 'indemnity', and also, what particular characteristics of a payment constitute the label 'ex gratia'. The tribunal held that payments of indemnification are made in respect of losses that have already occurred (as opposed to losses that 'may' occur). In regard to ex gratia payments, the tribunal suggested that compensation for legal costs offered after legal proceedings have commenced do not bear the character of an 'act of grace'.
The ruling drew upon a long debate about the word "indemnify".
"There is no general principle that an amount received as compensation for, or reimbursement of, a deductible expense is assessable income. The proposition that a general principle of that kind exists was rejected by the High Court in Commissioner of Taxation v Rowe [1997] HCA 16." (p 41)
"Finally, in relation to the ordinary meaning of ‘indemnity’ reaching to indemnification in respect of losses already incurred in the context of legal costs, we note the following statement of the High Court (Mason CJ, Brennan, Deane, Dawson and McHugh JJ) in Cachia v Hanes [1994] HCA 14; (1994) 179 CLR 403 at 410:
"It has not been doubted since 1278, when the Statute of Gloucester (6 Edw.I c.1.) introduced the notion of costs to the common law, that costs are awarded by way of indemnity (or, more accurately, partial indemnity) for professional legal costs actually incurred in the conduct of litigation."" (p 54)
"For those reasons the Tribunal will proceed on the basis that the views of Walters J in Goldsbrough Mort correctly state the law. That however is the beginning of the required analysis, not its end. In Batchelor, Edmonds and Pagone JJ stated that it is the character of a receipt which determines whether what the taxpayer has received may relevantly bear the description as being ‘by way of insurance or indemnity’.[30] An ex gratia payment does not fit that language. In a passage the Tribunal adopts, their Honours said at [13]:
"It may be accepted that the words “by way of insurance or indemnity” are, and are intended to be, wide, but they must be applied as intended. Generally speaking a payment will not be regarded as an indemnity (whether the word is taken alone or in combination in the composite phrase “by way of insurance or indemnity”) unless the entitlement to its receipt precedes the event in respect of which it is paid. An ex gratia payment, for example, is not apt to be regarded as indemnification of a loss or outgoing notwithstanding that its receipt may be said, from the point of view of economic equivalence, to compensate the recipient for a loss which had been suffered or an outgoing which had been incurred. Similarly, a refund would not ordinarily be regarded as an indemnification notwithstanding that its receipt may be said to have rendered a taxpayer harmless, from an economic point of view, for an antecedent loss or outgoing."" (p 55-56)
"The reasoning of the plurality in Batchelor therefore requires the Tribunal to determine the character of the receipt Dr Falk received. Neither its form nor its economic equivalence can be determinative of its character." (p 58)
"(If if was found) that the device of an act of grace payment was required only to comply with ACT internal procedures. We would find that the payment was made (adopting the language of the Chief Solicitor) ‘in return for [Dr Falk] withdrawing his application to the AIRC for costs and providing a release of the Territory in relation to the AIRC and associated costs’." (p 80)
"An ex gratia payment necessarily must be a payment made for reasons not compelled by law but that does not require its maker to be credulous or indifferent to his or her interests and a potential double recovery." (p 84)
The case is here [2015] AATA 392: http://www.austlii.edu.au/au/cases/cth/AATA/2015/392.html
The Australian Capital Territory (ACT) government labelled a payment given to an employee in respect of legal costs incurred during a dispute between himself and the government as an 'act of grace' payment, but the tribunal ruled that the transaction was clearly made on the condition of Mr Falk dropping all claims against the ACT government in regard to those costs. A payment made on such conditions is difficult be construed as an 'act of grace'. A payment made in compensation of legal costs can only be considered 'ex gratia' (an act of grace) if there is no legal liability on behalf of the payee to make the payment - whereas the key distinction in this case was that the taxpayer dropped current legal proceedings against the ACT government in return for the payment.
The case rested upon the definition of the word 'indemnity', and also, what particular characteristics of a payment constitute the label 'ex gratia'. The tribunal held that payments of indemnification are made in respect of losses that have already occurred (as opposed to losses that 'may' occur). In regard to ex gratia payments, the tribunal suggested that compensation for legal costs offered after legal proceedings have commenced do not bear the character of an 'act of grace'.
The ruling drew upon a long debate about the word "indemnify".
"There is no general principle that an amount received as compensation for, or reimbursement of, a deductible expense is assessable income. The proposition that a general principle of that kind exists was rejected by the High Court in Commissioner of Taxation v Rowe [1997] HCA 16." (p 41)
"Finally, in relation to the ordinary meaning of ‘indemnity’ reaching to indemnification in respect of losses already incurred in the context of legal costs, we note the following statement of the High Court (Mason CJ, Brennan, Deane, Dawson and McHugh JJ) in Cachia v Hanes [1994] HCA 14; (1994) 179 CLR 403 at 410:
"It has not been doubted since 1278, when the Statute of Gloucester (6 Edw.I c.1.) introduced the notion of costs to the common law, that costs are awarded by way of indemnity (or, more accurately, partial indemnity) for professional legal costs actually incurred in the conduct of litigation."" (p 54)
"For those reasons the Tribunal will proceed on the basis that the views of Walters J in Goldsbrough Mort correctly state the law. That however is the beginning of the required analysis, not its end. In Batchelor, Edmonds and Pagone JJ stated that it is the character of a receipt which determines whether what the taxpayer has received may relevantly bear the description as being ‘by way of insurance or indemnity’.[30] An ex gratia payment does not fit that language. In a passage the Tribunal adopts, their Honours said at [13]:
"It may be accepted that the words “by way of insurance or indemnity” are, and are intended to be, wide, but they must be applied as intended. Generally speaking a payment will not be regarded as an indemnity (whether the word is taken alone or in combination in the composite phrase “by way of insurance or indemnity”) unless the entitlement to its receipt precedes the event in respect of which it is paid. An ex gratia payment, for example, is not apt to be regarded as indemnification of a loss or outgoing notwithstanding that its receipt may be said, from the point of view of economic equivalence, to compensate the recipient for a loss which had been suffered or an outgoing which had been incurred. Similarly, a refund would not ordinarily be regarded as an indemnification notwithstanding that its receipt may be said to have rendered a taxpayer harmless, from an economic point of view, for an antecedent loss or outgoing."" (p 55-56)
"The reasoning of the plurality in Batchelor therefore requires the Tribunal to determine the character of the receipt Dr Falk received. Neither its form nor its economic equivalence can be determinative of its character." (p 58)
"(If if was found) that the device of an act of grace payment was required only to comply with ACT internal procedures. We would find that the payment was made (adopting the language of the Chief Solicitor) ‘in return for [Dr Falk] withdrawing his application to the AIRC for costs and providing a release of the Territory in relation to the AIRC and associated costs’." (p 80)
"An ex gratia payment necessarily must be a payment made for reasons not compelled by law but that does not require its maker to be credulous or indifferent to his or her interests and a potential double recovery." (p 84)
The case is here [2015] AATA 392: http://www.austlii.edu.au/au/cases/cth/AATA/2015/392.html
Wednesday, June 3, 2015
Garrett vs Commissioner of Taxation
Harassing the Commissioner of Taxation
The federal court has dismissed the case of one Mr Garrett for the ninth time this year, this time for being a "vexatious litigant". In his submission, the Commissioner of Taxation (the respondent) put forward 30 previous cases whereby Mr Garrett had lodged similarly passionate litigation, in support of a claim that Mr Garrett is abusing the court process to harass or cause delay for a wrongful purpose.
Mr Garrett has been issued with a bankruptcy notice (of which the Commissioner is presumably a party to) that is before other courts.
The judgement of Davies J contains some interesting remarks.
Referring to earlier dismissals of Mr Garrett's litigation:
"Pagone J ordered that Mr Garrett be prohibited from instituting in his own name... in the institution of any proceedings in any registry of the Federal Court against the Commissioner, any second Commissioner of Taxation, any Deputy Commissioner of Taxation, any person who is or was employed in the Australian Taxation Office as an “APS employee” within the meaning of the Public Service Act 1999 (Cth) or any agent or advisor of the Commissioner, without the leave of the Court." (p 9)
On the substance of earlier litigation:
"Beach J dismissed both applications, finding that Mr Garrett had not demonstrated any error in those decisions and there was no substance in any of the 48 proposed grounds of appeal in each matter, and that Mr Garrett had not shown that he would suffer any substantial injustice if leave were refused, even if the decisions were incorrect. " (p 15)
On the claims from Mr Garrett in the present proceeding - demanding the Commissioner be refused his lawful ability to amend a return:
"Mr Garrett’s claim for an order that a notice of assessment “stand” is fundamentally misconceived. The notice of assessment in question is the notice of assessment of income tax issued to Mr Garrett for the year ended 30 June 2014 based on the income tax return that Mr Garrett lodged for that year. By seeking that order, Mr Garrett seeks to prevent the Commissioner from exercising his power of amendment under s 170 of the Income Tax Assessment Act 1936 Act (Cth)... the Court would not interfere to prevent the Commissioner from performing his duty to reassess Mr Garrett’s liability in accordance with his duty to apply the law and to assess Mr Garrett to the correct amount of liability imposed by the Income Tax Assessment Acts... "
On Mr Garrett's serious allegations of professional misconduct:
"Mr Garrett was previously criticised for making serious assertions without support. In Garrett v Macks [2006] FCA 601, Lander J said at [14]:
These claims in their bald form should never have been made. They make the most serious allegations against a number of people, three of whom are officers of this Court, two of whom are professional persons who act as liquidators and trustees and are, therefore, responsible in that manner to this Court, and one of whom, of course, is a senior public officer, being the Deputy Commissioner of Taxation. Mr Garrett has made no effort in any way to support the allegations made in the proceeding. It was put by Mr Evans, by way of evidence, but really by way of submission in paragraph 19 of his affidavit, that the allegations are scandalous. I agree."
On suing the Commissioner for not complying with the taxpayer charter:
"The pleading in the present case is yet another illustration of Mr Garrett’s practice to make serious allegations of impropriety against other persons in unsupported and bald form. The final order sought that the respondents are able to be sued under the provisions of the Taxpayers’ Charter is not relief that is available at law. Accordingly, the application is bound to fail." (p 17)
The proceeding was dismissed.
The case [2015] FCA 485: http://www.austlii.edu.au/au/cases/cth/FCA/2015/485.html
The federal court has dismissed the case of one Mr Garrett for the ninth time this year, this time for being a "vexatious litigant". In his submission, the Commissioner of Taxation (the respondent) put forward 30 previous cases whereby Mr Garrett had lodged similarly passionate litigation, in support of a claim that Mr Garrett is abusing the court process to harass or cause delay for a wrongful purpose.
Mr Garrett has been issued with a bankruptcy notice (of which the Commissioner is presumably a party to) that is before other courts.
The judgement of Davies J contains some interesting remarks.
Referring to earlier dismissals of Mr Garrett's litigation:
"Pagone J ordered that Mr Garrett be prohibited from instituting in his own name... in the institution of any proceedings in any registry of the Federal Court against the Commissioner, any second Commissioner of Taxation, any Deputy Commissioner of Taxation, any person who is or was employed in the Australian Taxation Office as an “APS employee” within the meaning of the Public Service Act 1999 (Cth) or any agent or advisor of the Commissioner, without the leave of the Court." (p 9)
On the substance of earlier litigation:
"Beach J dismissed both applications, finding that Mr Garrett had not demonstrated any error in those decisions and there was no substance in any of the 48 proposed grounds of appeal in each matter, and that Mr Garrett had not shown that he would suffer any substantial injustice if leave were refused, even if the decisions were incorrect. " (p 15)
On the claims from Mr Garrett in the present proceeding - demanding the Commissioner be refused his lawful ability to amend a return:
"Mr Garrett’s claim for an order that a notice of assessment “stand” is fundamentally misconceived. The notice of assessment in question is the notice of assessment of income tax issued to Mr Garrett for the year ended 30 June 2014 based on the income tax return that Mr Garrett lodged for that year. By seeking that order, Mr Garrett seeks to prevent the Commissioner from exercising his power of amendment under s 170 of the Income Tax Assessment Act 1936 Act (Cth)... the Court would not interfere to prevent the Commissioner from performing his duty to reassess Mr Garrett’s liability in accordance with his duty to apply the law and to assess Mr Garrett to the correct amount of liability imposed by the Income Tax Assessment Acts... "
On Mr Garrett's serious allegations of professional misconduct:
"Mr Garrett was previously criticised for making serious assertions without support. In Garrett v Macks [2006] FCA 601, Lander J said at [14]:
These claims in their bald form should never have been made. They make the most serious allegations against a number of people, three of whom are officers of this Court, two of whom are professional persons who act as liquidators and trustees and are, therefore, responsible in that manner to this Court, and one of whom, of course, is a senior public officer, being the Deputy Commissioner of Taxation. Mr Garrett has made no effort in any way to support the allegations made in the proceeding. It was put by Mr Evans, by way of evidence, but really by way of submission in paragraph 19 of his affidavit, that the allegations are scandalous. I agree."
On suing the Commissioner for not complying with the taxpayer charter:
"The pleading in the present case is yet another illustration of Mr Garrett’s practice to make serious allegations of impropriety against other persons in unsupported and bald form. The final order sought that the respondents are able to be sued under the provisions of the Taxpayers’ Charter is not relief that is available at law. Accordingly, the application is bound to fail." (p 17)
The proceeding was dismissed.
The case [2015] FCA 485: http://www.austlii.edu.au/au/cases/cth/FCA/2015/485.html
Tuesday, June 2, 2015
Coshott vs Commissioner of Taxation
In September 2014, the Administrative Appeals Tribunal held that a payment of $350,000 to Mrs Coshott as consideration to release Mr Vardas from all claims against him, was encapsulated by capital gain tax (CGT) event C2 - the disposal of an intangible asset.
If the tribunal found the existence of a CGT event, Mrs Coshott claimed that any arising gain should be offset by legal costs incurred during the dispute in question. The tribunal refused to consider the intricate details of the CGT asset's cost base because in their view her record keeping was unsatisfactory, and hence could not be used to reduce a capital gain.
In May 2015 the full federal court ruled that the tribunal failed to discharge its review function and that the matter should be remitted to the tribunal for a proper review of the cost base.
Appealing from the tribunal to the federal court must be done so on a question of law, which in this case was: "whether a failure to maintain adequate records in accordance with s 121-20 of the Income Tax Assessment Act 1997 (Cth) necessarily constitutes a failure to meet the onus of proof imposed on the taxpayer under s 14ZZK of the Taxation Administration Act 1953 (Cth)".
The question posed will provide an interesting debate in the tribunal when it is heard again later this year.
Highlights from the judgment
"It may be that there was a degree of lack of clarity in the full identification of the costs by way of overlap and otherwise, but this did not relieve the Tribunal of a responsibility to examine and consider the material that had been put before it, and to deal with that matter in its reasons, including whether the material established at least a minimum figure for costs. " (p 9)
"With the utmost respect to the Tribunal, on the basis of that material, we consider that there is a prima facie failure to discharge its review function in relation to the assessment of the incidental costs incurred by the taxpayer in the second element of the costs base of a CGT event, that is, in the determining a cost base." (p 8)
"It is unnecessary to delay today’s matter by dealing with the propositions involved in Mr Lloyd’s submissions. There are other questions of law that could be posed, and the question as to whether that is a question of jurisdiction in the conditional sense, or a question of power, is a question for another day and another case. One could equally identify a question here as to whether, on the material placed before the Tribunal, and in the light of the reasons of the Tribunal, the Tribunal can be seen to have lawfully exercised its function of review." (p 5)
The cases are here:
Full Federal Court [2015] FCAFC 71: http://www.austlii.edu.au/au/cases/cth/FCAFC/2015/71.html
Administrative Appeals Tribunal [2014] AATA 622: http://www.austlii.edu.au/au/cases/cth/AATA/2014/622.html
If the tribunal found the existence of a CGT event, Mrs Coshott claimed that any arising gain should be offset by legal costs incurred during the dispute in question. The tribunal refused to consider the intricate details of the CGT asset's cost base because in their view her record keeping was unsatisfactory, and hence could not be used to reduce a capital gain.
In May 2015 the full federal court ruled that the tribunal failed to discharge its review function and that the matter should be remitted to the tribunal for a proper review of the cost base.
Appealing from the tribunal to the federal court must be done so on a question of law, which in this case was: "whether a failure to maintain adequate records in accordance with s 121-20 of the Income Tax Assessment Act 1997 (Cth) necessarily constitutes a failure to meet the onus of proof imposed on the taxpayer under s 14ZZK of the Taxation Administration Act 1953 (Cth)".
The question posed will provide an interesting debate in the tribunal when it is heard again later this year.
Highlights from the judgment
"It may be that there was a degree of lack of clarity in the full identification of the costs by way of overlap and otherwise, but this did not relieve the Tribunal of a responsibility to examine and consider the material that had been put before it, and to deal with that matter in its reasons, including whether the material established at least a minimum figure for costs. " (p 9)
"With the utmost respect to the Tribunal, on the basis of that material, we consider that there is a prima facie failure to discharge its review function in relation to the assessment of the incidental costs incurred by the taxpayer in the second element of the costs base of a CGT event, that is, in the determining a cost base." (p 8)
"It is unnecessary to delay today’s matter by dealing with the propositions involved in Mr Lloyd’s submissions. There are other questions of law that could be posed, and the question as to whether that is a question of jurisdiction in the conditional sense, or a question of power, is a question for another day and another case. One could equally identify a question here as to whether, on the material placed before the Tribunal, and in the light of the reasons of the Tribunal, the Tribunal can be seen to have lawfully exercised its function of review." (p 5)
The cases are here:
Full Federal Court [2015] FCAFC 71: http://www.austlii.edu.au/au/cases/cth/FCAFC/2015/71.html
Administrative Appeals Tribunal [2014] AATA 622: http://www.austlii.edu.au/au/cases/cth/AATA/2014/622.html
Tuesday, May 19, 2015
Hii vs Federal Commissioner of Taxation
Even the judge admitted this 141 paragraph ruling was the product of a complex case. Mr Hii self-assessed as a Singaporean tax resident during years 2001-2009, an act which the Australian tax office (ATO) amounted to 'fraud or evasion' under Part IVA of the income tax assessment act (1936), because they thought he was a resident of Australia. Therefore, they amended the income tax returns in question. (Note that income tax in Singapore is lower than Australia.)
At some point in the objection process, the ATO ceded to some arguments of the taxpayer, in turn, reducing his tax liability by amending his tax returns for a second time. However, the ATO maintained that the taxpayer was a resident of Australia and not Singapore - a point the taxpayer disputes and has taken to court, but before that proceeding commences, the taxpayer has a slightly more exotic objection. The objection is as follows; that when the Commissioner of taxation made the second amendments, he failed to reaffirm that the taxpayer had committed fraud or evasion, therefore the assessments are invalid. (Yes, read it again, that is actually it)
The taxpayer had his work cut out for him considering that even if he was correct, s. 175 provides:
"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 judge didn't make any surprising conclusions, ruling that the commissioner isn't required to reaffirm 'fraud or evasion' has occurred at every stage of amendment. The judge also ruled that s. 175 applies so that even if the Commissioner was required to reaffirm every point he makes in the act of amending, if his minions in the ATO forgot to perform that step, the assessment would still not be invalidated.
The judge concluded that an assessment of the Commissioner can only be invalidated due to administrative error where public servants have acted in bad faith, and the only case he could name where such a conclusion was reached happened to be a federal court grilling of the ATO in Donoghue vs FCT earlier this year.
Highlights from the judgement
"In reviewing the first amended assessments in light of a taxpayer’s objection in order to determine if it was correct or should be allowed in whole or in part, it is not necessary for the Commissioner to redetermine, ab initio, all issues relevant to that decision. I accept the submission of the Commissioner that, in deciding the correctness of the original decision, it would be contrary to the concept of a “review” if every decision and consideration previously made by the Commissioner in relation to a taxpayer’s assessable income in any particular year was required to be discarded and made afresh. This absurdity is highlighted in the circumstance where an assessment is affirmed by the Commissioner, either wholly or in part. Certainly, the ITAA 36 does not specify that this procedure must be followed." (p 108)
"Mr Hii does not allege actual bad faith on the part of the Commissioner or his officers. His submission of conscious maladministration is referable only to Mr Hii’s claim that the Commissioner “took an unreasonable view of the law” by failing to form an opinion in relation to avoidance by Mr Hii due to evasion at the objection stage.
There is nothing before me to support such a finding as urged by Mr Hii. Even if the Commissioner took such a view of the law, at most on the material before me the view taken by the Commissioner would simply be wrong at law. I am not persuaded that the conduct of the Commissioner in this case can be described as conscious maladministration, which clearly contemplates bad faith." (p 101 & 102)
More to come
I doubt this is the last we will see of Mr Hii, a look at the case demonstrates he is in dispute with the ATO over sums upwards of $30 million. He will now be left to argue that he was not a resident of Australia for the income years in question.
The case [2015] FCA 375: http://www.austlii.edu.au/au/cases/cth/FCA/2015/375.html
I doubt this is the last we will see of Mr Hii, a look at the case demonstrates he is in dispute with the ATO over sums upwards of $30 million. He will now be left to argue that he was not a resident of Australia for the income years in question.
The case [2015] FCA 375: http://www.austlii.edu.au/au/cases/cth/FCA/2015/375.html
Tuesday, May 12, 2015
Channel Pastoral Holdings vs Federal Commissioner of Taxation
Philosophical Underpinnings of Part IVA
Can the Commissioner rule that a consolidated group was formed as part of a tax avoidance scheme, then assess a subsidiary of the consolidated group as if the consolidated group was never created?
The Full Federal Court has ruled: Yes, the Commissioner can. The key question was, who can the Commissioner assess, if anyone?
Can the Commissioner amend the assessment of the head entity to include a taxable capital gain (of the subsidiary) that would have existed if the consolidated group had never formed? No: The Federal Court ruled that the Commissioner can not assess the head entity of a consolidated group he is determining should never have been formed in the first place! In their words this is an inconsistent conclusion.
Can the Commissioner issue an assessment to the subsidiary subject to this transaction, then attribute the taxable gain to the subsidiary's head entity in the consolidated group? No: The Federal Court dismissed this approach for the same reasons above.
Can the Commissioner issue an assessment to the subsidiary subject to this transaction, as if the consolidated group never formed? The Federal Court said: Yes. This is the preferred approach.
Highlights from the majority judgement
Background:
Head Entity: CPH
Subsidiary: CCC
The CGT event happened to CCC. CPH was a dormant company until shares in CCC were transferred onto its books.
The logic behind assessing a subsidiary as if consolidation never occurred:
"In the present case, the application of Pt IVA proceeds on the basis that CCC is not a subsidiary member of the CPH consolidated group for part of the 2008 income year. The fact that CCC is not a member of the CPH consolidated group for part of the 2008 income year is the basis for the alternative determination. The Commissioner then is required to, and did, give effect to that determination by issuing the alternative assessment to CCC: s 177F(1)(a). The ability to issue an assessment to a subsidiary member of a consolidated group that was not a member for part of the income year is expressly provided for by s 701-30. That section does not ignore the single entity rule in Pt 3-90. It recognises, as was the fact, that there will be instances where a subsidiary member is not part of the consolidated group for the whole income year. Section 701-30 provides a method of working out how the entity core rules apply to the entity for periods in the income year when the entity is not part of the group. The method involves treating each period separately with no netting off between them. That is what occurred here. There is no basis for reliance on the default exception to the core rules in s 701-85." (p 109)
On the application of Part IVA to tax consolidated groups
"Thirdly, the tax benefit upon which a taxpayer is assessed in reliance on a determination made under s 177F(1)(a) is predicated on a postulate, which is a hypothesis as to what the taxpayer would have, or might reasonably be expected to have, done if he had not done what he did do. If that postulate is that the taxpayer would have, or might reasonably be expected to have, sold an asset as a stand-alone entity without having become a subsidiary member of a consolidated group, it does not seem to us that there is any reason to prevent the Commissioner from making a determination in those terms, and using an assessment to give effect to it." (p 103)
On the intersection between s 177F (Part IVA) and pt 3-90 (Division 700 - tax consolidated groups)
"We accept that, at the time of issue of the assessment, CCC is part of CPH under the single entity rule in s 701-1, and that an assessment to CPH to give effect to the anterior determination to CCC can be said, in the context of the single entity rule viewed in isolation, to be consistent with that determination. But we cannot agree with that analysis when the single entity rule has to be viewed through the prism of its intersection with Pt IVA and the hierarchy afforded those latter provisions by s 177B(1). Arguably, this is best exemplified in our answer to reserved question 3 below (see [89] to [109]), and, in particular, our acceptance that s 177B(1) does not allow the single entity rule in s 701-1 to stand in the way of the Commissioner making a determination to include in the assessable income of CCC the amount that would have been included on the postulate upon which the determination to CCC was predicated, and issuing an assessment to CCC to give effect to that determination. Such an outcome leads to “harmonious goals”, to use the term that fell from the plurality in Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 (“Project Blue Sky”) at [70], in contrast to the conflicting outcome achieved by the issue of an assessment to CPH, said to give effect to an anterior determination to CCC only because CCC was a subsidiary member of the CPH consolidated group at the time of the issue of the assessment. Moreover, having regard to the objects of Pt 3-90, in particular that expressed in s 700-10(a) (see [67] above) – to prevent double taxation of the same economic gain realised by a consolidated group – it cannot be the case that the Commissioner is authorised to assess both CPH and CCC. In our view, the more harmonious outcome is the process underlying the issues raised by reserved question 3." (p 82) *Emphasis added
Technicalities of the Formalities
The five judges were split in their reasoning, with 3/5 affirming the position outlined above. However, more accurately, all judges ruled in favor of the Commissioner for differing reasons. I have quoted from the majority judgement of Edmonds and Gordon JJ, with whom Allsop CJ agreed with the conclusions of.
[2015] FCAFC 57
http://www.austlii.edu.au/au/cases/cth/FCAFC/2015/57.html
Can the Commissioner rule that a consolidated group was formed as part of a tax avoidance scheme, then assess a subsidiary of the consolidated group as if the consolidated group was never created?
The Full Federal Court has ruled: Yes, the Commissioner can. The key question was, who can the Commissioner assess, if anyone?
Can the Commissioner amend the assessment of the head entity to include a taxable capital gain (of the subsidiary) that would have existed if the consolidated group had never formed? No: The Federal Court ruled that the Commissioner can not assess the head entity of a consolidated group he is determining should never have been formed in the first place! In their words this is an inconsistent conclusion.
Can the Commissioner issue an assessment to the subsidiary subject to this transaction, then attribute the taxable gain to the subsidiary's head entity in the consolidated group? No: The Federal Court dismissed this approach for the same reasons above.
Can the Commissioner issue an assessment to the subsidiary subject to this transaction, as if the consolidated group never formed? The Federal Court said: Yes. This is the preferred approach.
Highlights from the majority judgement
Background:
Head Entity: CPH
Subsidiary: CCC
The CGT event happened to CCC. CPH was a dormant company until shares in CCC were transferred onto its books.
The logic behind assessing a subsidiary as if consolidation never occurred:
"In the present case, the application of Pt IVA proceeds on the basis that CCC is not a subsidiary member of the CPH consolidated group for part of the 2008 income year. The fact that CCC is not a member of the CPH consolidated group for part of the 2008 income year is the basis for the alternative determination. The Commissioner then is required to, and did, give effect to that determination by issuing the alternative assessment to CCC: s 177F(1)(a). The ability to issue an assessment to a subsidiary member of a consolidated group that was not a member for part of the income year is expressly provided for by s 701-30. That section does not ignore the single entity rule in Pt 3-90. It recognises, as was the fact, that there will be instances where a subsidiary member is not part of the consolidated group for the whole income year. Section 701-30 provides a method of working out how the entity core rules apply to the entity for periods in the income year when the entity is not part of the group. The method involves treating each period separately with no netting off between them. That is what occurred here. There is no basis for reliance on the default exception to the core rules in s 701-85." (p 109)
On the application of Part IVA to tax consolidated groups
"Thirdly, the tax benefit upon which a taxpayer is assessed in reliance on a determination made under s 177F(1)(a) is predicated on a postulate, which is a hypothesis as to what the taxpayer would have, or might reasonably be expected to have, done if he had not done what he did do. If that postulate is that the taxpayer would have, or might reasonably be expected to have, sold an asset as a stand-alone entity without having become a subsidiary member of a consolidated group, it does not seem to us that there is any reason to prevent the Commissioner from making a determination in those terms, and using an assessment to give effect to it." (p 103)
On the intersection between s 177F (Part IVA) and pt 3-90 (Division 700 - tax consolidated groups)
"We accept that, at the time of issue of the assessment, CCC is part of CPH under the single entity rule in s 701-1, and that an assessment to CPH to give effect to the anterior determination to CCC can be said, in the context of the single entity rule viewed in isolation, to be consistent with that determination. But we cannot agree with that analysis when the single entity rule has to be viewed through the prism of its intersection with Pt IVA and the hierarchy afforded those latter provisions by s 177B(1). Arguably, this is best exemplified in our answer to reserved question 3 below (see [89] to [109]), and, in particular, our acceptance that s 177B(1) does not allow the single entity rule in s 701-1 to stand in the way of the Commissioner making a determination to include in the assessable income of CCC the amount that would have been included on the postulate upon which the determination to CCC was predicated, and issuing an assessment to CCC to give effect to that determination. Such an outcome leads to “harmonious goals”, to use the term that fell from the plurality in Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 (“Project Blue Sky”) at [70], in contrast to the conflicting outcome achieved by the issue of an assessment to CPH, said to give effect to an anterior determination to CCC only because CCC was a subsidiary member of the CPH consolidated group at the time of the issue of the assessment. Moreover, having regard to the objects of Pt 3-90, in particular that expressed in s 700-10(a) (see [67] above) – to prevent double taxation of the same economic gain realised by a consolidated group – it cannot be the case that the Commissioner is authorised to assess both CPH and CCC. In our view, the more harmonious outcome is the process underlying the issues raised by reserved question 3." (p 82) *Emphasis added
Technicalities of the Formalities
The five judges were split in their reasoning, with 3/5 affirming the position outlined above. However, more accurately, all judges ruled in favor of the Commissioner for differing reasons. I have quoted from the majority judgement of Edmonds and Gordon JJ, with whom Allsop CJ agreed with the conclusions of.
[2015] FCAFC 57
http://www.austlii.edu.au/au/cases/cth/FCAFC/2015/57.html
Friday, May 8, 2015
Devuba Pty Ltd vs Federal Commissioner of Taxation
This was a win for the taxpayer on small business CGT concessions in the Administrative Appeals Tribunal. They ruled that ordinary shares are to be looked at before slightly more 'novelty' shares are considered, for the purpose of ownership tests outlined in the small business CGT concession division - 152.
When a company sells shares in a small business, if the owners of the company who sold the shares wish to claim small business capital gains concessions, the company must be 90% owned (directly or indirectly) by individuals who own at least 20% of the small business being sold (directly or indirectly). It is a complex concept when viewed abstractly, but when the time comes to sell your own business, the dots are a lot easier to connect with entities you are familiar with (ie: your own companies and trusts).
The problem in this case was that the taxpayer's wife held a dividend access share (DAS) in the Devuba, allowing her access to dividends, only when the directors want to give her one. The share carried with it no inherent rights or voting power. The ATO concluded that because the DAS could be paid a dividend, even on occasions that ordinary shares were not paid anything, that the DAS could effectively over-ride an ordinary share.
This is of importance because s 152-70 provides:
"An entity holds a direct small business participation percentage at the relevant time in an entity equal to the percentage of any distribution of capital that the company may make."
The ATO concluded that the husband "may" receive $0 because his wife owns a share that could over-ride him. This is a interesting conclusion that could lead to the eventual conclusion that no one is entitled to anything in a company with two different types of shares that can be paid out on different occasions. The end result in this case is that the taxpayer would not satisfy the requirements of s 152-70, because they failed to hold 90% of the company that sold the shares of the small business in question. In fact, following the ATO logic they own 0%.
The Tribunal didn't side with the ATO on this occasion. They ruled that ordinary shares should be used in these cases to test taxpayers according to s 152-70, with disregard to any novelty shares that may form part of the companies share capital (see the reasoning below). After the test was applied at the level of ordinary shares, the taxpayer was demonstrated to be 90% owned by owners of the small business being sold and hence could claim the concessions. Highlights from the judgement are below.
"In the view of the Respondent, the directors of the Applicant had discretion to pay a dividend on the DAS and could use their powers to pay a dividend on the DAS to the exclusion of all and any of the other classes of shares. Accordingly, the holders of the ordinary shares might obtain a zero distribution. As a result, for the purposes of the test contained in item 1 of the s 152-70, the "percentage of any dividend that the company (namely the Applicant) may pay" on the ordinary shares is nil. The consequence of such a finding would be that the SBPPs held by Mr Van der Vegt and the Trust in the Applicant would be zero and the Applicant would not be entitled to any relief under div 152.
The issue comes down to this - what is the effect of the words "the percentage of any dividend the company may pay" as those words are used in the Table in s 152-70(1) of the Act when read in the context of the DAS." (p 51-52)
"When one looks at the terms of s 152 - 10 (2) it is readily apparent that the CGT stakeholder test that is the subject of that subsection needs to be satisfied "just before the CGT event". Similarly, in s 152 - 70 the direct SBPP is to be worked out "at the relevant time" which again is just before the CGT event. It would seem to follow from this that the rights of shareholders in the Applicant and for that matter in Primacy are to be assessed at the same time namely just before the CGT event.
At that time being the moment just before 19 May 2010 logic would suggest that the only shares that carried any rights to dividends that may be paid in the Applicant were the ordinary shares. Those ordinary shares and no other shares at that time carried all the rights not only in respect of dividends but also in respect of voting and in respect of rights to distribution of surpluses on a winding up.
The consequence is that it cannot be said that at the relevant time (i.e. just before 19 May 2010), the DAS holder may be paid a dividend." (p 61-63)
"The decision of the High Court in Casuarina would seem to suggest that it is more a case of testing a hypothetical dividend which may be paid by the company based on the facts as they exist just before 19 May 2010.
Consequently, the Tribunal concludes that in this case the relevant time to which the relevant provision takes us is just before 19 May 2010. It is at that time that the hypothetical needs to be posed - namely if a dividend were to be declared at that time the dividend would not and could not have been paid in favour of anyone other than the ordinary shareholders. At that time, Mr Van der Vegt had a direct SBPP in the Applicant of 50% and that is not diminished by the existence of discretionary entitlements in the DAS holder. The fact that at some hypothetical future time, a dividend could have been resolved and paid in favour of the DAS holder is, based on the reasoning of the High Court in Casuarina, not to the point and is largely irrelevant to the question at hand." (p 76-77)
*Note: This decision has been appealed*
*Was upheld in the initial appeal... (2016)
[2015] AATA 255
http://www.austlii.edu.au/au/cases/cth/AATA/2015/255.html
When a company sells shares in a small business, if the owners of the company who sold the shares wish to claim small business capital gains concessions, the company must be 90% owned (directly or indirectly) by individuals who own at least 20% of the small business being sold (directly or indirectly). It is a complex concept when viewed abstractly, but when the time comes to sell your own business, the dots are a lot easier to connect with entities you are familiar with (ie: your own companies and trusts).
The problem in this case was that the taxpayer's wife held a dividend access share (DAS) in the Devuba, allowing her access to dividends, only when the directors want to give her one. The share carried with it no inherent rights or voting power. The ATO concluded that because the DAS could be paid a dividend, even on occasions that ordinary shares were not paid anything, that the DAS could effectively over-ride an ordinary share.
This is of importance because s 152-70 provides:
"An entity holds a direct small business participation percentage at the relevant time in an entity equal to the percentage of any distribution of capital that the company may make."
The ATO concluded that the husband "may" receive $0 because his wife owns a share that could over-ride him. This is a interesting conclusion that could lead to the eventual conclusion that no one is entitled to anything in a company with two different types of shares that can be paid out on different occasions. The end result in this case is that the taxpayer would not satisfy the requirements of s 152-70, because they failed to hold 90% of the company that sold the shares of the small business in question. In fact, following the ATO logic they own 0%.
The Tribunal didn't side with the ATO on this occasion. They ruled that ordinary shares should be used in these cases to test taxpayers according to s 152-70, with disregard to any novelty shares that may form part of the companies share capital (see the reasoning below). After the test was applied at the level of ordinary shares, the taxpayer was demonstrated to be 90% owned by owners of the small business being sold and hence could claim the concessions. Highlights from the judgement are below.
"In the view of the Respondent, the directors of the Applicant had discretion to pay a dividend on the DAS and could use their powers to pay a dividend on the DAS to the exclusion of all and any of the other classes of shares. Accordingly, the holders of the ordinary shares might obtain a zero distribution. As a result, for the purposes of the test contained in item 1 of the s 152-70, the "percentage of any dividend that the company (namely the Applicant) may pay" on the ordinary shares is nil. The consequence of such a finding would be that the SBPPs held by Mr Van der Vegt and the Trust in the Applicant would be zero and the Applicant would not be entitled to any relief under div 152.
The issue comes down to this - what is the effect of the words "the percentage of any dividend the company may pay" as those words are used in the Table in s 152-70(1) of the Act when read in the context of the DAS." (p 51-52)
"When one looks at the terms of s 152 - 10 (2) it is readily apparent that the CGT stakeholder test that is the subject of that subsection needs to be satisfied "just before the CGT event". Similarly, in s 152 - 70 the direct SBPP is to be worked out "at the relevant time" which again is just before the CGT event. It would seem to follow from this that the rights of shareholders in the Applicant and for that matter in Primacy are to be assessed at the same time namely just before the CGT event.
At that time being the moment just before 19 May 2010 logic would suggest that the only shares that carried any rights to dividends that may be paid in the Applicant were the ordinary shares. Those ordinary shares and no other shares at that time carried all the rights not only in respect of dividends but also in respect of voting and in respect of rights to distribution of surpluses on a winding up.
The consequence is that it cannot be said that at the relevant time (i.e. just before 19 May 2010), the DAS holder may be paid a dividend." (p 61-63)
"The decision of the High Court in Casuarina would seem to suggest that it is more a case of testing a hypothetical dividend which may be paid by the company based on the facts as they exist just before 19 May 2010.
Consequently, the Tribunal concludes that in this case the relevant time to which the relevant provision takes us is just before 19 May 2010. It is at that time that the hypothetical needs to be posed - namely if a dividend were to be declared at that time the dividend would not and could not have been paid in favour of anyone other than the ordinary shareholders. At that time, Mr Van der Vegt had a direct SBPP in the Applicant of 50% and that is not diminished by the existence of discretionary entitlements in the DAS holder. The fact that at some hypothetical future time, a dividend could have been resolved and paid in favour of the DAS holder is, based on the reasoning of the High Court in Casuarina, not to the point and is largely irrelevant to the question at hand." (p 76-77)
*Note: This decision has been appealed*
*Was upheld in the initial appeal... (2016)
[2015] AATA 255
http://www.austlii.edu.au/au/cases/cth/AATA/2015/255.html
Wednesday, May 6, 2015
WWXY vs Commissioner of Taxation [2015] AATA 130
In determining whether a property development business was being carried on, the tribunal concluded that acquiring development approval before selling land was a key determining factor.
The taxpayers purchased two blocks of land with the intention to substantially develop, but soon-after abandoned their plan to perform substantial developments, and instead sold out of the project, but not before obtaining a few valuable development rights for the land that may have increased its value significantly. The taxpayers compared themselves to Kratzmann in the High Court [1970]:
"It is, however, a matter for decision whether the difference between the purchase price and the selling price of the land—less the expenses of doing what the taxpayer did towards carrying out his scheme—is to be regarded as a profit from the carrying on or the carrying out of the taxpayer's scheme. What happened was that the taxpayer, for financial reasons, gave up the idea of developing the land as had been intended and sold it, so making a profit.
For the Commissioner it was argued that, because the purchase was part of a profit-making scheme, any profit arising from the purchase was a profit from the carrying on or carrying out of that scheme. It seems to me, however, that the profit here arose not from the purchase but from the sale and because the sale was not part of the profit-making scheme the profit did not arise ``from the carrying on or carrying out'' of that scheme. Indeed, the profit in question did not arise until the scheme had been abandoned."
Later cases on this issue include Myer [1987] and Westfield [1991], where the principle of acquiring an asset with the intention of making a profit was considered to be a determining factor in the question of whether or not a business was being undertaken.
The Commissioner's contention in the case was simple:
"The Commissioner says the taxpayer may have preferred to undertake a comprehensive development in company with other parties but the evidence in the email – and common sense – suggests from the outset that the taxpayer regarded the possibility of a profitable resale after obtaining relevant approvals as an acceptable outcome. On that view, the taxpayer was in the business of acquiring property for redevelopment but without a fixed view of how that redevelopment was to occur. " (p 9)
That the taxpayer had a profit making intention. Rather than abandoning this profit making scheme (as per Kratzmann), the taxpayer simply moved to "plan B", which was to make profit from the land in some other form.
The judge concluded:
"A range of successful outcomes must have been in contemplation. That range presumably included (and certainly did not exclude) the possibility of a profitable sale after obtaining a development approval. This case is different to the situation in Westfield, where a profitable resale of the land did not form any part of the taxpayer’s objective, even if the taxpayer knew that was one possible outcome of the transaction." (p 22)
The case is here [2015] AATA 130: http://www.austlii.edu.au/au/cases/cth/AATA/2015/130.html
The taxpayers purchased two blocks of land with the intention to substantially develop, but soon-after abandoned their plan to perform substantial developments, and instead sold out of the project, but not before obtaining a few valuable development rights for the land that may have increased its value significantly. The taxpayers compared themselves to Kratzmann in the High Court [1970]:
"It is, however, a matter for decision whether the difference between the purchase price and the selling price of the land—less the expenses of doing what the taxpayer did towards carrying out his scheme—is to be regarded as a profit from the carrying on or the carrying out of the taxpayer's scheme. What happened was that the taxpayer, for financial reasons, gave up the idea of developing the land as had been intended and sold it, so making a profit.
For the Commissioner it was argued that, because the purchase was part of a profit-making scheme, any profit arising from the purchase was a profit from the carrying on or carrying out of that scheme. It seems to me, however, that the profit here arose not from the purchase but from the sale and because the sale was not part of the profit-making scheme the profit did not arise ``from the carrying on or carrying out'' of that scheme. Indeed, the profit in question did not arise until the scheme had been abandoned."
Later cases on this issue include Myer [1987] and Westfield [1991], where the principle of acquiring an asset with the intention of making a profit was considered to be a determining factor in the question of whether or not a business was being undertaken.
The Commissioner's contention in the case was simple:
"The Commissioner says the taxpayer may have preferred to undertake a comprehensive development in company with other parties but the evidence in the email – and common sense – suggests from the outset that the taxpayer regarded the possibility of a profitable resale after obtaining relevant approvals as an acceptable outcome. On that view, the taxpayer was in the business of acquiring property for redevelopment but without a fixed view of how that redevelopment was to occur. " (p 9)
That the taxpayer had a profit making intention. Rather than abandoning this profit making scheme (as per Kratzmann), the taxpayer simply moved to "plan B", which was to make profit from the land in some other form.
The judge concluded:
"A range of successful outcomes must have been in contemplation. That range presumably included (and certainly did not exclude) the possibility of a profitable sale after obtaining a development approval. This case is different to the situation in Westfield, where a profitable resale of the land did not form any part of the taxpayer’s objective, even if the taxpayer knew that was one possible outcome of the transaction." (p 22)
The case is here [2015] AATA 130: http://www.austlii.edu.au/au/cases/cth/AATA/2015/130.html
Monday, May 4, 2015
Creation Ministries International vs Screen Australia
Division 376 of the Income Tax Assessment Act 1997 provides that Screen Australia are in charge of granting tax offsets to film producers and that the offset is only available for expenditure incurred by you in the process of making a film.
Creation Ministries International claimed expenditure incurred by an entity under their control (Fathom Media Pty Ltd) - which they eventually paid for, but the brains trust at Screen Australia were not satisfied that this was claimable expenditure under the act . On appeal to the Administrative Appeals Tribunal, the deputy president held that the amount was not claimable under the act, not because claiming expenditure of a related entity was unlawful, but because the expenses claimed were held on a loan account for Creation Ministries, rather than "incurred" under the legal meaning of that term by the organisation. The tribunal appears to imply that if you do not incur expenditure at the time it is expensed, then you will not be eligible for the offset. If you are going to pay for items through another entity, it appears that there would need to be a strict, legally enforceable agreement in place to ensure that the expenses are incurred by the head entity as defined by tax legislation.
Highlights:
"The applicant, Creation Ministries International Ltd, is a not-for-profit corporation. As is evident from its name, its purpose is to affirm the reliability of the Bible, in particular, the account of creation contained in Genesis. In 2006, and in anticipation of the bicentenary of the birth of Charles Darwin, Creation Ministries decided to make a film concerning the impact of the life and work of Darwin.
The film, which was called “The Voyage that Shook the World”, was produced. It was first exhibited publicly in about May 2009. Because the controlling minds behind Creation Ministries were concerned about the public response to the notion of a creationist entity producing a film about Charles Darwin, it was determined to set up a stalking horse, Fathom Media Pty Ltd, to be the public face of the production of the film." (p 1-2)
"In oral argument, Creation Ministries pointed to the agreement of 30 October 2008. That agreement operated retrospectively and prospectively it was said. Because Creation Ministries had agreed to indemnify Fathom Media, expenditure incurred nominally by Fathom Media was, additionally, incurred by Creation Ministries.
I am unable to agree. The argument fails on the facts because, despite the agreement of 30 October 2008, the parties did not act in accordance with its terms. They treated the relationship between Creation Ministries and Fathom Media as that of lender and borrower. " (p 20-21)
"Creation Ministries was never under a “presently existing liability”; it was not “definitively committed” nor “completely subjected” to, the amounts paid by Fathom Media to discharge its contractual obligations to suppliers and other third parties. Fathom Media was the contracting party; it was the entity that incurred the expenditure. Creation Ministries did not incur the expenditure by lending Fathom Media sufficient funds to discharge the contractual debts that Fathom Media incurred.
It follows that the decision under review was correct. It will be affirmed." (p 24-25)
The case [2015] AATA 250: http://www.austlii.edu.au/au/cases/cth/AATA/2015/250.html
Creation Ministries International claimed expenditure incurred by an entity under their control (Fathom Media Pty Ltd) - which they eventually paid for, but the brains trust at Screen Australia were not satisfied that this was claimable expenditure under the act . On appeal to the Administrative Appeals Tribunal, the deputy president held that the amount was not claimable under the act, not because claiming expenditure of a related entity was unlawful, but because the expenses claimed were held on a loan account for Creation Ministries, rather than "incurred" under the legal meaning of that term by the organisation. The tribunal appears to imply that if you do not incur expenditure at the time it is expensed, then you will not be eligible for the offset. If you are going to pay for items through another entity, it appears that there would need to be a strict, legally enforceable agreement in place to ensure that the expenses are incurred by the head entity as defined by tax legislation.
Highlights:
"The applicant, Creation Ministries International Ltd, is a not-for-profit corporation. As is evident from its name, its purpose is to affirm the reliability of the Bible, in particular, the account of creation contained in Genesis. In 2006, and in anticipation of the bicentenary of the birth of Charles Darwin, Creation Ministries decided to make a film concerning the impact of the life and work of Darwin.
The film, which was called “The Voyage that Shook the World”, was produced. It was first exhibited publicly in about May 2009. Because the controlling minds behind Creation Ministries were concerned about the public response to the notion of a creationist entity producing a film about Charles Darwin, it was determined to set up a stalking horse, Fathom Media Pty Ltd, to be the public face of the production of the film." (p 1-2)
"In oral argument, Creation Ministries pointed to the agreement of 30 October 2008. That agreement operated retrospectively and prospectively it was said. Because Creation Ministries had agreed to indemnify Fathom Media, expenditure incurred nominally by Fathom Media was, additionally, incurred by Creation Ministries.
I am unable to agree. The argument fails on the facts because, despite the agreement of 30 October 2008, the parties did not act in accordance with its terms. They treated the relationship between Creation Ministries and Fathom Media as that of lender and borrower. " (p 20-21)
"Creation Ministries was never under a “presently existing liability”; it was not “definitively committed” nor “completely subjected” to, the amounts paid by Fathom Media to discharge its contractual obligations to suppliers and other third parties. Fathom Media was the contracting party; it was the entity that incurred the expenditure. Creation Ministries did not incur the expenditure by lending Fathom Media sufficient funds to discharge the contractual debts that Fathom Media incurred.
It follows that the decision under review was correct. It will be affirmed." (p 24-25)
The case [2015] AATA 250: http://www.austlii.edu.au/au/cases/cth/AATA/2015/250.html
Swansea vs Federal Commissioner of Taxation
In this case the Administrative Appeals Tribunal rejected the Commissioner of Taxation's argument that the longevity of an investment (such as in antiques) should be considered when determining whether or not an enterprise is being carried on for purposes of GST.
Swansea was the company used by a notable project home builder to build and manage his substantive art collection. Swansea claimed GST credits on $4 million worth of art purchased in the mid-2000s and were yet to make any significant sales of the artwork, instead he claimed he was planning to sell the collection at some point in the future to a willing buyer at a profit. True to form, the Commissioner objected to the claiming of GST credits by Swansea claiming that there was no enterprise being carried on and that the activities were that of a hobby, in any case. He also disallowed the claiming of any tax losses. The three key findings of the tribunal were:
1. Swansea were entitled to claim GST credits because they were carrying on an enterprise (see the judge's reasoning below).
2. Swansea were entitled to claim tax losses, because they were carrying on a business.
3. The activities went beyond that of a personal hobby, so the GST registration exemption for personal hobbies did not apply.
Quotes from the judgement:
"The Tribunal is of the view for the reasons which follow, that in its ordinary meaning, an enterprise consists of an activity or activities comprised of one or more transactions entered into for business or commercial purposes." (p 106)
"It appears to the Tribunal that the word “done” in s 9-20(1) in place of the words “carried on” or “carrying on” is used to ensure that a single transaction will suffice to constitute the activity of an enterprise, and to exclude the requirement for there to be a carrying on of business and its notions of repetition and regularity in relation to the enterprise. Those concepts arise in relation to taxable supply." (p 112)
"A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions." (p 128, quoted from high court)
"...the evidence shows that the business and commercial activities of the applicant are conducted in accordance with a pre-formulated policy, coupled with a carefully devised investment strategy. The applicant retains specialist art consultants. It keeps detailed records. It uses a database of records. It has an annual budget and banking facilities. It purchases valuable property, which is insured and properly stored and housed. All its activities are characterised by system, repetition and regularity. Such activities are in the Tribunal’s opinion consistent only with the carrying on of a business and the conduct of an enterprise." (p 163)
"In determining whether what was initially a pastime or hobby has developed and become a business operation or not, the use of a system and the systematic conduct of the activity is often particularly important. " (p 164)
"The Tribunal finds that in both an income tax and GST context there is no doubt that the activities of Swansea constitute the activities of a business." (p 147)
"The Tribunal rejects the respondent’s assertion that the taxpayer’s operations amount to a hobby. The Tribunal finds that the facts do not support any such conclusion." (p 161)
"Overall, the Tribunal finds that the activities of the applicant are consistent with the conduct of a business. The expenditure incurred in relation to the acquisition of paintings and artworks would in the Tribunal’s view be deductible under s 8-1 of the ITAA 1997, and would not be excluded by s 26-50. In fact the taxpayer has accounted for the artwork and paintings as plant and equipment, and has not claimed a deduction for the purchase of such items. The taxpayer has accounted for such items as plant and equipment because the taxpayer did not expect to sell those items within 12 months of purchase. In the Tribunal’s opinion that does not defeat the taxpayer’s purpose of embarking on the acquisition and eventual sale of artwork and antiques at a profit which is a business for both income tax or GST purposes." (p 184)
The case is here [2008] AATA 461: http://www.austlii.edu.au/au/cases/cth/AATA/2008/461.html
This judgment makes sense when considering what approach the Commissioner might take on a business that has just declared $4 million of artwork sales on their tax return, without registering for GST!
Swansea was the company used by a notable project home builder to build and manage his substantive art collection. Swansea claimed GST credits on $4 million worth of art purchased in the mid-2000s and were yet to make any significant sales of the artwork, instead he claimed he was planning to sell the collection at some point in the future to a willing buyer at a profit. True to form, the Commissioner objected to the claiming of GST credits by Swansea claiming that there was no enterprise being carried on and that the activities were that of a hobby, in any case. He also disallowed the claiming of any tax losses. The three key findings of the tribunal were:
1. Swansea were entitled to claim GST credits because they were carrying on an enterprise (see the judge's reasoning below).
2. Swansea were entitled to claim tax losses, because they were carrying on a business.
3. The activities went beyond that of a personal hobby, so the GST registration exemption for personal hobbies did not apply.
Quotes from the judgement:
"The Tribunal is of the view for the reasons which follow, that in its ordinary meaning, an enterprise consists of an activity or activities comprised of one or more transactions entered into for business or commercial purposes." (p 106)
"It appears to the Tribunal that the word “done” in s 9-20(1) in place of the words “carried on” or “carrying on” is used to ensure that a single transaction will suffice to constitute the activity of an enterprise, and to exclude the requirement for there to be a carrying on of business and its notions of repetition and regularity in relation to the enterprise. Those concepts arise in relation to taxable supply." (p 112)
"A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions." (p 128, quoted from high court)
"...the evidence shows that the business and commercial activities of the applicant are conducted in accordance with a pre-formulated policy, coupled with a carefully devised investment strategy. The applicant retains specialist art consultants. It keeps detailed records. It uses a database of records. It has an annual budget and banking facilities. It purchases valuable property, which is insured and properly stored and housed. All its activities are characterised by system, repetition and regularity. Such activities are in the Tribunal’s opinion consistent only with the carrying on of a business and the conduct of an enterprise." (p 163)
"In determining whether what was initially a pastime or hobby has developed and become a business operation or not, the use of a system and the systematic conduct of the activity is often particularly important. " (p 164)
"The Tribunal finds that in both an income tax and GST context there is no doubt that the activities of Swansea constitute the activities of a business." (p 147)
"The Tribunal rejects the respondent’s assertion that the taxpayer’s operations amount to a hobby. The Tribunal finds that the facts do not support any such conclusion." (p 161)
"Overall, the Tribunal finds that the activities of the applicant are consistent with the conduct of a business. The expenditure incurred in relation to the acquisition of paintings and artworks would in the Tribunal’s view be deductible under s 8-1 of the ITAA 1997, and would not be excluded by s 26-50. In fact the taxpayer has accounted for the artwork and paintings as plant and equipment, and has not claimed a deduction for the purchase of such items. The taxpayer has accounted for such items as plant and equipment because the taxpayer did not expect to sell those items within 12 months of purchase. In the Tribunal’s opinion that does not defeat the taxpayer’s purpose of embarking on the acquisition and eventual sale of artwork and antiques at a profit which is a business for both income tax or GST purposes." (p 184)
The case is here [2008] AATA 461: http://www.austlii.edu.au/au/cases/cth/AATA/2008/461.html
This judgment makes sense when considering what approach the Commissioner might take on a business that has just declared $4 million of artwork sales on their tax return, without registering for GST!
Thursday, April 30, 2015
Can I object to the AAT and then leave the country?
It is safe to say that the Federal Court were disappointed with the AATs decision to allow individuals facing massive tax liabilities to give evidence via video link from Mauritius, after they had fled the country before court proceedings commenced due to a fear of being convicted of a crime.
Quotes from the judgement are telling.
I see no objective basis at all for a conclusion by the AAT that cross-examination by the Commissioner would not be impeded. It was inevitable that the Commissioner’s ability to cross-examine (about matters in issue, credit and more generally) would be impeded, perhaps seriously. That is one of the things which it was necessary to assess. I accept the Commissioner’s submission that this was a necessary matter to take into account. I shall return to it also. (p 81)
For example, had it been apparent that a refusal to return to Australia was based on a desire to avoid arrest on an outstanding warrant for some crime of violence, it is unthinkable that the AAT would regard it as appropriate to assist in that endeavour or to give it any weight. No different position could be taken in relation to a “white collar crime”. Nor, in my view, could a taxpayer be assisted to avoid arrest for a criminal offence arising out of alleged participation in a tax fraud. I do not see that it could make a difference that an arrest was merely a real possibility which a taxpayer wished to avoid. (p 93)
Different considerations might arise if a party needed to obtain the evidence of an overseas witness who would not come to Australia – possibly. But where a party to proceedings in the AAT puts a request to give video evidence on the basis that the party wishes to avoid any possibility of legitimate action by taxation, regulatory or prosecuting authorities in Australia, I do not see how such a matter (which remains the declared position of the taxpayers regardless of the position of the Commissioner about DPOs) could normally be relied upon as relevant, much less decisive, by the AAT. (p 99)
The consequence of the AAT’s reasoning upon the rights of the Commissioner to crossexamine was, in my view, profound. The AAT could not expect to exert more than the most basic procedural influence over the conduct of a party giving evidence from Mauritius. The possibility of effective cross-examination on documents, for example, must be regarded as effectively illusory. The ability to cross-examine on credit would be no more effective. Although there can be no suggestion that jurisdictional error is fairly or safely to be deduced only from a preference for a different procedural course, in my view, the restraint upon the ability of the Commissioner to answer the taxpayers’ case, and present his own, was so fundamentally affected that the Commissioner was denied procedural fairness. (p 102)
In my view, therefore, the AAT took into account an irrelevant matter, and failed to take into account a relevant matter, as well as failing to give procedural fairness to the Commissioner. (p 106)
Additionally, and in any event, any conclusion that the Commissioner’s position was forensically unaffected by the decision to allow the taxpayers to give effectively noncompellable, unsupervised, evidence from Mauritius at their ongoing discretion was unsustainable. That would, in the circumstances of the present case at least, deny the Commissioner any fair opportunity of cross-examination on matters potentially critical to an assessment of the taxpayers’ cases. In my view, that was a denial of procedural fairness and a breach of s 39(1) of the AAT Act. It went well beyond a legitimate exercise of discretion in the taxpayers’ favour. As in Hayes, the prejudice would be incurable. (p 111)
Case
[2015] FCA 320
Commissioner of Taxation vs John Seymour, Jeanette Seymour and Administrative Appeals Tribunal
http://www.austlii.edu.au/au/cases/cth/FCA/2015/320.html
Quotes from the judgement are telling.
I see no objective basis at all for a conclusion by the AAT that cross-examination by the Commissioner would not be impeded. It was inevitable that the Commissioner’s ability to cross-examine (about matters in issue, credit and more generally) would be impeded, perhaps seriously. That is one of the things which it was necessary to assess. I accept the Commissioner’s submission that this was a necessary matter to take into account. I shall return to it also. (p 81)
For example, had it been apparent that a refusal to return to Australia was based on a desire to avoid arrest on an outstanding warrant for some crime of violence, it is unthinkable that the AAT would regard it as appropriate to assist in that endeavour or to give it any weight. No different position could be taken in relation to a “white collar crime”. Nor, in my view, could a taxpayer be assisted to avoid arrest for a criminal offence arising out of alleged participation in a tax fraud. I do not see that it could make a difference that an arrest was merely a real possibility which a taxpayer wished to avoid. (p 93)
Different considerations might arise if a party needed to obtain the evidence of an overseas witness who would not come to Australia – possibly. But where a party to proceedings in the AAT puts a request to give video evidence on the basis that the party wishes to avoid any possibility of legitimate action by taxation, regulatory or prosecuting authorities in Australia, I do not see how such a matter (which remains the declared position of the taxpayers regardless of the position of the Commissioner about DPOs) could normally be relied upon as relevant, much less decisive, by the AAT. (p 99)
The consequence of the AAT’s reasoning upon the rights of the Commissioner to crossexamine was, in my view, profound. The AAT could not expect to exert more than the most basic procedural influence over the conduct of a party giving evidence from Mauritius. The possibility of effective cross-examination on documents, for example, must be regarded as effectively illusory. The ability to cross-examine on credit would be no more effective. Although there can be no suggestion that jurisdictional error is fairly or safely to be deduced only from a preference for a different procedural course, in my view, the restraint upon the ability of the Commissioner to answer the taxpayers’ case, and present his own, was so fundamentally affected that the Commissioner was denied procedural fairness. (p 102)
In my view, therefore, the AAT took into account an irrelevant matter, and failed to take into account a relevant matter, as well as failing to give procedural fairness to the Commissioner. (p 106)
Additionally, and in any event, any conclusion that the Commissioner’s position was forensically unaffected by the decision to allow the taxpayers to give effectively noncompellable, unsupervised, evidence from Mauritius at their ongoing discretion was unsustainable. That would, in the circumstances of the present case at least, deny the Commissioner any fair opportunity of cross-examination on matters potentially critical to an assessment of the taxpayers’ cases. In my view, that was a denial of procedural fairness and a breach of s 39(1) of the AAT Act. It went well beyond a legitimate exercise of discretion in the taxpayers’ favour. As in Hayes, the prejudice would be incurable. (p 111)
Case
[2015] FCA 320
Commissioner of Taxation vs John Seymour, Jeanette Seymour and Administrative Appeals Tribunal
http://www.austlii.edu.au/au/cases/cth/FCA/2015/320.html
Wednesday, April 29, 2015
Lessons from the AAT (23 April 2015)
Applicant 6115 of 2013 vs Federal Commissioner of Taxation
Due to council zoning restrictions the taxpayer was unfortunately set-back in his attempt to build a poultry farm upon purchasing the land in 1990. He was informed of the council's environmental concerns prior to the finalization of the land purchasing contract, but ventured on regardless of the expected complexities.
From this point forward the tribunal member informs readers that the evidence suggests the taxpayer's key purpose for holding the land was for the purpose of subdivision and an eventual sale at a future date. The taxpayer was eventually successful in his endeavor, selling the subdivided blocks between 2005 and 2008. The taxpayer was disappointed that the Commissioner disallowed the inclusion of legal and brokering costs in the cost of purchasing the land (the 'cost base') because the taxpayer failed to apportion those costs correctly. However, the key focus of this case was on the regular expenses incurred in maintaining the operation of land including interest expenses, losses on forfeited loans and various legal expenses he incurred during the 15 year period in question.
Section 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 97) provides that you can deduct expenses that are incurred gaining or producing assessable income. Holding passive investments such as a block of land produce no assessable income on a frequent basis, therefore the taxpayer required a better story.
Case law has established that prior to gaining assessable income, taking actions to build up an income producing business shows intent to produce assessable income, which is deemed acceptable under s 8-1 and therefore expenses are deductible in such cases. The taxpayer's argument was that for the entire 15 year period, he intended to commence a turkey farming business at the first available opportunity. For reasons explained at length during the judgement, the tribunal rejected this proposition and went as far as labeling the taxpayer as an unreliable and evasive witness.
The other main point of contention concerned a loan from the taxpayer to a company (OCS) in which he held shares in and was a director. The tribunal agreed with the taxpayer that when OCS deregistered, GCT event C2 occurred (cancellation of an intangible asset) to the forfeited loan. However, the tribunal referred the taxpayer to s 108-20(1) which provides that in working out a capital gain any loss made from a "personal use asset" is disregarded. They concluded that the debt did not arise in the course of producing assessable income or from carrying on a business and therefore the net loss from CGT event C2 was to be disregarded and the taxpayer was unable to claim that back against income he eventually made from selling land in Wanneroo at a different point in time.
The tribunal found in favor of the Commissioner on every point in this case. The senior tribunal member was unimpressed by the taxpayer's evasive nature and unreliability in cross examination.
Lessons from the AAT this week
- If you want to claim general deductions on land you plan to sell, it must be done in the course of carrying on a business, and is best not done in retrospect.
- If you want to include expenses in the cost base of a CGT asset, keep records and apportion them correctly.
- Loaning money to a related party and then cancelling the loan is unlikely to be seen as part of an income producing activity.
If you are planning on undertaking any of the above activities see a tax specialist beforehand to ensure that you are taking a course of action that matches your motives.
The case [2015] AATA 244: http://www.austlii.edu.au/au/cases/cth/AATA/2015/244.html
Tuesday, April 28, 2015
Ward vs Federal Commissioner of Taxation
The Administrative Appeals Tribunal (AAT) added additional words to the ordinary meaning of the term "determination", in order to make a determination in favour of a taxpayer seeking objection rights in Ward vs the Federal Commissioner of Taxation (FCT).
The Case [2015] AATA 138: http://www.austlii.edu.au/au/cases/cth/AATA/2015/138.html
Section 292-465 of the Income Tax Assessment Act 1997 (ITAA 1997) allows the Commissioner to waive any penalties lodged against a taxpayer if they breach the limit one is allowed to contribute to superannuation in a financial year. The same section also provides that a taxpayer can object to a determination made by the Commissioner under that section. Such an objection could be lodged in the AAT or Federal Court, where a judge would decide whether or not it was reasonable for the Commissioner to act in the way he did.
Section 292-465 is constructed in a way that allows the Commissioner to make a determination to waive a penalty for over-contributing to superannuation, but it fails to mention how the Commissioner might reject such a request and determine that a taxpayer is still required to pay the penalties levied against them. The latter scenario is hardly a "determination" under the ordinary meaning of that term. A hardline textualist would argue that the Commissioner is simply ignoring a taxpayer's plea, no determination occurs.
A broader thinking individual would argue however, that a decision not to make a determination, is itself a determination. A football referee determining that a player has dived in the penalty box has no need to blow his whistle. In fact it is the act of not awarding a penalty that makes his decision clear to both teams. This is where the AAT stand on the issue (regarding s 292-465).
An explanatory memorandum of the bill introducing the provisions in question clearly states that the legislature was intended to give taxpayers a right to object "on the grounds that they are dissatisfied with the Commissioner's determination or the Commissioner's decision not to make a determination".
The tribunal members note that the alternate view (a strict textualist approach to the provision) leads to a conclusion where only taxpayers who have received a favorable determination from the Commissioner can object to his decision! Such a conclusion is "manifestly absurd" in the eyes of the AAT. An absurd provision can be clarified by the judiciary under the Acts Interpretation Act 1901, to give the word "determination" a meaning that offers s 292-465 a sensible construction.
The tribunal members note that the alternate view (a strict textualist approach to the provision) leads to a conclusion where only taxpayers who have received a favorable determination from the Commissioner can object to his decision! Such a conclusion is "manifestly absurd" in the eyes of the AAT. An absurd provision can be clarified by the judiciary under the Acts Interpretation Act 1901, to give the word "determination" a meaning that offers s 292-465 a sensible construction.
The Commissioner's argument was sneaky at best, against the interests of his fellow citizens at worst. That is why it is welcoming news that the AAT has affirmed the rights of taxpayers to object to a tax office "non determination" in regard to a superannuation over-contribution.
The Case [2015] AATA 138: http://www.austlii.edu.au/au/cases/cth/AATA/2015/138.html
Friday, April 24, 2015
The Trustee for SBM Trust vs Federal Commissioner of Taxation
The Administrative Appeals Tribunal (AAT) has concluded that GST credits from pre-2009 cannot be claimed on post-2009 GST returns (or business activity statements) if they fall outside the four year time limit imposed by a legislature change in 2009.
[2015] AATA 174
A Straightforward Case
The Deputy President of the AAT was delighted to inform us that "the facts of this case are straightforward, and not in dispute."
The taxpayer unfortunately didn't claim eligible input tax credits in a 2005 business activity statement (BAS). They therefore included the amounts in a 2012 BAS upon realization of this error.
The four year time frame for GST return amendments was introduced in 2009. The question before the AAT was whether or not the amendments are out of time, with regard had to the fact that there was no time limit in 2005 when the returns were lodged.
The Law
Section 29-10 of the GST Act provides, that if a GST return for a tax period does not take into account an input tax credit attributable to that tax period, the credit is attributable to the first period for which you give the Commissioner a return that does consider the amount.
The Decision
With the above in mind, the Deputy President had little option but to side with the Commissioner of Taxation. The Commissioner argued that the first notification of these credits was received in 2012, therefore the period they were attributable to was in 2012 and hence the post-2009 time limit applies and the taxpayer was out of time to claim them.
All post-2009 GST returns are subject to the four year time limit (with few exceptions), therefore credits from 2005 could not be claimed on those business activity statements. The AAT were somewhat unkind to the taxpayer, who was arguing fervently for his seven year old GST credits:
All post-2009 GST returns are subject to the four year time limit (with few exceptions), therefore credits from 2005 could not be claimed on those business activity statements. The AAT were somewhat unkind to the taxpayer, who was arguing fervently for his seven year old GST credits:
"The taxpayer's submissions cannot be sustained. In particular, the submission that clause 19 in Schedule 1 to the 2010 amending Act "can also be interpreted as applying only to acquisitions post 12 May 2009" is without merit. There is no justification for restricting the clear words of the clause in that way."
[2015] AATA 174
Thursday, April 23, 2015
Bond vs Federal Commissioner of Taxation
On 17 March 2015 the Federal Court decided whether esteemed Qantas pilot Mr Bond had received a termination payment in compensation for an injury, or whether the golden handshake received was in the order of something much more generous than 'compensation'.
From what we can infer from the judgement, Mr Bond's injury was linked to increasing medical issues accumulating later in his career, probably linked to the aging process. The case rested on whether or not a payment in the order of $500,000 was a fair reimbursement to Mr Bond with regard to his injuries. A case that had the potential to delve into a long winded dispute about fundamental temporal principals of human biology was quickly answered in the negative by judge Mansfield in the space of 119 paragraphs - in which the world record for highest usage of the term "LOL" in a court judgement was considerably beaten. In summary, Mr Bond did not receive his employee termination payment in compensation for any injury sustained while working, he had in fact received a payment in respect of his retirement, a payment he would have received injured or not.
Background
Mr Bond was a pilot of Qantas for over 15 years. Pilots in his category of service were eligible to access an insurance scheme to cover themselves in the case of them losing their pilot license with the Civil Aviation Safety Authority (CASA). Judge Mansfield informs us that Qantas pilots were eligible to access “loss of licence (LOL) insurance” under which Mr Bond was entitled to a LOL payment if he lost his licence for medical reasons.
The question arises as to whether or not the eventual insurance payment to Mr Bond was in fact an employee termination payment (ETP) under s 82-130 after he lost his license due failing to pass a medical for two years.
The Law
An ETP includes any payment made to you in result of the termination of your employment, received within 12 months of termination (s 82-130).
Section 82-135 provides that the payment is not an ETP if it is received in respect of personal injury to you, so far as the payment is reasonable and its likely effect on your capacity to derive income from personal exertion.
If a termination payment is exempted by s 82-135 it is generally not taxable.
The Decision
Firstly, Judge Mansfield concluded that the LOL insurance payout was in fact an ETP and that it had been triggered by failing a medical whilst Mr Bond was employed by Qantas.
However, Judge Mansfield concluded the LOL payment was not covered by s 82-135 because the payment was not made in consideration of any personal injury. He took guidance from Scully in the federal court where it was determined that any consideration made in compensation for injury must involve some kind of measurement or calculation in order to determine a fair value for the loss of a worker's income. Judge Mansfield summarized the payment as follows:
"I do not think it can be said that the amount of the Capital Benefit is “for or in respect of” Mr Bond’s condition or can be assessed to be reasonable having regard to the nature of the injury and its likely effect on the capacity to derive income from personal exertion, in the way that “reasonable” is explained in Scully at [30]. For a pilot, the Capital Benefit is the same for any illness or injury causing loss of licence for any age up to age 54, although it then drops significantly for each year after that age. It is the same for all senior officers, whether Captains, First or Second Officers, or Flight Engineer Officers. It is the same irrespective of the nature of the injury, although the nature of the injury and consequential disability must be relevant to the ongoing capacity to derive income. It is the same whether the relevant employee is or is nor re-employed, and irrespective of the actual earnings in any new position."
Conclusion
Termination payments for injury are (1) required to be reasonable and (2) must be calculated with some connection to the injury. In the case of Qantas pilots, their LOL insurance policy fails this test because the payment is made according to a pre-determined formula with too little regard to individual circumstances.
This should not come as a surprise. The law was clearly designed to make it hard for high income earning employees to claim a tax free golden handshake. It does however raise an interesting question, how would you fairly compensate someone for lost income as a result of the natural biological aging process? (to the point where it satisfies s 82-135)
LOL
Judge Mansfield used the term 127 times during the judgement, surely a new world record.
[2015] FCA 245
http://www.austlii.edu.au/au/cases/cth/FCA/2015/245.html
From what we can infer from the judgement, Mr Bond's injury was linked to increasing medical issues accumulating later in his career, probably linked to the aging process. The case rested on whether or not a payment in the order of $500,000 was a fair reimbursement to Mr Bond with regard to his injuries. A case that had the potential to delve into a long winded dispute about fundamental temporal principals of human biology was quickly answered in the negative by judge Mansfield in the space of 119 paragraphs - in which the world record for highest usage of the term "LOL" in a court judgement was considerably beaten. In summary, Mr Bond did not receive his employee termination payment in compensation for any injury sustained while working, he had in fact received a payment in respect of his retirement, a payment he would have received injured or not.
Background
Mr Bond was a pilot of Qantas for over 15 years. Pilots in his category of service were eligible to access an insurance scheme to cover themselves in the case of them losing their pilot license with the Civil Aviation Safety Authority (CASA). Judge Mansfield informs us that Qantas pilots were eligible to access “loss of licence (LOL) insurance” under which Mr Bond was entitled to a LOL payment if he lost his licence for medical reasons.
The question arises as to whether or not the eventual insurance payment to Mr Bond was in fact an employee termination payment (ETP) under s 82-130 after he lost his license due failing to pass a medical for two years.
The Law
An ETP includes any payment made to you in result of the termination of your employment, received within 12 months of termination (s 82-130).
Section 82-135 provides that the payment is not an ETP if it is received in respect of personal injury to you, so far as the payment is reasonable and its likely effect on your capacity to derive income from personal exertion.
If a termination payment is exempted by s 82-135 it is generally not taxable.
The Decision
Firstly, Judge Mansfield concluded that the LOL insurance payout was in fact an ETP and that it had been triggered by failing a medical whilst Mr Bond was employed by Qantas.
However, Judge Mansfield concluded the LOL payment was not covered by s 82-135 because the payment was not made in consideration of any personal injury. He took guidance from Scully in the federal court where it was determined that any consideration made in compensation for injury must involve some kind of measurement or calculation in order to determine a fair value for the loss of a worker's income. Judge Mansfield summarized the payment as follows:
"I do not think it can be said that the amount of the Capital Benefit is “for or in respect of” Mr Bond’s condition or can be assessed to be reasonable having regard to the nature of the injury and its likely effect on the capacity to derive income from personal exertion, in the way that “reasonable” is explained in Scully at [30]. For a pilot, the Capital Benefit is the same for any illness or injury causing loss of licence for any age up to age 54, although it then drops significantly for each year after that age. It is the same for all senior officers, whether Captains, First or Second Officers, or Flight Engineer Officers. It is the same irrespective of the nature of the injury, although the nature of the injury and consequential disability must be relevant to the ongoing capacity to derive income. It is the same whether the relevant employee is or is nor re-employed, and irrespective of the actual earnings in any new position."
Conclusion
Termination payments for injury are (1) required to be reasonable and (2) must be calculated with some connection to the injury. In the case of Qantas pilots, their LOL insurance policy fails this test because the payment is made according to a pre-determined formula with too little regard to individual circumstances.
This should not come as a surprise. The law was clearly designed to make it hard for high income earning employees to claim a tax free golden handshake. It does however raise an interesting question, how would you fairly compensate someone for lost income as a result of the natural biological aging process? (to the point where it satisfies s 82-135)
LOL
Judge Mansfield used the term 127 times during the judgement, surely a new world record.
[2015] FCA 245
http://www.austlii.edu.au/au/cases/cth/FCA/2015/245.html
Monday, April 20, 2015
Mr Anderson vs Federal Commissioner of Taxation
In Mr Anderson v the Commisioner of Taxation the tribunal was asked to decide whether the trustee of the Anderson Family Trust was liable for GST for the period in which two properties on its books were sold. The period in question was October-December 2009.
Background
The Anderson Family Trust took out loans with a property development company to finance a property development. It just so happens that the property development company in question was also contracted to perform developments for the Anderson Family Trust!
In July 2009 the property development company put the Anderson Family Trust on notice by telling them they had 28 days to catch up on loan payments, if the demand was not met they threatened to take ownership of the securities subject to this loan. The loan security was in fact personal property of Mr Anderson and not the two properties that the loan was financing.
Mr Anderson was trustee of the Anderson Family Trust and when the properties were sold by 18 November 2009, the ATO expected the GST liability on sale (10% of sale - 10% of cost base and associated expenses) to be included in the 31 December quarter Business Activity Statement.
Instead, Mr Anderson gave all the proceeds to his angry creditors and claimed that he never sold the properties on behalf of the trust. Mr Anderson claims that after the angry letter he received in July 2009 and after he failed to catch up on payments, all legal ownership of the properties became that of the property development company.
The Commissioner of Taxation rejected this claim, saying that under law the properties were never transferred out of the Anderson Family Trust.
Questions of Fact
The tribunal needed to decide whether or not the properties were transferred from the trust in order to determine who was liable to the GST on sale of the properties.
The tribunal found that the properties could not have been transferred for two reasons. The first reason being that security for the loan was personal Property of Mr Anderson, any property being chased by creditors was not property of the trust.
Secondly, Mr Anderson contended that the creditors forced him to sell the properties in question, and hence they were either in control on the properties or in control of the trust. The judge rejected that the properties had been transferred to control of the property developers, irrespective of how much pressure they put on him.
Questions of Law
In regard to the latter point (about control of the trust), the judge noted that tax legislation narrowly defines a controlling entity:
Background
The Anderson Family Trust took out loans with a property development company to finance a property development. It just so happens that the property development company in question was also contracted to perform developments for the Anderson Family Trust!
In July 2009 the property development company put the Anderson Family Trust on notice by telling them they had 28 days to catch up on loan payments, if the demand was not met they threatened to take ownership of the securities subject to this loan. The loan security was in fact personal property of Mr Anderson and not the two properties that the loan was financing.
Mr Anderson was trustee of the Anderson Family Trust and when the properties were sold by 18 November 2009, the ATO expected the GST liability on sale (10% of sale - 10% of cost base and associated expenses) to be included in the 31 December quarter Business Activity Statement.
Instead, Mr Anderson gave all the proceeds to his angry creditors and claimed that he never sold the properties on behalf of the trust. Mr Anderson claims that after the angry letter he received in July 2009 and after he failed to catch up on payments, all legal ownership of the properties became that of the property development company.
The Commissioner of Taxation rejected this claim, saying that under law the properties were never transferred out of the Anderson Family Trust.
Questions of Fact
The tribunal needed to decide whether or not the properties were transferred from the trust in order to determine who was liable to the GST on sale of the properties.
The tribunal found that the properties could not have been transferred for two reasons. The first reason being that security for the loan was personal Property of Mr Anderson, any property being chased by creditors was not property of the trust.
Secondly, Mr Anderson contended that the creditors forced him to sell the properties in question, and hence they were either in control on the properties or in control of the trust. The judge rejected that the properties had been transferred to control of the property developers, irrespective of how much pressure they put on him.
Questions of Law
In regard to the latter point (about control of the trust), the judge noted that tax legislation narrowly defines a controlling entity:
"The applicant in this case is a natural person...that means he could only be regarded as an incapacitated entity if he has a representative. That expression is itself narrowly defined in s 195.1. None of the definitions assist the applicant. The applicant relies in particular on the reference in sub-section (ca) to "a controller (within the meaning of s 9 of the Corporations Act 2001 (Cth))" (emphasis added). Section 9 defines a controller as follows:
The definition refers to the property of a corporation, whereas the applicant is an individual. It follows the definition does not fit."
The judge remarks "anyone whose knowledge of trusts is uncontaminated by knowledge of the tax laws would find that a startling proposition" but then proceeds to quote s 184.1(2) of the GST Act: "The trustee of a trust...is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time." The distinction is clear and the judge affirmed this. The question then arose, who was the trustee of the Anderson Family Trust who was liable to pay GST on the sale of these properties? The ATO have narrowed it down to Mr Anderson or his mother, they decided not to take this point up in court as it requires further investigation. Mr Anderson The judge, undoubtedly a fan of The Matrix failed to use the term Mr Anderson as many times as Agent Smith in the 1999 film (24 vs 29), but he came close... https://www.youtube.com/watch?v=XooISvoZ_rs The case [2015] AATA 167: http://www.austlii.edu.au/au/cases/cth/AATA/2015/167.html |
Tuesday, April 14, 2015
Ting vs Federal Commissioner of Taxation
In February 2015 the Administrative Appeals Tribunal (AAT) considered whether or not a high school teacher could deduct the upfront expenses of his postgraduate diploma in management from his taxable income. The course included subjects like financial accounting and marketing.
Classes of 30 children require a lot of managing, but not enough to satisfy the Commissioner of the need to acquire management qualifications from the University of Melbourne's business school in order to produce assessable income.
Background
Mr Ting claimed $20,000 of self education deductions against $70,000 of income in his 2013 income tax return. The expenses claimed were for six units undertaken at the University of Melbourne during the relevant financial period.
Following an audit, the ATO issued a notice of amended assessment to Mr Ting in respect of the 2013 year of income, disallowing the deduction in question, with accompanying administrative penalties for failing to take reasonable care .
The Law
Section 8-1 of the ITAA 1997 deals with deductible expenses:
Mr Alpins, deputy president of the AAT discussed the implications of case law dealing with the deductibility of self education expenses incurred in producing assessable income to eventually conclude that basic statutory requirements of s 8-1 should not be overlooked in favour reading about how case law interprets the section in any particular way. Hence, the case turned on whether or not the expenses were deductible under the plain definition of the law.
The Decision
In the words of the deputy president, the expenses were not deductible under s 8-1 because the taxpayer's income earning activities did not "require skills in financial reporting, nor in marketing, or were they likely to increase his income".
The judge affirmed administrative penalties because the taxpayer had not sought appropriate advice when preparing the return.
A Lesson to Self Educators
The taxpayer's main downfall was claiming throughout most of the audit and objection process that he endeavored on obtaining a marketing degree because he aspired to be promoted to a senior teaching role at his place of employment in the future and one day to become a school principal. The deputy president ruled that any deduction claim based solely on prospects of promotion could not be allowable on the basis that it does not assist a taxpayer producing assessable income, instead it assists him obtaining a different job in which income is produced differently to the job in which the taxpayer is claiming deductions against in that income year.
[2015] AATA 166
http://www.austlii.edu.au/au/cases/cth/AATA/2015/166.html
Classes of 30 children require a lot of managing, but not enough to satisfy the Commissioner of the need to acquire management qualifications from the University of Melbourne's business school in order to produce assessable income.
Background
Mr Ting claimed $20,000 of self education deductions against $70,000 of income in his 2013 income tax return. The expenses claimed were for six units undertaken at the University of Melbourne during the relevant financial period.
Following an audit, the ATO issued a notice of amended assessment to Mr Ting in respect of the 2013 year of income, disallowing the deduction in question, with accompanying administrative penalties for failing to take reasonable care .
The Law
Section 8-1 of the ITAA 1997 deals with deductible expenses:
"(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income"
The Case
Mr Alpins, deputy president of the AAT discussed the implications of case law dealing with the deductibility of self education expenses incurred in producing assessable income to eventually conclude that basic statutory requirements of s 8-1 should not be overlooked in favour reading about how case law interprets the section in any particular way. Hence, the case turned on whether or not the expenses were deductible under the plain definition of the law.
The Decision
In the words of the deputy president, the expenses were not deductible under s 8-1 because the taxpayer's income earning activities did not "require skills in financial reporting, nor in marketing, or were they likely to increase his income".
The judge affirmed administrative penalties because the taxpayer had not sought appropriate advice when preparing the return.
A Lesson to Self Educators
The taxpayer's main downfall was claiming throughout most of the audit and objection process that he endeavored on obtaining a marketing degree because he aspired to be promoted to a senior teaching role at his place of employment in the future and one day to become a school principal. The deputy president ruled that any deduction claim based solely on prospects of promotion could not be allowable on the basis that it does not assist a taxpayer producing assessable income, instead it assists him obtaining a different job in which income is produced differently to the job in which the taxpayer is claiming deductions against in that income year.
[2015] AATA 166
http://www.austlii.edu.au/au/cases/cth/AATA/2015/166.html
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