In a significant property development decision, the Federal Court has ruled that a large-scale farm subdivision was a capital transaction. The ATO has won the appeal in the Merchant case dealing with a wash sale and dividend stripping, and has released a FAQ on the Bendel decision while we await the High Court special leave decision.

LEGISATION UPDATE

Superannuation concessions

With the calling of the Federal Election Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 and the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023 have lapsed.

The Bill seeks to introduce a 15% tax for superannuation earnings on balances in excess of $3m. Labor have stated that this continues to be their policy.

Build-to-Rent (BTR)

Treasury has released a legislative instrument specifying additional requirements for a dwelling to be ‘affordable dwelling’ for the purposes of the BTR concessions:

• Dwelling must be either a moderate-income dwelling or a lower-income dwelling;
• The number of lower-income dwellings in a BTR development must be at least 2%
• The owner of the development must have engaged an eligible community housing provider (CHP);
• Each tenant was identified by an eligible CHP as a prospective tenant.

CASE LAW UPDATE

Merchant v FCT—Part IVA and Dividend Stripping

This case dealt with two transactions entered into by the Merchant Family Trust (MFT) prior to the sale of its shares in Plantic for a large capital gain. It sold shares in another company to the Merchant SMSF at a capital loss to offset the gain. In addition, loans owned by Plantic to other companies within the Merchant Group were forgiven which reduced their retained profits and increased the capital gain.

The Full Federal Court held that Part IVA applied to the sale of shares to the SMSF on the basis it was undertaken for the purpose of reducing the taxable gain rather than for the commercial purposes that were submitted by the taxpayer. The Court also held that the debt forgiveness was a dividend stripping scheme. The purpose of forgiving the debts was for MFT to derive a higher capital gain and avoid the tax otherwise payable on distribution of the profits by the debtor companies.

Morton v FCT—Sale of Developed Farmland

The taxpayer farmed a pre-CGT parcel of land. The land was rezoned as residential which adversely affected the profitability of his farming operation. Together with his family who owned the adjacent blocks (‘Morton Farm’) he decided to subdivide the land and sell it as individual allotments in a housing estate. A development agreement was entered into under which the taxpayer appointed the developer power of attorney to do anything required for the development. The taxpayer was not required to borrow any money or to guarantee any obligations and the land would not be used as security. 

The ATO view was that the sale proceeds were assessable income. The Federal Court held that the sale was on capital account. The taxpayer adhered to his 2 ‘tenets’, which precluded the land from being used as security and provided for the family to obtain a fixed percentage of sale proceeds (rather than taking the risk of the commercial success of the development). He continued to farm the land up to 2015 and played little active role in its development. the taxpayer was not engaged in a business of land subdivision and development. 

Key points: The decision conflicts with the ATO view that large scale farmland developments of this nature are generally on revenue account, regardless of the terms of the development agreement or that the owner has no history of development.

Case Appeals

The following cases have been appealed:

• Trustee for Peter Hatfield Trust—SGC: The Commissioner has appealed against the decision that a plumber who had worked over 10 years for an entity was not an employee under the superannuation guarantee legislation.

• Baya Casal—Genuine redundancy: The Commissioner has appealed against the decision that a payment to a teacher upon termination should be taxed as a genuine redundancy payment, despite being offered a similar position with reduced hours.

• Quy and FCT – Individual residency: The taxpayer has appealed against the decision that he was an Australian resident under the domicile test.

• Shaw v FCT: The Commissioner has appealed against the decision that a long-haul truck driver was entitled to deduct meal expenses as exceptions to the substantiation provisions applied.

OTHER UPDATES

Bendel decision—FAQ

The ATO has published information relating to its current position on the Bendel decision.

• If the High Court chooses not to hear the appeal the ATO will almost immediately publish practical guidance for taxpayers by updating its Interim Decision Impact Statement followed by a review and update of relevant ATO guidance products.
• The ATO are not going to grant a blanket extension of time for affected companies to lodge their tax returns pending the High Court’s decision.
• Taxpayers should be mindful that, in the meantime, the ATO maintains their view in relation to unpaid present entitlements (UPEs). In addition, UPEs may have consequences under other tax integrity provisions which do not depend on the outcome of the High court process (e.g. s100A).  
• If the Commissioner is ultimately successful in the High Court and a deemed dividend has arisen due to reliance on the Full Federal Court decision, the Commissioner will not be granting a blanket exercise of the discretion under section 109RB to disregard any deemed dividends

Tax Practitioner Board (TPB) —Significant Breach Reporting

The TPB has advised that, as at 28 February, it had received 53 reports from tax practitioners of a significant breach of the Code of Professional Conduct (Code). 28 were reports against another registered tax practitioner and 15 were self-reported breaches. The TPB is also observing reports of fraud on clients. None of the significant breach reports have been identified as frivolous, vexatious or malicious.

Tax Agents must make a report to the TPB  in circumstances where they become aware of a Code breach and have ‘reasonable grounds’ to believe the breach is ‘significant’.

CONTACT US

For further information on any of these updates, or for general assistance, please contact Our Directors, Jacci Mandersloot or Natalie Claughton.

The information contained in this bulletin is intended to provide general information only and is not intended to serve as tax advice. Specific advice should always be sought regarding a taxpayers’ particular circumstances. Please contact MC Tax Advisors if you would like assistance with the issues identified in this bulletin.