-
1
2010-09 ~ MTUN Master www.taxmatrix.com.au
The September 2010 MTUN
~ tax education for the thinking tax professional
Links to electronic resources
Taxmap™ resources Legislation enacted Bills in Parliament
MTUN Archive Full Court Appeals HCA Special Leave
Getting a “fair shake of the sauce bottle”
In recent days we have been made aware of the details of the
ATO’s pursuit of Paul Hogan for alleged tax debts arising many
years ago.
Newspapers and internet media have reported that Hogan
“intentionally avoided paying income tax” in Australia.
The newspaper reports allege that documents lodged in the
Federal Court by the ATO “claimed there was evidence Hogan's former
accountant, John Gibb, told him tax structures he proposed to use
were "not in accordance with Australian law"”
One newspaper article quoted Hogan’s current legal advisor as
claiming the documents lodged by the ATO "omitted crucial parts of
evidence" given by [his accountant] to the Tax Office and a
representative of the Australian Government Solicitor's office in
Sydney in July last year.
The legal advisor’s statement claimed that “A transcript of the
meeting showed Hogan had relied on the advice of a leading 1980s QC
and US attorneys, who found that his tax arrangements were
legitimate. The statement said the lawyers had determined the tax
structures to be "effective and proceeded accordingly". More recent
newspaper reports have speculated on the identity of the Australian
silk.
The model litigant
Article 2 of the Model Litigant policy promulgated by the
Attorney General requires the ATO to act honestly and fairly in
handling claims and litigation brought by or agaoinst it. Article 2
also requires the ATO to endeavour to avoid, prevent and limit the
scope of legal proceedings.
There is a further requirement that the ATO not take advantage
of a claimant who lacks the resources to litigate a legitimate
claim.
ATO duty as model litigant
The ATO is an agency of the Commonwealth and in that capacity
has a positive obligation to act as a model litigant. [The
obligation also extends to matters at the AAT].
These reports, if true, are disturbing, not because Paul Hogan
is in the ATO sights, but because the behaviour of the ATO in
omitting, from documents lodged with the Federal Court, in support
of its case, relevant evidence in its possession, is on any view,
short of the behaviour expected, if not required, of a model
litigant.
It is arguable that omitting evidence may limit the scope of the
proceedings.
The model litigant policy
The model litigant policy is promulgated as Appendix B to the
Legal Services Directions 2005 made under section 55ZF of the
Judiciary Act 1903 and Prepared by the Office of Legislative
Drafting and Publishing, AttorneyGeneral’s Department,
Canberral.
Table of Contents 1 INCOME TAX 3 1.1 Politicians, Boards &
Statutory Authorities 3 1.2 Courts & Tribunals 3 (a) Courts
3
(1) ** Was the Wentworth branch of the Bendigo Bank established
for community service purposes? (Wentworth District Capital Ltd v C
of T) 3
(2) ** Taxpayer entitled to a stay of judgment in order to
contest assessment? (DC of T v Denlay) 8 (3) ** Did part IVA apply
to scheme to obtain foreign tax credits? (Citigroup v C of T)
11
(b) Tribunals 15 (1) ** No entitlement to CGT small business
concessions – 25% penalty! (Cannavo And C of T) 15
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
http://www.taxmap.com.au/http://www.taxmap.com.au/acts_date.phphttp://www.taxmap.com.au/pdfs/ON-LINE%20-%2002%20%7E%20Part%207%20-%20Bills%20before%20the%20Parliament.pdfhttp://www.taxmatrix.com.au/update_notes.asphttp://www.taxmap.com.au/pdfs/ON-LINE%20-%2007%20%7E%20Part%208%20-%20Appeals.pdfhttp://www.taxmap.com.au/pdfs/ON-LINE%20-%2008%20%7E%20Part%208%20-%20Special%20Leave.pdfhttp://www.optuszoo.com.au/news/190027/hogan-knew-of-fraud-claims-government.htmlhttp://www.optuszoo.com.au/news/190027/hogan-knew-of-fraud-claims-government.html
-
2 The September 2010 MTUN
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
(2) ** Was there hardship or special reaons to justify reduction
of HELP and SFSS repayments? (Dedes and C of T) 19
(3) ** Is the taxpayer carrying on a business in share trading?
(Smith and C of T) 21 (4) ** Adjourning AAT review of objection
decisions (MacMahon and C of T) 29
1.3 Featured ATO interpretations 30
2 GST 31 (b) Tribunals 31
(1) ** Claiming back input tax credits after BAS errors
(Australian Leisure Marine and C of T) 31 2.3 Featured ATO
interpretations 33
3 FBT ~ UPDATE MATERIAL IS ACCESSED ON LINE THROUGH TAXMAP™
33
4 STATE TAXES ~ UPDATE MATERIAL IS ACCESSED ON LINE THROUGH
TAXMAP™ 33
5 SUPERANNUATION, ETP’S & PENSIONS 35 5.2 Courts &
Tribunals 35 (b) Tribunals 35
(1) ** The problem with excess concessional contributions
(McMennemin and C of T) 35
6 OTHER IMPOSTS, OFFSETS & REBATES 53 6.2 Courts &
Tribunals 53 (a) Courts 53
(1) ** Is a stretched Hummer a luxury vehicle? (Dreamtech
International v Cof T) 53
7 LISTED ATO PUBLICATIONS FOR THE MONTH 59 7.1 ATO Publications
that you can rely upon 59 (b) TD Series - including TD Series in
draft form 59 (c) Class Rulings 59 (f) Addenda & Errata &
Withdrawals of documents able to be relied upon 59 7.2 ATO
Publications that you are not entitled to rely upon 59 (e) ATO ID’s
New 60 (f) Addenda & Errata & Withdrawals to documents not
intended to be relied upon 60
(1) Addenda 60 (2) 60 (3) Withdrawals 60
(g) Decision Impact Statements 62
8 LEGISLATION - UPDATE MATERIAL IS ACCESSED ON LINE THROUGH
TAXMAP™ 62
9 APPEALS TO THE FULL COURT OF THE FEDERAL COURT - UPDATE
MATERIAL IS ACCESSED ON LINE THROUGH TAXMAP™ 62
10 DECISIONS DEALING WITH PRACTICE & PROCEDURE ISSUES 62 (1)
** Taxpayer’s lack of evidence of financial circumstances fatal to
stay of judgment application (D C of T v
Sakovits) 62 (2) * Taxpayer’s application dismissed for not
complying with Tribunal orders (LVR (WA) and C of T) 65 (3) (DC of
T v Ansett Resources & Industries) 65 (4) (Grapsas v C of T) 65
(5) (Clark v C Of T (No. 2)) 65 (6) (DC of T v Cranswick) 66
-
The September 2010 MTUN 3
2010-09 ~ MTUN Master www.taxmatrix.com.au
1 INCOME TAX
1.1 Politicians, Boards & Statutory Authorities As a result
of the Government calling the election and the Government being in
caretaker mode over the period since calling the election there
have been no press releases.
1.2 Courts & Tribunals
(a) Courts
(1) ** Was the Wentworth branch of the Bendigo Bank established
for community service purposes? (Wentworth District Capital Ltd v C
of T)
Source: Month 08-2010-37 ~ Part 1-2(a) - Wentworth District
Capital Ltd v C of T [2010] FCA 862 (13 August 2010) Perram J
What is the issue?
Was the Wentworth branch of the Bendigo Bank an association
established for community service purposes within section
50-10?
What was the outcome?
The Court concluded that the Wentworth Branch of the Bendigo
Bank was an association established for community purposes.
What was the evidence?
In September 1996 the only bank in Wentworth, in New South Wales
near the confluence of the Murray River and the Darling River,
closed leaving the town without a bank.
In 1998 members of the Wentworth community incorporated WDCL
which entered into arrangements with Bendigo Bank Ltd (“Bendigo
Bank”) under which the bank provided banking services in Wentworth
through premises, staff and equipment provided by WDCL.
The legal aspects of WDCL
♦ WDC was a corporation limited by guarantee and incorporated on
25 January 1999;
♦ originally had two principal objects being to take over the
funds and other assets and liabilities of the steering committee
and “to operate and manage the ongoing action (if any) stated at
Item 3 in the 1st schedule”.
On 29 November 2006, the original objects were changed:
The ongoing action (if any) that the Company proposes to Operate
and Manage are:
3.1 To do such things as may be necessary to re-establish for
the Wentworth and district community a face-to-face banking service
in view of the withdrawal of face-to-face banking services from the
Wentworth district by all major banks;
3.2 To conclude a Management Agreement with Bendigo Bank Limited
and one or more of its subsidiaries to enable the Company to manage
a franchised office of Bendigo Bank Limited;
3.3 To manage such franchised outlet at Wentworth and such other
places as the Company may decide;
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
http://www.austlii.edu.au/au/cases/cth/federal_ct/2010/862.html
-
4
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
3.4 If and when possible, to conduct Commercial Banking within
New South Wales and Victoria under franchise from Bendigo Bank
Limited or from such other Banking Corporation as the Company may
from time to time decide;
3.5 To distribute such portion of any profit derived by carrying
on the Management of (or conducting the business of) Banking
Franchise for such community service purposes within the areas in
which such management or franchise is conducted as the Board may
from time to time decide;
3.6 For the avoidance of doubt, the Company’s main and or
dominant purpose and or object is the promoting, providing, or
carrying out activities, facilities or projects including but not
limited to community banking services for the benefit or welfare of
the community or any members of the community who have a particular
need by reason of youth, age, infirmity or disablement, poverty or
social or economic circumstances. Any other ongoing action or
object otherwise stated or inferred is secondary and subservient to
the extent of any inconsistency to the Company’s main or dominant
purpose and or objective as expressed in this item 3.
Bendigo Bank granted an exclusive licence to its wholly owned
subsidiary, Bendigo Franchising Pty Ltd (“Bendigo Franchising”), to
conduct the Wentworth franchising operation under which that entity
granted franchises to third parties to conduct retail shopfronts
for the Bendigo Bank.
On 17 February 1999 Bendigo Franchising granted the franchise to
conduct a Bendigo Bank branch to another wholly owned subsidiary of
Bendigo Bank, BBL Wentworth Franchising Pty Ltd (“BBL
Wentworth”).
BBL Wentworth entered into a management agreement with WDCL in
effect passing along to WDCL all of BBL Wentworth’s obligations to
Bendigo Franchising under the franchise deed.
What was the decision?
13. The community bank opened in March 1999 … For present
purposes it suffices to observe that a company limited by guarantee
was incorporated – WDCL – and that that company provided the
premises, staff and equipment to an entity owned by Bendigo Bank
for the conduct of its banking business. …
14. The business was rapidly successful. …By September 1999 WDCL
experienced its first break-even month, having 809 customers, $22
million in business and $17,367 in gross income. The annual report
for 30 June 2009 showed that after 10 years the branch had nearly
$100 million in business with an annual income before tax of about
$200,000.
15. The unexpected success of WDCL quickly gave rise to an issue
about what to do with the excess of funds generated. At first this
was resolved by repaying all of the money which originally had been
pledged with interest. Subsequently, after the pledges had been
repaid a grants scheme was put in place in 2002 under which
community groups could apply for, and receive, grants from WDCL.
Recipients included football clubs, schools, bowling clubs, the
Rotary Club and so on. Recipients were not required to bank with
the branch. As at the date of the hearing WDCL had given away in
excess of $1 million to such recipients.
16. … the Wentworth branch improved economic circumstances in
the town. Despite the drought, business picked up and traffic
returned to the main street to the extent that parking was
sometimes an issue. …
23 WDCL’s important obligations under the management agreement
were as follows:
(a) To use its very best endeavours in the management and
conduct of the franchise and to use the same endeavours actively
and diligently to promote the franchise and the interests of
Bendigo Bank, Bendigo Franchising and BBL Wentworth.
(b) To pay all of the fees payable by BBL Wentworth to Bendigo
Franchising and also to receive all of the fees to which that
company was entitled under the franchise deed.
(c) To provide staff, including a manager, for the operation of
the branch.
(d) To ensure that the staff wore Bendigo Bank uniforms.
-
5
2010-09 ~ MTUN Master www.taxmatrix.com.au
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
(e) To lease premises for the conduct of the branch.
(f) To fit out those premises to the satisfaction of Bendigo
Franchising.
24 …The fee arrangements involved BBL Wentworth in paying WDCL
50% of the amount earned by it through the borrowing and lending
transacted through the branch. ….
IV - The tax question
26 …, not all “assessable income” is liable to tax. Section
6-20(1) provides that:
An amount of ordinary income or statutory income is exempt
income if it is made exempt from income tax by a provision of this
Act or another Commonwealth law.
27 Section 50-1 erects a series of such exemptions. It
provides:
The total ordinary income and statutory income of the entities
covered by the following tables is exempt from income tax. In some
cases, the exemption is subject to special conditions.
28 In ss 50-5 to 50-45 there are then set out nine tables of
different classes of exemptions. One such a table in s 50-10 deals
with “community service” and is in the following terms:
Community Service
Item Exempt entity Special conditions
2.1 society, association or club established for community
service purposes (except political or lobbying purposes)
see section 50-70
29 The table picks up, by reference, the special conditions set
out in s 50-70. ….
30 The question which arises is, … whether WDCL is a “society,
association or club established for community service purposes” in
terms of the expressions appearing in the table. WDCL took the view
that it was established for “community service purposes”. The
Commissioner took the opposite view. 36 …
V - The construction of the expression
“established for community service purposes”
31 One should start, I think, with the obvious and that is that
this expression is inherently vague. It is not clear whether
“established” means presently established or originally established
and the expression “community service” has such a wide and sweeping
range of meanings that it is difficult to be sure what is connoted
at all. No less obscure is the relationship between the word
“purposes” and the balance of the phrase – questions at once
prompted include whether the purposes involved are the subjective
purposes of particular individuals or whether, instead, they refer
to a more concrete and objective assessment of aptness or
suitability.
40 So far as the present interpretative task is concerned I
would take from the explanatory memorandum the following
matters:
(a) the provisions were intended by the Treasurer to extend tax
exemption status beyond charitable institutions to embrace, at
least, community service clubs such as Apex;
(b) the expression was intended by the Treasurer to have a wide
meaning;
(c) the concept of services was intended by the Treasurer to
extend to “activities, facilities or projects”, which were to be
promoted, provided by or carried on by the organisation;
(d) those undertakings had to be for the benefit of the
community or for the members of the community
-
6
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
who had particular need for those undertakings;
(e) the need in question could include those arising from social
or economic circumstances and that, in turn, could include the
circumstances of living in a remote area.
41 I approach these points as part of the interpretative
material available to construe the words of the statute. They are
not, however, the sole materials and they cannot dictate the
meaning of s 50-10 to this Court. Like Jessup J, who considered the
same explanatory memorandum in Navy Health Ltd v Federal
Commissioner of Taxation (2007) 163 FCR 1 at 33 [82], I would not
regard “myself under an executive injunction, not carried into the
legislation, to give the words a wide interpretation”. It may be,
in that regard, that the author of the explanatory memorandum
proceeded on an assumption as to its definitive effect which is not
warranted.
45 Neither the reasons of Jessup J in Navy Health nor those of
French J in Victorian Women Lawyers form part of the ratio
decidendi of either decision. This is so in Navy Health because
Jessup J concluded that the applicant was not an association to
which the provision could apply (163 FCR at 32 [76] and [80]). The
Commissioner argued that paragraph [85] of his Honour’s reasons
showed that he had decided the case on this basis. There his Honour
said:
For the reasons explained above, I am not satisfied that, in the
three years ending 31 March 2001, 2002 and 2003, or in any of those
years, the applicant was a “non-profit association, … established
for community services” within the meaning of s 65J(1)(j) of the
FBTA Act.
However, that has to be read in light of paragraph [81] which
says:
Although not strictly necessary, for the sake of completeness I
shall deal also with the question whether the applicant was
“established for community service purposes”.
(emphasis added)
This is a plain indication that what followed was not the basis
for his Honour’s decision.
46 Be that as it may, however, on this aspect – namely the need
for the service to involve a tangible or practical benefit for the
community or part of the community – the decision seems, with
respect, plainly to be correct.
47 Granted then that a community service involves a concrete
benefit to the community there remains the question of what
community service purposes might be. As a matter of first
principles it would seem likely that “purposes” would be likely to
cover a broad range of aims. One obvious purpose would be the
purpose of providing a community service. However, there is no
reason to think that other purposes are not included. They could
include, for example, purposes such as funding, promoting or
organising community services. It is likely that so long as the
proposed purpose can be seen as having a reasonable connexion to
the delivery of a community service it will be within the class of
contemplated purposes.
48 That view is supported by the explanatory memorandum which
made clear, at least the Treasurer’s view, that the expression not
only had a broad meaning but that it “would extend to promoting,
providing or carrying out” community service activities. There the
matter might rest save for the second passage I have quoted from
above in Navy Health at paragraph [43]. In that passage however
Jessup J not only said that the benefit had to be identifiable
(with which I agree) but also that it should be “bestowed or
provided directly by the putative benefactor”. If his Honour meant
by this that the exemption would not apply unless the association
in question in fact itself provided a tangible benefit to the
community then I must respectfully differ. Such a reading would
remove from the exemption all entities whose purposes were other
than the direct supply of community services. It would, for
example, remove from the exemption organisations pursuing tangible
community service by means of fundraising activities or those who
would provide voluntary labour to service providers. …
50 The Commissioner submitted that to constitute a community
service the nominated benefit had to be directly conferred on the
community by the entity. Particular reliance was placed on the
passage just referred to. However, for reasons just given I do not
think that that is what his Honour meant. …
51 There are three further matters which should be mentioned.
The first is the requirement that the body in question be
“established” for community services purposes. It was settled by
the Full Court in Cronulla
-
7
2010-09 ~ MTUN Master www.taxmatrix.com.au
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
Sutherland Leagues Club Ltd v Commissioner of Taxation (1990) 23
FCR 82 at 89-90 (“Cronulla”) that this issue was to be addressed in
each income year so that, perhaps contrary to ordinary parlance, an
entity might be “established” for the requisite purpose in one year
but not another.
52 There is no reason for that principle not to apply to s 50-10
and, indeed, clause six of the original explanatory memorandum
contained the statement that bodies “are established for exempt
purposes according to their actual objects and activities from time
to time”.
53 The second matter concerns the characterisation of bodies
established for multiple purposes. The requirement of s 50-10 is
that the body be established for the specified purpose. In order to
meet that requirement the entity must have the purpose as its main
or predominant purpose: Cronulla 23 FCR at 93-95. The answer to
that question is to be ascertained by examining the “true character
and nature of” the body in question: Cronulla 23 FCR at 95. That
other purposes exist does not necessarily affect that analysis
unless those purposes can be said to supplant the identified
purpose’s role as the main or dominant purpose. The issue at hand
is, I think, a commonsense question whose answer should not be
obscured by an overzealous attendance to the taxonomy of
purposes.
54 The third matter concerns the provision of a benefit in
return for a reward. In Navy Health Jessup J was of the view that
it could not be a community service to provide insurance products
at normal market rates (163 FCR at 33 [83]). This was because such
an arrangement was not properly to be described as a benefit or
advantage. His Honour did not need to, and did not, address the
position of subsidised services. Since this case does not involve
that question it is not necessary to pass upon it either.
55 From the above the following principles may be distilled:
(a) the kind of community service referred to in s 50-10 is a
practical or tangible help, benefit or advantage conferred on the
community or an identifiable section thereof;
(b) a service provided for reward is not a community service at
least where there is no element of subsidisation;
(c) community service purposes include the purpose of providing
a community service but the purposes contemplated are not limited
solely to the act of provision. The expression is broad and may
extend to encompass any activity whose purpose has a reasonable
connexion to the delivery of a community service. Facilitation and
promotion are, therefore, purposes which are squarely within s
50-10;
(d) the entity claiming the exemption must be “established” for
those purposes. This requires an analysis of what the entity is
doing in the relevant income year both as a matter of its
constitutive documents such as its constitution and also by
reference to its actual activities;
(e) the purpose must be the entity’s main or dominant purpose
which is a practical question. The existence of other purposes will
not lead to a different conclusion so long as a matter of true
characterisation the main or dominant purpose is still reasonably
connected to the delivery of a community service
VI - Application to the facts of the present case
56. It is necessary in light of the above to identify the
purposes for which WDCL was “established” in the years 2006 and
2007. This in turn requires attendance to the constitutive
documents of WDCL in those years as well as its actual activities.
Further, although the issues arise in the 2006 and 2007 years, it
would be to take a blinkered approach to ignore the context in
which WDCL originally came into existence. The question at hand, in
light of these matters, is the isolation and identification of
WDCL’s main or dominant purpose.
57 The history of WDCL dictates a connexion between a serious
and precisely definable problem and the company’s incorporation.
That problem was the absence of face-to-face banking services in
the town of Wentworth. The solution to that problem was the
incorporation of an entity to manage a franchised branch of Bendigo
Bank. As would be natural in any franchise relationship (including
those conducted through a management arrangement like the present
one) WDCL was bound to further the interests of the franchisor as
the commercial documentation required by Bendigo Bank made clear.
But it would be quite unrealistic to suggest that WDCL’s principal
purpose when originally established was to help the Bendigo Bank in
its
-
8
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
commercial endeavours. No doubt WDCL had that purpose but it did
so, so it seems to me, only to further its basic purpose of
restoring banking services to Wentworth.
58 As the Commissioner correctly submitted the purpose of WDCL
was not to provide banking services in Wentworth and it did not do
so. The only entity conducting the business of banking in the town
was Bendigo Bank (or its wholly owned subsidiary, BBL Wentworth).
But WDCL’s purpose was to facilitate the provision of banking
services in the town by making it commercially viable for a bank to
return to Wentworth. This was the purpose for which WDCL was
originally established and that remained its purpose in the 2006
and 2007 years. In those years there was no other bank in the town
except Bendigo Bank and the conduct by WDCL of the shopfront
operations of that bank on a not-for-profit basis continued its
purpose of facilitating the provision of banking services in the
town. Further, by 2006 its formal objects in its constitution
included the promotion of community banking services which
confirmed what its activities otherwise demonstrated.
59 There were, no doubt, other purposes of WDCL. I would accept
that it aimed to distribute any generated profits through the
community grants programme but I do not think that that was its
raison d’être. The origins of that programme lay in the
unexpectedly rapid accumulation of excess money in WDCL with the
attendant need to dispose of that surplus. The surplus was, in that
sense, a collateral benefit of WDCL’s principal operation. I am
unable to accept that such a collateral benefit was the principal
purpose for which WDCL existed in the relevant years. So too,
whilst it is true that WDCL was able to provide additional services
to the elderly in the form of a weekly visit by a staff member to
the aged care facility, this is again to be seen not as a central
purpose of the company but rather as an incidental benefit of its
operation. Largely for the same reasons, no different
characterisation should apply to the provision by WDCL of banking
visits to schools.
61 The Commissioner submitted that WDCL’s real purpose in the
relevant years was to conduct and manage a franchise branch of the
Bendigo Bank. It would be unrealistic to deny that WDCL had that as
one of its purposes. However, its management of the branch was a
means rather than an end. The end was to the facilitation of
face-to-face banking in Wentworth. The accomplishment of that end
was achieved through the means of the management contract. …
62 For those reasons the main or dominant purpose of WDCL in the
2006 and 2007 years was the facilitation of previously absent
face-to-face banking services in Wentworth and, in the requisite
sense, WDCL is to be seen as established in those years for that
purpose. The question then is whether that purpose is a community
service purpose. I accept the Commissioner’s submission that the
provision of banking services to customers of Bendigo Bank could
not be the provision of a community service. Such a service would
be the provision of an ordinary retail service, for reward, to
customers. For the reasons given by Jessup J in Navy Health it is
impossible to characterise such an arrangement as having about it
the requisite element of community service. This observation,
although correct, is not material, for the provision of banking
services was not the service provided by WDCL. The service it
provided was the creation of the circumstances which would make it
possible for a bank to operate in the town.
63 Was it a service to the Wentworth community to bring about
circumstances apt to lead to the re-introduction of banking in the
town? It is not to be thought that the facilitation of the
commercial supply of services which would otherwise not be provided
is always a community service. Had WDCL been incorporated to
facilitate the provision of a toy shop in Wentworth it might be
doubted that the community was much thereby served. The question in
each case is whether the facilitation of the service in question
provides a real or tangible benefit to the community. If it does,
then a community service is established.
64. In (sic) a town with no face-to-face banking services the
facilitation of such services provided a substantial benefit to the
community. That benefit was both real and tangible. It consisted of
the fact that local banking then became available, increasing in a
concrete way the amenity of the town. It follows that in 2006 and
2007 WDCL was established for community services purposes. The
income of WDCL was, therefore, exempt under s 50-1 of the 1997
Act.
(2) ** Taxpayer entitled to a stay of judgment in order to
contest assessment? (DC of T v Denlay)
-
9
2010-09 ~ MTUN Master www.taxmatrix.com.au
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
Source: Month 08-2010-44 ~ Part 1-2(a) – DC of T v Denlay [2010]
QCA 217 (20 August 2010) McMurdo P & Chesterman JJA
What is the issue?
Did the primary judge, who ordered a stay of the Commissioner’s
right to recover tax debts from the taxpayer, give sufficient
weight to the Commissioner’s right to recover judgment debts for
unpaid tax by making a finding that it would be highly likely the
taxpayer would be adjudged bankrupt?
In simple terms that legal question could be put this way – Did
the primary judge get it wrong by allowing the taxpayer an
opportunity to contest the underlying tax debt?
What was the outcome?
The Court of Appeal:
♦ dismissed the Commissioner’s appeal against the stay of
judgment;
♦ noted that the purpose of the stay was self evident – to allow
the taxpayers’ appeals against the underlying assessments to be
heard;
♦ were dismissive of the Commissioner’s arguments that the
taxpayers’ loss of their property to the judgment and the
consequent inability to prosecute their appeals does not constitute
extreme personal hardship.
“It is preposterous to contend that the loss of the taxpayers’
entire estate, and with it any chance of demonstrating that the
basis for the assessments was wrong so that they should not have
lost their property, could not be a hardship rightly called
extreme. It is not easy to imagine a greater hardship in this
context”.
The Court distinguished situations where bankruptcy deprived a
taxpayer of the right to challenge an assessment from those where
the taxpayer had never sought to exercise the right to challenge an
assessment and was later subjected to bankruptcy proceedings
What was the evidence?
The Commissioner had obtained summary judgment against two
taxpayers, husband and wife in the amounts of $1.04m and $2.02m
respectively in respect of tax liabilities and penalties and
interest for the years 2002 to 2007.
The judge who gave the summary judgment ordered that the
judgments be stayed for six months or until another date fixed by
further order. Later the orders staying the judgment were extended
for a further six months.
The Commissioner brought an appeal challenging the correctness
of the decision to stay the judgment.
The taxpayers have appealed against the assessments to the
Federal Court and the hearing of their appeals is set for four
days, 13 to 16 September next.
What was the decision?
16. Before dealing with the arguments in detail I should notice
the statutory provisions which establish the “legislative scheme”,
and rehearse the principles relevant to a stay of execution of
judgment debt for assessed income tax, as they emerge from the
cases.
20. A convenient starting point in the consideration of
authority is Snow, in which French J considered the authorities at
some length and concluded (at 139):
“... the power of State courts to stay recovery proceedings ...
is well established and ... courts exercising it have regard to the
following propositions:
1. The policy of the (ITA Act) ... gives priority to recovery of
the revenue against the determination of the taxpayer’s appeal
against his assessment.
2. The power to grant a stay is therefore exercised sparingly
and the onus is on the taxpayer to justify it.
http://www.austlii.edu.au/au/cases/qld/QCA/2010/217.html
-
10
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
3. The merits of the taxpayer’s appeal constitute a factor to be
taken into account in the exercise of the discretion (although some
judges have expressed different views on this point).
4. Irrespective of the ... merits of the appeal a stay will not
usually be granted where the taxpayer is party to a contrivance to
avoid his liability to payment of the tax.
5. A stay may be granted in a case of abuse of office by the
Commissioner or extreme personal hardship to the taxpayer called on
to pay.
6. The mere imposition of the obligation to pay does not
constitute hardship.
7. The existence of a request for reference of an objection for
review where appeal is a factor relevant to the exercise of the
discretion.”
22. The relevance of “extreme personal hardship” to the exercise
of the discretion is well established. In Deputy Commissioner of
Taxation (NSW) v Mackey (1982) 13 ATR 547 Hutley JA expressed the
opinion that the power to stay should be exercised with great
caution and only in special circumstances. …
[His Honour’s thoughts were] quoted with apparent approval by
Kaye J (with whom King and Gobbo JJ agreed) in Cywinski v Deputy
Commissioner of Taxation [1990] VR 193 at 197.
The section [His Honour] referred to, s 201 of the ITA Act, was
to the same effect as s 14ZZR of the TA Act, which replaced it.
38. It is time now to return to the [Commissioner]’s arguments.
…
39. The first part of the argument, as I mentioned, is the
submission that the primary judge failed to afford sufficient
weight to the policy of the ITA Act and TA Act that, in Nathan J’s
neat aphorism, the taxpayer should “pay now and argue later.” The
judgment is not amenable to that criticism. The primary judge
clearly had regard to the principle. Her Honour expressly referred
to it and noted that, as a consequence, stays of execution were to
be given “sparingly”.
40. The [Commissioner]’s complaint that the principle is given
insufficient weight comes down to an assertion that the principle
overwhelms all other considerations, or that, in the circumstances
of this case, to grant the stay was an exercise of discretion so
unreasonable as to indicate error.
41. The first proposition cannot be accepted. There will be no
occasion for the grant of a stay if the only consideration is the
Commissioner’s right to recover judgment debts for unpaid tax. Yet
the authorities make it abundantly clear that there is a power, in
appropriate circumstances, to stay the execution of a judgment
notwithstanding the terms of s 14ZZR. …
43. The second complaint was that the primary judge wrongly
concluded that bankruptcy was “highly likely” to follow the
judgments, if no stay were granted. I have outlined earlier the
basis for the criticism, which fails because the [Commissioner]
misreads the judgment. Her Honour did not ignore the possibility
that a federal judicial officer might refuse to sequestrate the
[taxpayers]’ estates because of the prospect that the appeals
against the assessments might succeed. Her Honour expressly
mentioned that possibility.
45. It was, I think, common ground that the mere possibility of
bankruptcy following a judgment would not amount to extreme
personal hardship. Unless, therefore, there was evidence to support
a finding that bankruptcy was highly likely, or probable, in the
absence of a stay, it could not be said that the judgments would
result in the requisite degree of hardship.
46. In my opinion the evidence justified the finding. The
[Commissioner] moved for judgment at a time when the [taxpayers]’
appeals were progressing through the Federal Court. The
[Commissioner] declined to offer any undertaking that he would not
proceed to bankruptcy pending the hearing of those appeals. The
inference that the [Commissioner] will commence bankruptcy
proceedings is more than fairly raised.
47. Next the [Commissioner] contends that the likelihood of
bankruptcy was not sufficient to justify the stay. The submission
was that the outcome of any bankruptcy proceedings would be
determined by a federal court which might not order sequestration
because of the pendency of the appeals. …
48. I would reject the submission. It seeks to deprive the
Supreme Court altogether of its power to stay execution in
appropriate cases. …While the power should be exercised “sparingly”
or “with great caution” it is a power that can be exercised in
appropriate circumstances. It is not to be surrendered.
http://www.austlii.edu.au/cgi-bin/LawCite?cit=%281982%29%2013%20ATR%20547http://www.austlii.edu.au/cgi-bin/LawCite?cit=%5b1990%5d%20VR%20193
-
11
2010-09 ~ MTUN Master www.taxmatrix.com.au
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
49. It should not be overlooked that bankruptcy is not the only
avenue open to the [Commissioner] to obtain satisfaction of the
judgments. Absent the stays the [Commissioner] can enforce the
judgments by any of the means of execution provided for by the
UCPR. He has already exercised powers given him by the ITA Act and
TA Act to recover money from the [taxpayers]. He has issued
garnishee orders. There is no reason to suppose that the
[Commissioner] is not aware of his rights, or is not prepared to
exercise them. Although the primary judge’s reasons referred only
to the likelihood of bankruptcy, it is, I consider, equally likely
that the [Commissioner] might move to satisfy the judgments by
execution, in the absence of the stays.
50 This leads to the [Commissioner]’s third point, that the loss
of their property and consequent inability to prosecute their
appeals does not constitute extreme personal hardship. The point
may be answered shortly. It is preposterous to contend that the
loss of the [taxpayers]’ entire estate, and with it any chance of
demonstrating that the basis for the assessments was wrong so that
they should not have lost their property, could not be a hardship
rightly called extreme. It is not easy to imagine a greater
hardship in this context. Certainly the primary judge cannot be
criticised for so regarding it.
51. The [Commissioner]’s individual complaints are without
substance. It has not demonstrated that the primary judge mistook
the law or the facts. That leaves for consideration the contention
that the exercise of discretion to grant the stays was so
unreasonable as to indicate error, in particular failing to accord
sufficient weight to the legislative scheme.
(3) ** Did part IVA apply to scheme to obtain foreign tax
credits? (Citigroup v C of T)
Source: Month 08-2010-35 ~ Part 1-2(a) – Citigroup v C of T
[2010] FCA 826 (9 August 2010) Edmonds J
What is the issue?
Did the taxpayer enter into or carry out schemes for the
dominant purpose of obtaining a tax benefit in the form of foreign
tax credits?
Was the Commissioner entitled to cancel a foreign tax credit to
which CPL is otherwise entitled for the year ended 31 December 2003
and for the year ended 31 December 2004 in consequence of its
participation in two Hong Kong bond transactions, the first on 31
December 2003 (‘HKBT 2003’) and the second on 2 November 2004
(‘HKBT 2004’)?
What was the outcome?
The Court concluded that:
♦ the schemes were entered into with the dominant purpose of
obtaining a tax benefit.
♦ that the taxpayer was not liable pursuant to s 204(3) or
otherwise, to pay GIC:
What were the contentions
CPL contended that:
♦ the HKBTs exhibited none of the elements identified in the
Treasury Press Release issued on 13 August 1998 as being the target
of the relevant amendments made to Part IVA nor any of the elements
identified in the EM circulated by authority of the Treasurer at
the time the amending bill was introduced into the House of
Representatives (see [12] above);
♦ it should not be concluded that its dominant purpose in
entering into each of the schemes constituted by the HKBTs was to
obtain a tax benefit; rather, it should be concluded that its
dominant purpose was to obtain fee income, premium and the return
on the bonds.
The Commissioner’s case was that:
♦ it should be concluded that CPL’s purpose in entering into
each of the schemes constituted by the HKBTs was to obtain a tax
benefit in the form of a foreign tax credit;
http://www.austlii.edu.au/au/cases/cth/FCA/2010/826.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s204.html
-
12
♦ that CPL’s contention about exhibiting none of the elements
sought to read the EM in substitution for the plain words of the
Act, which do not contain the restriction on the operation of the
section for which CPL contended.
What was the evidence?
On 13 August 1998 the Treasurer of the day announced that the
provisions of Pt IVA of the 1936 Act would be amended with
immediate effect in relation to schemes entered into after that
time which are designed to acquire or generate foreign tax credits
that can be used to shelter low-taxed foreign source income from
Australian tax.
The Treasurer went on to say:
‘These transactions generally are structured to yield little or
no economic profit relative to the expected Australian tax
benefits. Typically they involve the acquisition of an asset that
generates an income stream subject to foreign withholding tax. An
illustrative example of one such arrangement is attached.
Step 1: Foreign Resident Company (ForCo2) owes royalty payment
to Foreign Resident (ForCo1) for the use of intellectual
property.
Step 2: ForCo1 & AustCo enter into assignment agreement
under which the right to receive the income stream in respect of
the intellectual property is assigned to AusCo.
Step 3: AusCo makes payment to ForCo1 for the right to receive
the income stream.
Step 4: The assigned income is paid to AusCo by ForCo2. Country
B withholds 10% tax on the royalty.
AusCo includes the income stream in its assessable income. After
“grossing up” to reflect the foreign tax, and claiming a deduction
in respect of the cost of acquiring the income stream, only a small
amount of net income is included in AusCo’s taxable income. AusCo
claims a foreign tax credit for the full amount withheld by Country
B. This amount is greater than the amount needed to offset the tax
in respect of the net foreign income. The excess credit is used to
reduce the Australian tax payable on other foreign income of the
same class.’
Paragraphs (bb) and (f) were added to s 177C(1) to implement the
announcement.
Dictionary
BPP BPP (Hong Kong) Partnership, the partners in which were CPL
and OIPL
BPQ BPQ (Hong Kong) Partnership, the partners in which were CPL
and OIPL
Guidelines Guidelines issued by the HKIRD on bond transactions
of the kind exemplified by the HKBTs
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
-
13
2010-09 ~ MTUN Master www.taxmatrix.com.au
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
Healthcote Healthcote Limited, a company incorporated in Hong
Kong whose ultimate parent company is Citigroup Inc
HKIRD Hong Kong Inland Revenue Department
What was the decision?
2 There is no issue in this case that, absent the application of
Part IVA, CPL is entitled to foreign tax credits arising out of
HKBT 2003 and HKBT 2004.
3 If the Court finds that the Commissioner is entitled to cancel
the foreign tax credits in reliance on Part IVA, a consequential
issue arises as to whether CPL is liable to pay the general
interest charge (‘GIC’) pursuant to s 204(3) of the 1936 Act or
otherwise: …
15 The real issue between the parties is the conclusion that
should be drawn, having regard to the eight matters or
considerations in s 177D(b), as to the dominant purpose of CPL in
entering into each of the schemes constituted by the HKBTs.
16 The Commissioner’s case against persons, other than CPL, who
entered into or carried out each of the schemes or part of them, as
to the conclusion that should be drawn as to their dominant purpose
in doing so, appears to be no different from that alleged against
CPL itself. Consequently, if it was not concluded that CPL had the
requisite purpose under s 177D(b) of entering into or carrying out
each of the schemes, it would follow, according to CPL, that no
other relevant person had such a purpose. Again, I think this must
be right; nor did the Commissioner press that if the Court should
conclude that CPL did not have the requisite purpose, it was
nevertheless open to the Court to find that another relevant person
did have such a purpose.
The Opening Salvos
17 In opening, CPL contended that a reasonable person could not
conclude that the dominant purpose of a person making an actual
payment of foreign tax was the acquisition of foreign tax credits
in the same amount. That is evident, so CPL contended, because no
rational taxpayer would pay a dollar of foreign tax simply to avoid
an obligation to pay an equal amount of tax in Australia: why, one
might ask, would the rational taxpayer be anything other than
indifferent as to where it paid that tax?
18 So much may be conceded where the foreign tax on the relevant
income is equal to or less than the Australian tax on that income;
it may also be conceded where the foreign tax on the relevant
income is greater than the Australian tax on that income by reason
only of a greater foreign tax rate. But where, as here, the foreign
tax rate (17.5%) is less than the Australian tax rate (30%) but the
foreign income base, in the years in which the relevant
transactions are entered into, is considerably greater than the
Australian income base by reason of the different computation of
those bases, resulting in greater foreign tax payable than the
Australian tax that would otherwise be payable, giving rise to
excess foreign tax credits, the door of inquiry under s 177D(b) as
to the dominant purpose of a person entering into a scheme giving
rise to a tax benefit in the form of those foreign tax credits, is
not foreclosed by recourse to arguments based on the rationality of
a taxpayer. It has to be determined by reference to the relevant
matters or considerations set out in s 177D(b) …
The Section 177D(b) Matters
131 As indicated in [25] above, some of the matters or
considerations referred to in s 177D(b) will not be relevant in a
particular case, while others will be relevant but neutral in the
sense of not pointing in one direction or the other in the
conclusion drawing process as to whether a person entered into or
carried out a scheme for the requisite dominant purpose. My
assessment of the facts of the present case leads me to the view
that matters numbered (vi), (vii) and (viii) are not relevant to
the task the Court has in the present case, but if they are, they
are neutral in the sense which I have described and would not alter
the conclusion to be drawn by a reasonable person having regard to
the five matters which I now propose to analyse in detail.
The manner in which the schemes were entered into or carried
out
132 There is no doubt that the structure of the schemes was
dictated by the Guidelines designed, as they were, to allow BOC, as
the principal partner in the CPP, a deduction, for Hong Kong
Profits Tax purposes, for the purchase price of the interest
coupons but at the same time requiring the BPP/BPQ to bring to
account that price as assessable profits, for Hong Kong Profits Tax
purposes. The matching required by the Guidelines
-
14
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
was designed to avoid any leakage of revenue, not only
quantitatively, but temporally by requiring the deduction on the
one hand and the profit on the other to be brought to account in
the same year. Additionally, it required that the BPP/BPQ not carry
on any trade or business in Hong Kong which might give rise to
losses which could be offset against the coupon profit.
133 But the identity of the participants in the structure, at
least on the BPP/BPQ side, were not dictated by the Guidelines;
they were dictated by the need for the participants, in particular
the principal partner in the BPP/BPQ, to be entitled to some form
of relief in a jurisdiction outside Hong Kong to offset the
post-tax loss in Hong Kong. That relief might take a number of
forms, but one form it could take was by giving a credit in the
jurisdiction of the principal partner’s residence for the tax
suffered in Hong Kong which might be applied against the tax
liability of the principal partner in its jurisdiction of residence
against other foreign source income which had not borne foreign tax
at a rate equal to the jurisdiction of residence rate. In the
relevant years of income, Div 18 of Pt III of the 1936 Act provided
such relief.
134 In my view, the choice of CPL as the principal partner in
the BPP/BPQ is explicable solely on the basis of the foreign tax
credit regime in Australia embodied, in the relevant years, in Div
18 of Pt III of the 1936 Act. On the other hand, this does not
determine the conclusion to be drawn in terms of s 177D(b); the
fact that CPL’s participation in the HKBTs is facilitated by
Australia’s foreign tax credit regime and that, but for that
regime, CPL would not have participated as such, does not answer
the conclusion to be drawn by s 177D(b); it remains to consider the
other relevant matters or considerations before drawing any such
conclusion.
The form and substance of the schemes
135 The form of the schemes was undoubtedly complex, largely
because of the requirement of the Guidelines. Indeed, the whole
form of the HKBTs had an air of artificial complexity which was no
doubt a function of the Hong Kong fiscal objectives: a deduction
for the CPP (BOC principal partner) and equivalent assessable
profits for the BPP/BPQ (CPL principal partner). The existence of
the Hong Kong partnerships on the CPL side no doubt provided a
territorial nexus for an entity otherwise composed of two non-Hong
Kong partners, but the partnerships were terminated the day after
the transactions were consummated.
136 … In short, each scheme involved the subscription for an
interest-bearing bond and the immediate sale of the interest
coupons attached to the bond for a lump sum payment. That all
occurred on day one and thereafter the stripped securities were
continued to be held, although not necessarily by the day one
parties, for the life of the bond. The financial and tax
consequences for CPL over the life of the bond flowed from what
occurred on day one, including the collateral arrangements
involving, in the case of HKBT 2003 for example, the swap of the
fixed leg of AUD60,495,296 on 31 December 2008 for the three
monthly AUD BBSW floating leg on AUD169,504,704.
The result in relation to the operation of this Act that, but
for this Part, would be achieved by the schemes
138 It is common ground that the result obtained under the 1936
Act but for the application of Pt IVA was a reduction of CPL’s
Australian tax. In the year ended 31 December 2003 the reduction
amounted to AUD9,613,285 being the balance of the Hong Kong profits
tax on HKBT 2003 (AUD11,561,339) available to be used as a credit
against other foreign source income after application of
AUD1,948,054 of such tax credit to the HKBT 2003 income in that
year. In the year ended 31 December 2004 the reduction amounted to
AUD9,653,163 being the balance of the Hong Kong profits tax on HKBT
2004 (AUD11,520,171) available to be used as a credit against other
foreign source income after application of AUD1,867,008 of such tax
credit to the HKBT 2004 income in that year.
142. Put shortly, while HKBT 2003 was pre-tax positive, it was
post-tax negative prior to taking into account the foreign tax
credits arising from the payment of Hong Kong Profits Tax on the
transaction; this was so, irrespective of whether or not the
pre-tax profit was inclusive of a ‘margin’ over cost of funds
utilised in the transaction.
143 Moreover, CPL’s other foreign source income facilitated the
immediate utilisation of the foreign tax credits.
144 In my view, these are matters which point strongly in the
direction that the conclusion to be drawn by the Court under s
177D, having regard to the matters set out in subparas (i) to (v)
inclusive of para (b) thereof, is that CPL entered into HKBT 2003,
and it follows HKBT 2004, with the dominant purpose of obtaining a
tax benefit in the form of those foreign tax credits.
-
15
2010-09 ~ MTUN Master www.taxmatrix.com.au
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
Edmonds J continued on to examine whether the taxpayer was
liable for GIC.
(b) Tribunals
(1) ** No entitlement to CGT small business concessions – 25%
penalty! (Cannavo And C of T)
Source: Month 08-2010-38 ~ Part 1-2(c) - Cannavo and C of T
[2010] AATA 591 (10 August 2010) Mr Julian Block, Deputy
President
What is the issue?
Was the taxpayer entitled to the CGT small business
concessions?
Which liabilities could be taken into account in determining the
net asset value for the purposes of the CGT small business
concessions?
What was the outcome?
The Tribunal concluded that the taxpayer’s net asset value far
exceeded the then applicable $5m test.
What is the impact of the decision for your firm’s
practices?
The calculation of the capital gain was incorrect – how good are
your working papers in relation to the calculation of the capital
gain?
Could you have made the same errors as the tax agent made?
A 25% penalty imposed on an understated capital gain will soak
up the fees from tax returns. Does your firm minimise the
possibility of miscalculating a capital gain? How foolproof is your
firm’s software or spreadsheets?
What was the evidence?
The taxpayer sold a building and claimed the CGT small business
concessions in order to reduce his tax liability.
The taxpayer was audited for the 2006 income year and on 6 April
2009 the [Taxpayer] was notified the Commissioner had determined
that the taxpayer was not eligible to access the small business 50%
reduction as he did not satisfy:
♦ the maximum net asset value test; and
♦ active asset tests.
The only evidence that was before the Tribunal in relation to
the relevant property was from the T statements which stated:
2. The [Taxpayer] obtained ownership of [672-676 Pacific
Highway, (“the property”)]. a period of time, as follows:
♦ 40% of 676 Pacific Highway, Chatswood on 8 August 1985 for
$169,148;
♦ the remaining 60% of 676 Pacific Highway, Chatswood on 18
November 1986 for $993,230;
♦ 40% of 672 Pacific Highway, Chatswood on 7 March 1986 for
$96,794; and
♦ the remaining 60% of 672 Pacific Highway, Chatswood on 18
November 1986 for $240,000
(each acquisition amount stated is inclusive of stamp duty and
other legal costs incurred upon acquisition).
3. The property was renovated in February 1997 for a total cost
of $2,440,400. By the date of sale, 11 July 2005, the depreciated
value of the improvements was $581,679 thus reducing the value of
the building costs, for the purpose of inclusion in the cost base
of the property, to $1,858,721
http://www.austlii.edu.au/au/cases/cth/aat/2010/591.htmlhttp://www.austlii.edu.au/au/cases/cth/aat/2010/591.html
-
16
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
5. On 11 July 2005, the [Taxpayer] entered into a contract for
the sale of the property for a sale price of $9,900,000 [T15-144].
Settlement of the sale of the property took place on 22 August
2005. As a consequence of entering into the contract for sale the
[Taxpayer] became liable to pay vendor’s duty equal to 2.25% of the
dutiable value of the property (being an amount equal to the GST
exclusive sales price)1 upon settlement.
6. …The [Taxpayer] drew upon [a bill facility]y at various times
to fund his business activities. Just prior to the sale of the
property, the [Taxpayer] had drawn upon $4,813,667 from the bill
facility. This comprised of $2,000,000…, $1,900,000 … and $913,667
….
7. At, or about 11 July 2005, the [Taxpayer] had loans owing
from related entities totaling $3,856,950. This comprised of:
♦ $3,803,231 loaned to Icon Property Investments ATF Icon
Property Unit Trust [T10-87]; and
♦ $53,719 loaned to Phonetalk Pty Ltd [T10-76].
10. On 16 May 2007, the [Taxpayer] lodged his income tax return
for the 2006 income year declaring a net capital gain of $1,179,357
[T3-14]. According to the Capital Gains Tax Schedule attached to
the return [T3-24 to T3-28], this was calculated as follows:
Capital gain from active assets $5,375,632
Total year capital gains $5,375,632
Less capital losses -$658,2052
Total capital gain from active assets $4,717,427
Less general 50% discount -$2,358,714
Less 50% discount for small business concession -$1,179,357
Net capital gain $1,179,356
Paragraph 17 disclosed how the taxpayer had calculated its tax
liability.
17. The [Taxpayer]’s liability for capital gains tax (“CGT”) was
calculated as follows:
As part of the property was obtained prior to the introduction
of CGT a portion of the capital gain was disregarded. This portion
was calculated as follows:
Capital proceeds ($9,900,000 x 29.92%3) $2,962,080
Less value of capital improvements ($1,858,721 x 29.92%) $
556,1294
$2,405,951
Less cost base –
Acquisition cost $169,148
Vendors tax ($222,750 x 29.92%) $ 66,647 $ 235,795
Capital gain to be disregarded $2,170,156 The remaining capital
gain was calculated a follows:
Total capital gain $6,319,357
Less capital gain to be disregarded $2,170,156
$4,419,201
Less- Current year capital loss $ 109,226
1 s. 146 and 150 of the Duties Act (NSW) 1997. 2 $109,226
(Current year capital losses) + $548,979 (Prior year losses) 3 This
was calculated as the percentage of the total area of the property
that related to the pre-CGT asset. This percentage is not in
dispute. 4 A capital improvement to a CGT asset acquired before 29
September 1985 is a separate CGT asset under subsection 108-70(2)
of the ITAA 1997.
-
17
2010-09 ~ MTUN Master www.taxmatrix.com.au
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
Prior year capital loss $ 548,979
CGT discount $1,745,498 $2,403,703
Net capital gain $1,745,498
Although there was no evidence before the Tribunal at one stage
the Tribunal was informed that one part of the property was
originally used as a car park and the other part as a service
station and that after 20 September 1985 a building was constructed
to house the taxpayer’s mobile phone and car radio business.
The reasons for the decision make reference to the contents of
an amended Statement of Facts and Contentions dated 27 July 2010
(“RASFC”).
What were the reasons for the decision?
8. Mr Hauer in respect of the RASFC agreed with much, but not
all of its content; in particular he agreed that:
…
(f) that in respect of the small business concession claimed by
the [Taxpayer] and in relation to the relevant year and although
there are references in the documents before the Tribunal to a
number of provisions of the Income Tax Assessment Act 1997 (the
“Tax Act”) the [Taxpayer] could succeed if, and only if the net
value of his CGT assets was less that $5 million (sometimes
referred to in these reasons as “the threshold”) and thus
satisfying the maximum net asset value test set out in section
152-15 of the Tax Act (in its form in respect of the relevant
year); if that test was not satisfied the [Taxpayer] could not seek
the small business concessions under any other sections, and in
particular sections 152-105, 152-205 or 152-300 of the Tax Act.
10. Mr Hauer contended that the Glowbuoy Unit Trust (referred to
in clause 8 of the RASFC) did not have a positive net asset value
and that by contrast its net asset value was negative; he said more
particularly that the [Commissioner] had incorrectly added back an
amount of employee benefits and consisting of leave entitlements
and PAYG. The Tribunal was informed that the PAYG component was at
a late stage allowed, but that the Commissioner should have also
allowed the leave entitlement amounts, in that the amounts in
question were in fact paid at a time which was in the circumstances
relevant. Mr Hauer contended also that, in any event the value, if
there was a positive net asset value, should have been taken into
account at one half and not the whole value. The Tribunal does not
consider it necessary to deal with these contentions having regard
to the fact that the amount involved is small and may properly be
considered as de minimis, and having regard to the fact that the
threshold in respect of the small business concession was far
exceeded; accordingly the value of this particular trust is for all
practical purposes irrelevant.
11. Mr Hauer contended, at considerable length, that the debts
(referred to in clause 7 of the RASFC) were not CGT assets and
should not have been taken into account for the purpose of
considering whether the threshold had been achieved. … Debts are
unquestionably assets as is clear having regard to section 108-5 of
the Tax Act. If moreover a debt being a capital asset is not
recovered in full the shortfall can be netted against capital gains
and where relevant carried forward.
15. The vendor tax which at the relevant time was in force in
New South Wales deserves some brief comment. The tax (now repealed)
was imposed as a percentage of the sale proceeds of real property.
In broad terms the tax arose and became payable in consequence of a
sale of real property and was payable on completion of that sale.
It is relevant to note that the tax was exacted on the whole sale
proceeds and not simply (as is the case with land tax) on the
unencumbered value of the land. ,,,. The tax could not in my view
be described as a liability which was contingent in any relevant
sense; the [Taxpayer] referred at some length to a decision of this
Tribunal in Re The Taxpayer and Commissioner of Taxation [2010]
AATA 455; clause 38 of the decision (which was referred to during
the hearing although in my view it is of limited if any relevance)
reads as follows:
I have difficulty in seeing how it could possibly be said that
the amount of $23,450 was not a liability of the [Taxpayer] “just
before” the execution of the contracts of sale. All of the
accountants’ work had been performed; all that remained to be done
was for an invoice to be prepared and sent for the fees payable.
The obligation to pay had been incurred prior to 24 October 2003
even if the date for payment had not yet arrived. A balance sheet
of the [Taxpayer] prepared as at 23 October 2003 would not be a
true and fair financial statement [Footnote: See s 286(1),
Corporations Act (Cth)] if it did not show the accountants’ fees as
a liability that had been accrued by the [Taxpayer].
-
18
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
16. The decision referred to in the preceding paragraph has been
appealed and it is neither appropriate nor necessary to comment on
it. …However, it is clear that the vendor tax constitutes an
incidental expense forming part of the cost base of the property
(and also the improvements) within section 110-35 of the Tax
Act.
Part C. Clause 17 of the RASFC
22. Clause 17 of the RASFC was the subject of considerable
discussion and debate. In effect the [Taxpayer] contests some
aspects of the calculation of the assessment.
25. Each of the tests contained in section 108-70(2) is
satisfied. For the purposes of paragraph (a) the relevant amount
ascertained from the tables is, so Mr Geale advised, $109,447 which
is much less than the cost base of the improvements; for the
purpose of paragraph (b) the 5% calculation produces a result which
is much less than the cost base of the improvements and regardless
of whether it is applied to the whole proceeds of sale or the
proceeds in respect of the improvements; it is clear then that the
improvements constituted a separate asset and Mr Hauer (correctly)
did not contend otherwise.
Part D. Miscellaneous
28. …Section 152-20(2)(a) of the Tax Act makes it clear (and I
refer here to the words in brackets in the first line) that debt is
taken into account for the purpose of the relevant calculation; it
reads as follows:
(2) In working out the net value of the CGT assets of an
entity:
(a) disregard *shares, units or other interests (except debt) in
another entity that is *connected with the first-mentioned entity
or with a *small business CGT affiliate of the first-mentioned
entity;
29. There was no dispute as to the fact that the debtor entities
were connected in accordance with section 152-20 of the Tax
Act.
Part E. Penalty
30. The [Taxpayer]’s tax return in respect of the relevant year
demonstrates in the clearest possible terms that the [Taxpayer] did
not calculate his capital gain correctly and that there were
important aspects of it which were omitted. It is here necessary to
note that the return was prepared by the [Taxpayer]’s then tax
agent; however the provisions of the Taxation Administration Act
1953 (“TAA”) make it clear that it is necessary to focus on the
actions of both the taxpayer and his agent. (There were indications
that the [Taxpayer] blames his previous tax agent for the fact that
proper disclosure was not made; it is unnecessary for the Tribunal
to express a view as to the extent to which the [Taxpayer] might or
might not have a claim against his former tax agent.)
31. Penalty was originally imposed at 50% of the tax shortfall
on the basis that the [Taxpayer] was reckless. However, the
Commissioner conceded in the RASFC that penalty should be reduced
to 25% on the basis that the [Taxpayer]’s conduct should more
appropriately be characterised as false and misleading within
section 284-90 of Schedule 1 to TAA.
33. The Commissioner cited authority to the effect that tax
agents are presumed to be aware of the law and that for this reason
a higher standard is expected of them. See in this context Hart v
Federal Commissioner of Taxation (2002) 51 ATR 471 at 479.
Part F. Conclusion
34. The [Taxpayer]’s net CGT assets were far in excess of the
threshold and so that he is not entitled to any small business
concession in respect of his capital gain.
38. As regards penalty the Tribunal does not consider that any
further reduction above the reduction conceded by the Commissioner
in the RASFC is warranted and, subject to that reduction conceded
to the [Taxpayer] by the [Commissioner], affirms the objection
decision in respect of the penalty.
-
19
2010-09 ~ MTUN Master www.taxmatrix.com.au
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
Editor:
The taxpayer’s representative in the matter was Mr Hauer, an
accountant who had not been the taxpayer’s tax agent at the time
the offending tax return was completed.
Over many years the Tribunal has been willing to highlight the
conduct of taxpayer representatives before the Tribunal – usually
by observation, sometimes cryptically, sometimes pointedly. The
Tribunal made several observations about the taxpayer’s
representative in this matter:
Mr Hauer in reply raised matters which had not been raised
previously and which led to further submissions by both parties,
and so that and to some extent the hearing took on some of the form
of a debate.
Mr Hauer contended, at considerable length, that the debts
(referred to in clause 7 of the RASFC) were not CGT assets and
should not have been taken into account for the purpose of
considering whether the threshold had been achieved. He contended
that this was so because they were debts pure and simple which
could not yield anything more than (at most) an interest return and
that the most which could be obtained in respect of the capital
amount of the debts was their face value; accordingly, so he
argued, they could not be CGT assets. He reinforced his argument in
this context by contending that if the debts were not recovered in
full a capital gains tax deduction would not be allowed.
Mr Hauer contended that the value of the property which was
relevant for the purpose of the threshold calculation was that set
out in a valuation obtained prior to the sale and pursuant to which
the value was set at $8,740,000.
At a later stage Mr Hauer claimed that the debts if they were to
be taken into account should be taken into account by reducing them
to the extent that payment would not be received if the debtors
were placed in liquidation.
Also at a later stage Mr Hauer claimed that the debts were
personal use assets although he could not point to any evidence to
this effect and again did not offer any.
Mr Hauer again at a late stage contended that the debts were not
used in connection with a business and should not for this reason
be taken into account.
During his submissions in reply Mr Hauer contended that debt
should not be taken into account by virtue of a statutory provision
to this effect although he could not remember which provision it
was.
Towards the end of the hearing contentions were made by Mr Hauer
and which had not been made previously and in support of which
evidence had not been and was not then produced.
In respect of the improvements Mr Hauer did not at any time seek
to deny that the improvement constituted a separate asset in
accordance with section 108-70 of the Tax Act.
(2) ** Was there hardship or special reaons to justify reduction
of HELP and SFSS repayments? (Dedes and C of T)
Source: Month 08-2010-30 ~ 1-1(b) - Dedes and C of T [2010] AATA
567 (30 June 2010) Senior Member R W Dunne
What is the issue? Should the Tribunal exercise the
discretion:
♦ in s 154-50 of Higher Education Support Act 2003 (“HESA”) to
amend the [Taxpayer]’s assessment for the year ended 30 June 2009
to excise the HELP and SFSS repayment amounts included in the
assessment?
♦ in s 154-45 of the HESA to defer the making of the
[Taxpayer]’s assessment for the year ended 30 June 2010 to include
HELP and SFSS repayment amounts in the assessment?
http://www.austlii.edu.au/au/cases/cth/AATA/2010/567.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/aata1975323/s50.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/aata1975323/s45.html
-
20
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
What was the decision? Should the [Taxpayer]’s assessment for
the year ended 30 June 2009 be amended to excise the HELP and SFSS
repayment amounts included in the assessment?
10. Sections 154-45 and 154-50 of the HESA allow the
Commissioner (and the Tribunal, upon review) the exercise of the
discretion to defer HELP and SFSS repayment amounts, or amend an
assessment if HELP and SFSS repayment amounts have already been
raised, if the Commissioner (or the Tribunal) is of the opinion
that payment of the relevant amounts would cause serious hardship
or there are other special reasons that make it fair and reasonable
to defer making the assessment or to make the amendment. …
14. Mr Dedes’ notice of assessment for the year ended 30 June
2009 issued on 28 July 2009. Included in the assessment was a HELP
repayment amount of $2,624.45 and a SFSS repayment amount of
$1,574.67, totalling $4,199.12. Mr Dedes is seeking amendment to
the 2008/2009 assessment to reduce the HELP and SFSS repayment
amounts to nil by reason of serious hardship or special reasons. As
Mr S Webb, Member, did in Re The Taxpayer (supra), it is necessary
to consider Mr Dedes’ factual circumstances to determine whether,
as a matter of probability to the reasonable satisfaction standard,
there are grounds to amend his 2008/2009 assessment under the terms
of s 154-50 of the HESA, so that no amount of tax is payable.
SERIOUS HARDSHIP
15. Plainly, hardship is to be assessed in relation to the HELP
and the SFSS assessed amounts, whether in fact payment has been
made or has yet to be made. When does payment of the assessed
amounts occur? Clearly, payment is effected when a PAYG credit is
applied against a HELP and SFSS assessment debt or repayment amount
of a person, even though a taxation deficit in equivalent amount
may result. It follows that the time at which hardship is to be
assessed in Mr Dedes’ 2008/2009 assessment is the time of effective
payment from PAYG credit of the HELP and SFSS repayment amounts
(see Re Szekely and Commissioner of Taxation [2001] AATA 704 at
paragraph 4). In Mr Dedes’ case, that time is the date on which his
assessment for the year ended 30 June 2009 issued, namely 28 July
2009.
25. On the evidence presented, I am not satisfied that the
[Taxpayer] is destitute or experiencing hardship to the extent
shown by the authorities to be “serious hardship”. Although his
financial position may be straitened, there is no evidence that he
will be left without reasonable acquisitions of food and clothing,
medical supplies or other basic requirements. He has medical and
dental requirements that may need to be provided for. However, he
received the retention pay prior to the termination of his
employment and, in reading the termination letter from the AVO
dated 17 June 2010 which he forwarded to the Tribunal on 2 July
2010, it appears that he would have also received payment in lieu
of 5 weeks notice of termination, together with severance benefit
and payments in lieu of leave.
26. He also owns his residence at Myers Lane which, on his
evidence, would now have a market value of approximately $600,000.
He said he believed he had the right to live in his residence with
a small mortgage and that the re-alignment of his financial affairs
should not involve a sale of the residence. In my view, there is
the capacity for him to re-align his financial arrangements by
disposing of his present residence and downsizing to a cheaper
residence that would be adequate for his personal and present
needs. The excess funds could then be used to provide him with the
medical and dental equipment that he requires. In doing so, and
having regard to the moneys he received from the AVO in June 2010,
I am satisfied that Mr Dedes will not suffer unduly burdensome
consequences depriving him of the necessities of life. In the
circumstances, I find that he has not established “serious
hardship” under the HESA, particularly s 154-50.
SPECIAL REASONS
27. The term “special reasons” has been seen as similar in
meaning to the term “special circumstances” used in Social Security
legislation: see Re Comptom and Commissioner of Taxation [1999]
AATA 351. Cases which demonstrate “special circumstances” must show
something which is “unusual, uncommon or exceptional” (see Re
Beadle and Director-General of Social Security (1984) 6 ALD 1 at
4). …
28. To prove “special reasons”, Mr Dedes’ position must be
different from the ordinary run of cases, but does not have to be
unique. In his case, the evidence clearly shows that he is not
destitute.
SUMMARY
http://www.austlii.edu.au/au/cases/cth/AATA/2001/704.htmlhttp://www.austlii.edu.au/au/cases/cth/AATA/1999/351.htmlhttp://www.austlii.edu.au/cgi-bin/LawCite?cit=%281984%29%206%20ALD%201
-
21
2010-09 ~ MTUN Master www.taxmatrix.com.au
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
32. Mr Dedes has not relevantly established “serious hardship”
or proved “special reasons” under either s 154-45 or s 154-50 of
the HESA in relation to the HELP and SFSS repayment amounts in (or
that might be included in) the 2008/2009 and the 2009/2010
assessments.
DECISION
33. The Tribunal affirms the decision under review.
Editor
The gratuitous comment from the Tribunal that the taxpayer could
downsize his house ignores the reality of the stamp duty expense
such a move would cause. It also ignores the reality that a person
who lost their job may be able to service their current housing
loan but not qualify for a new loan.
The comment about what the taxpayer could do didn’t need to be
made and shouldn’t have been made.
(3) ** Is the taxpayer carrying on a business in share trading?
(Smith and C of T)
Source: Month 08-2010-33 ~ Part 1-2(b) - Smith and C of T [2010]
AATA 576 (5 August 2010) Ms G Ettinger, Senior Member
What is the issue?
Was the taxpayer:
♦ carrying on a business in the 2007 and 2008 income years?
♦ in the business of being a share trader in the 2007 and 2008
income years?
In the alternative, were the shares to be treated as trading
stock on revenue account?
What was the outcome?
The Tribunal was satisfied that the taxpayer in the 2007 and
2008 years:
♦ invested reasonably large amounts of money and conducted
various buying and selling transactions;
♦ did not meet the tests in order to have been held to have been
conducting a business;
♦ was not a share trader in those years.
What was the evidence?
Mr Smith, who had completed a thesis on “share market
over-reaction” and also a graduate diploma in finance, claimed to
be in engaged in the business of share trading during the 2007 and
2008 income years.
Mr Smith transferred to Australia in 1996, worked for ABN Amro
for five years and later was one of five directors employed by
Babcock & Brown to develop an infrastructure team primarily
focused on public/private partnerships.
Mr Smith was represented at the AAT by his accountant, Mr
Hollestelle.
What is the impact of the decision on your firm’s practices?
This decision is one of real importance for many practitioners
with clients who claim to be share traders. After reading this
decision you might come to the conclusion that none of them could
be a share trader, but that should not be your conclusion.
A more appropriate response would be to seek to understand how
the Tribunal viewed the evidence before it and to understand the
deficiencies in the evidence that the Tribunal identified. The
different sets of figures were not helpful.
Having undertaken an evaluation of the evidence exercise you
will be in a better position to understand the evidence
http://www.austlii.edu.au/au/cases/cth/aat/2010/576.html
-
22
www.taxmatrix.com.au 2010-09 ~ MTUN Master
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
you will need to demand from a client before you could lodge a
tax return in which a person claims to be a share trader.
In paragraph 4 of the decision the Tribunal made this
observation:
“Mr HollestelIe, Mr Smith’s accountant who represented him at
the Tribunal, filed numerous documents and various versions of his
share accounts as well as four sets of Statements of Facts and
Contentions over the period of preparation of this matter,
including amended figures during the hearing.”
The observation is perhaps central to understanding what the
Tribunal saw as the vibe of the case and of particular importance
in understanding the Tribunal’s observation that “The evidence
before me indicates that Mr Smith did not represent himself as a
share trader until after he had lodged his income tax returns for
2007 and 2008.” For an understanding of how the Tribunal came to
its decision it is important to understand the role of impression –
or the vibe: see paragraphs 15, 17, 22, 27, 53, 69, 77, 84 and
86.
Having read the decision you might decide that some tax returns
lodged in relation to losses sustained in the GFC might need
revision.
What were the relevant legislative provisions?
The relevant legislation is the Income Tax Assessment Act 1997
(the Act), in particular:
6-5 Income according to ordinary concepts (ordinary income)
(1) Your assessable income includes income according to ordinary
concepts, which is called ordinary income.
Note: Some of the provisions about assessable income listed in
section 10-5 may affect the treatment of ordinary income.
(2) If you are an Australian resident, your assessable income
includes the *ordinary income you *derived directly or indirectly
from all sources, whether in or out of Australia, during the income
year.
….
8-1 General deductions
(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; or
(b) it is necessarily incurred in carrying on a *business for
the purpose of gaining or producing your assessable income.
Note: Division 35 prevents losses from non-commercial business
activities that may contribute to a tax loss being offset against
other assessable income.
(2) However, you cannot deduct a loss or outgoing under this
section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature;
or
(b) it is a loss or outgoing of a private or domestic nature;
or
(c) it is incurred in relation to gaining or producing your
*exempt income or your *non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
…..
70-10 Meaning of trading stock
Trading stock includes:
(a) anything produced, manufactured or acquired that is held for
purposes of manufacture, sale or exchange in the ordinary course of
a *business; and
…
-
23
2010-09 ~ MTUN Master www.taxmatrix.com.au
Tax Matrix Pty Ltd has no arrangements with any legal firms and
receives no payments for documents or deeds it recommends.
70-30 Starting to hold as trading stock an item you already
own
(1) If you start holding as *trading stock an item you already
own, but do not hold as trading stock, you are treated as if:.
(a) just before it became trading stock, you had sold the item
to someone else (at arm’s length) for whichever of these amounts
you elect:
• its cost (as worked out under subsection (3) or (4));
• its *market value just before it became trading stock; and
(b) you had immediately bought it back for the same amount.
Example: ….
Note: Depending on how you elect under paragraph (1)(a), the
sale may or may not give rise to a capital gain or a capital loss
for the purposes of Parts 3-1 and 3-3 (about CGT). It does not if
you elect to be treated as having sold the item for what would have
been its cost: see subsection 118-25(2). However, it can if you
elect market value.
When you must make the election
(2) You must make the election by the time you lodge your
*income tax return for the income year in which you start holding
the item as *trading stock. (If you do not make the election by
then because you do not realise until later that you started to
hold the item as trading stock, you must make the election as soon
as is reasonable after realising that.)
However, the Commissioner can allow you to make it later (in
either case).
How to work out the item’s cost
(3) The item’s cost is what would have been its cost for the
purposes of section 70-45 (about valuing trading stock at the end
of the income year) if it had been your *trading stock ever since
you last acquired it. In working that out, disregard section 70-55
(about acquiring live stock by natural increase).
…..
70-35 You include the value of your trading stock in worki