Tax Bulletin – March 2019

March 2019 has seen the ATO set its focus on residential rental properties and the rental deductions being claimed. There has also been a number of case law developments, including the Paule decision (regarding multiple CGT rollovers), and the High Court granting the ATO special leave to appeal the Sharpcan decision (regarding deductibility of gaming machine entitlements). Our March Tax Bulletin covers these and other updates.

CASE LAW UPDATE

Paule v CofT—Multiple CGT rollovers and the 50% CGT discount

In Paule v CofT (2019) the taxpayer used a series of CGT rollovers to firstly transfer assets to a company, and then roll the shares into a new company, which were then sold for a capital gain. The original assets had been held for more than 12 months, but the rollover shares had been held for only a few days.

Where an asset is acquired under a series of replacement asset rollovers a specific provision deems its  acquisition date to be that of the original asset. However, this deeming rule does not apply if one of the rollovers was under subdivisions 122-A or 122-B (disposal of assets by an individual, trust or partnership to a wholly-owned company) or 124-N (disposal of assets by a trust to a company).

The Federal Court held that as one of these rollovers had been applied in the series of rollovers, the acquisition date of the sale shares were their actual acquisition date and so the gain was not eligible for the 50% CGT discount. As the words of the section were clear, they were to be interpreted in accordance with meaning and regard was not able to be had to their underlying purpose.

This case therefore has implications where multiple rollovers are used to restructure (but does not affect restructures using single rollovers).

Kort v FCT —Compensation payment

In Kort v FCT (2019) the taxpayer was found to be totally and permanently disabled (TPD) after a workplace injury. After receiving monthly payments, he entered into a Release Agreement with his life insurer under which he received an amount in settlement of the TPD claim as well as a separate lump sum. Under the terms of the Agreement the lump sum covered all his claims, including payment under his income protection policy, as well as damages for inconvenience, mental anguish, personal insecurity and distress.

The ATO identified the lump sum as solely comprising an amount to settle the income claim and was therefore assessable income.

The AAT held that the payment had not been apportioned exclusively to compensate for the loss of income benefits, but for all claims other than the TPD claim. The amount was therefore a single undissected lump sum and capital in nature. The payment was not eligible for a CGT exemption however, as it was not possible to identify the portion relating to any personal harm suffered by the taxpayer.

Wainwright v FCT—Exclusion of superannuation benefit from income

In Wainwright v CofT (2019) the taxpayer had purchased a farm which was to be financed by selling another property to his SMSF. Funds were taken from the SMSF to pay the duty on the farm, and for the deposit on the SMSF’s property purchase. The taxpayer ran into financial trouble, he and his spouse had to sell all their properties to repay debts, and the SMSF was unable to complete the property purchase.

The ATO sought to include both amounts taken from the SMSF in the taxpayer’s assessable income as a superannuation benefit, as well as 50% penalties for recklessness. The AAT held that;
– The inclusion of income relating to the duty on the farm was appropriate as the taxpayer was aware he could not use SMSF income for private purposes.
– The Commissioner should have exercised his discretion to exclude the property deposit amount from income as this was an arms length, documented, business transaction based on professional advice.
– A benefit only arose once the purchase fell through and the SMSF took no action to recover the funds. However, this was due to subsequent events principally beyond the taxpayer’s control.

Rosebridge Nominees v CofT—Period for liquidator to claim GST credits

The liquidator in Rosebridge Nominees v CofT lodged quarterly BAS covering a period of 15 years, most of which resulted in a refund. The ATO refused to remit refunds on the basis that the 4 year time limit for claiming ITCs had expired, whilst the liquidator claimed that this period should commence from the date of his appointment. The AAT held that there was no entitlement to input tax credits on the basis that;
– Pre 1 July 2012 tax periods – as Rosebridge had not lodged any notifications to preserve its claim, the Commissioner has no discretion to extend the period to claim credits.
– Post 1 July 2012 tax periods – the 4 year period was not extended as the Commissioner had not made a direction to the liquidator to lodge the BAS which would have given them a new due date.

Murrindindee Bushfire Class Action Settlement v FCT—Deductibility of expenses

This case involved a Fund which received $300m in settlement of a class action on behalf of bushfire victims. The administrator incurred costs in managing and administering the Fund and investing monies, including in-house and third party costs. The trustee derived $8.3m in interest income and incurred $4.34m in administration costs which were paid out of the income and for which it sought a deduction.

The Federal Court denied a section 8-1 deduction on the basis that the administration costs;
– did not satisfy the first limb as they related to the distribution of the Fund and so did not have sufficient connection to activities which produced interest;
– did not satisfy the second limb as the taxpayer was not carrying on a business; and
– were of a capital nature as the advantage sought was to ensure distribution of monies.

Appeals Update

– The ATO has requested special leave to appeal to the High Court in the residency case of Harding v FCT (2019) (refer Tax Bulletin—February 2019).

– Special leave has been granted for the ATO to appeal to the High Court in CofT v Sharpcan Pty Ltd (2018) (refer Tax Bulletin—October 2018). This will be relevant for Victorian hotels and clubs seeking a deduction for gaming machine entitlements acquired in the 2019 income year, or who are still in a position to amend returns for the 2010 income year in respect of the previous auction.

RULINGS, GUIDELINES  & PRACTICE STATEMENTS

Practice Statements on penalties and lodgement obligations

The ATO has rewritten a number of practice statements which deal with lodgement obligations, due dates and deferrals, and penalties for false and misleading statements. The rewrite includes the introduction of a new penalty relief strategy for individuals and small businesses.

The new strategy provides relief from penalties from 1 July 2018, including audits/reviews of prior periods. Individuals are eligible if they do not control net wealth of more than $5m. Small businesses are eligible if it has an aggregated turnover of less than $10m (unless controlled by a wealthy individual).

Penalty relief applies to eligible taxpayers making false or misleading statements, or failing to have a reasonably arguable position, in an income tax return or BAS (but not other obligations, such as FBT or SGC). However, relief may not apply if within the last 3 years a taxpayer has received penalty relief, or has been penalised for recklessness or intentional disregard.

Demergers—meaning of ‘restructuring’

Draft tax determination TD 2019/D1 sets out the ATO view of the meaning of ‘restructuring’ within the demerger provisions. Rollover relief can apply where there is a restructuring of a demerger group. To qualify, an interest holder must receive new interests in return for their old interests and nothing else, and must maintain the same proportional interest holding. The broader the transactions included within a restructure, the greater the risk that the interest holder may not meet these requirements.

The Ruling includes examples of when a restructuring may include:
– subsequent sale of the head entity – in the context of meeting the ‘nothing else requirement’; and
– subsequent capital raising by a demerged entity – in the context of meeting the ‘proportionality requirement’.

The ATO is also planning to issue a draft TD in May on the ‘nothing else’ requirement in the context of back to back CGT rollovers. On the basis of TD 2019/D1, care should be taken if currently considering undertaking such a transaction.

Transfer Pricing guidance for inbound distributors—PCG 2019/1

PCG 2019/1 sets out the ATO transfer pricing compliance approach for taxpayers who distribute goods purchased from related foreign entities for resale in Australia, or digital products or services where related foreign entities own the relevant IP. The guidance does not apply if a taxpayer chooses to adopt the ‘distributor simplified TP record-keeping option’ available under PCG 2017/2.

The guidelines assess taxpayers as low, medium or high risk based on comparing profit outcomes (based on EBIT relative to sales) against the ATO’s own profit markers. The ATO will not commit resources to review arrangements of low risk taxpayers.

Addendums to GST rulings for legislative changes

Addendums have been added to GSTR 2001/7 (GST Turnover) and GSTR 2000/37 (Agency Relationships) to reflect recent changes in legislation.

LEGISLATIVE UPDATE

Superannuation law refinements & Running balance accounts

Exposure draft legislation has been released to introduce;
– A number of technical amendments to superannuation tax law with effect from 1 July 2017.
– Changes to the way the Commissioner operates Running Balance Accounts, including recording net amounts payable on a NOAA as a single amount

Main residence exemption—non-residents

Recent comments made by the Assistant Treasurer, Stuart Robert, have suggested that this legislation will not proceed, however, no formal confirmation has yet been made in this regard.

ATO & GOVERNMENT ACTIVITY AND FOCUS

Rental deductions — almost 90% of random enquiry audits have errors

The ATO has advised their next focus is on rental income and deductions. The common errors they are finding on review of rental deductions include:
– Claiming interest on a loan in full when it has been partially refinanced for private purposes.
– Incorrect classification of capital works as repairs and maintenance.
– Not apportioning deductions for holiday homes when they are not genuinely available for rent.

The ATO are also concerned that income earned through platforms such as Airbnb is not being declared.

This also serves as a timely reminder for the changes made to rental deductions for residential properties from 1 July 2017, being:
– Travel expenses relating to residential investment properties are not deductible; and
– No depreciation claims are allowable for previously used plant and equipment (applicable to plant and equipment acquired after 9 May 2017, or acquired before that time and not used to earn income in either the current or previous year).

These changes do not apply to company taxpayers.

Israeli—Australia Double Tax Agreement

A tax treaty between Australia and Israel has finally been signed. The following withholding rates will apply under the treaty;
– 0% for dividends (if direct holding is no more than 10%) and 5% for interest for certain pension or superannuation funds.
– 5% for dividends paid to companies with a holding of at least 10% for a 365 day period.
– 15% for all other dividends, 10% for all other interest and 5% for all royalties.

Review of Tax Practitioners Board

Keith James has been appointed by the Government as an independent expert to lead a review of the Tax Practitioners Board. The terms of reference include;
– Do legislative and Governance framework operate as intended and meet objectives?
– Consider appropriateness of TPB governance arrangements.
– Does the Tax Agent Services Act support the TPB in responding to issues?
– Whether its powers and functions are sufficient to meet the objects of the legislative framework.
– Interaction with regulation of relevant related professional services.

Submissions are due by 12 April with the report to Government due by 31 October 2019.

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.