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1. Commissioner’s submission to the Public Accounts and Audit Committee
As reported in Edition 38/2008 Tax Bulletin, the Commissioner of Taxation appeared before the Public Accounts and Audit Committee to explain how Australia’s tax system is being administered. A submission from the ATO was provided to the Committee prior to the public hearing on 3 October. Key topics and issues canvassed in the submission included:
- Implementation of the Government’s legislation program
- Delivering of the ATO’s Change Program
- Provision of advice to Treasury and Government
- Management of revenue collections and transfers
- Compliance program 2007-08
- Working with small and large businesses
- ATO’s strategies and performance in areas including public ruling, cash economy, misuse of tax havens and wealthy individuals
- Compliance assurance and support for transfers and regulation of superannuation funds
- Topical issues such as:
- Compliance program 2008-09
- ATO’s financial position
- Update on managed investment schemes
- Phoenix arrangements
- Judicial decisions
- Taxation rulings issued since April 2008.
A copy of the ATO submission can be accessed via Parliament website.
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2. Accounting Working Group (AWG) meeting
On 10 October, the Institute represented by Norman Kang attended an AWG meeting. Items discussed included:
- Activity statement form redesign
- Mail out to taxpayers with recurring errors in their activity statements
- Use of Proof of Identity protocols by debt collection agencies
- Communication strategy regarding debt collection agencies approving the remission of general interest charge.
In addition, updates were provided on luxury car tax, the ‘pre-filling’ of income tax returns and the superannuation Lost Members Register.
Once the draft minutes of the meeting are approved, they will be published on the ATO website and a link provided in the Tax Bulletin.
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3. Joint submission on draft determination
The Institute has lodged a joint submission, available on the Institute website, on the following draft Taxation Determination:
TD 2008/D12 - Income tax: is the deductibility of compound interest determined according to the same principles as the deductibility of other interest?
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4. No unlimited amendment period under s 170(10AA) in respect of the CGT event concerned - Metlife Insurance Ltd v Commissioner of Taxation [2008] FCAFC 167
The Full Federal Court (Spender ACJ, Jessup and Middleton JJ) has allowed the taxpayer’s appeal, finding that an amended assessment issued more than four years after the time at which tax under the original assessment became due and payable was not an amendment made, within the meaning of s 170(10AA) of the ITAA 1936, for the purpose of giving effect to s 104-10(3) of the ITAA 1997. Thus, the Commissioner was out of time to amend the taxpayer’s assessment.
In brief, the taxpayer sold a Taiwanese business in July 2000 (date of contract) which settled the following January. The taxpayer reported a capital gain on the transaction in its 2001 income tax return. Following an audit, the Commissioner issued an amended assessment more than four years later increasing the capital gain on the sale to include policy rights of around $12.5m.
One of the exceptions in s 170(10AA) to the amendment periods in s 170, as it was at the relevant time, was that the amendment of an assessment “at any time” was permitted where that amendment is “for the purpose of giving effect to” the backdating provision of s104-10(3). Broadly, that provision dictates that the time of a CGT event is when a contract is entered into.
In rejecting the Commissioner’s arguments, the Court was of the view that seeking to amend the assessment to include the policy proceeds would be doing more than just giving effect to the operation of s 104-10(3). The Court stated [at para 29]:
‘In our view, s 170(10AA) was not designed to allow for oversight by the Commissioner, but was designed to address new facts after the original assessment, and which could occur at any time, enlivening the operation of s 104-10(3). In situations where the settlement occurs before the making of the assessment, s 170(10AA) will generally have no work to do; this is because s 104-10(3) will already have been taken into account by the Commissioner in his assessment. In other words, where an assessment is made at a time when all relevant events have occurred, no mischief arises and no amendment under s 170(10AA) is needed to ‘give effect to’ the retrospective consequences of the subsequent event’.
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5. No error in Tribunal decision to disallow deductions for alleged scaffolding hire - 3D Scaffolding Pty Ltd v Commissioner of Taxation [2008] FCA 1477
The Federal Court (Edmonds J) has dismissed the taxpayer’s appeal against the Tribunal’s decision regarding the disallowance of deductions under s 8-1 of the ITAA 1997 for outgoings claimed to have been incurred for the hire of scaffolding equipment. The Tribunal concluded that the alleged lessor did not exist.
The Court rejected the taxpayer’s submission that the Tribunal applied the wrong test in determining whether the outlays were an allowable deduction under s 8-1. In this respect, the taxpayer submitted that ‘the issue was not to whom the payments were made, but what the payments were for – it is that latter issue which the Tribunal should have addressed’. The Court found that ‘[a]t best, they are mixed questions of fact and law; at worst, pure questions of fact’ and ‘even if these grounds of appeal did raise pure questions of law, they are ill conceived’. The Court also held that there had been no breach of procedural fairness in failing to put specific allegations of fabrication in spreadsheet documents to the witness.
In a related matter, the Court agreed that there was sufficient evidence to support the conclusion of the Tribunal that Mr Docherty controlled 3D Scaffolding Pty Ltd (and the fact that the Tribunal incorrectly concluded that he was the sole director was not necessary or relevant). It followed that Division 7A of the ITAA 1936 applied.
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6. Foreign earnings not exempt from tax under s 23AG - McCabe and Commissioner of Taxation [2008] AATA 904
The Tribunal has found that the applicant was not exempt from Australian tax on his foreign earnings as the exemption in section 23AG of the ITAA 1936 did not apply.
For the years ended 30 June 2001 to 2005, the applicant worked intermittently on a casual basis on projects overseas for the one company. He worked from contract to contract when work was available. When a contract was finished he was unemployed.
Although the applicant derived foreign earnings from foreign service, the Tribunal found that the applicant had not met the requirement of at least 91 days of continuous foreign service required by subsection 23AG(1) in any of the relevant years (except for the period 11 January 2004 to 14 April 2004 by virtue of the operation of former subsections 23AG(6A) to 6(E)). This was because each return to Australia between the periods of overseas work constituted a break or interruption in service.
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7. Travel expenses incurred by travel agent allowable deductions under s 8-1 of ITAA 1997 - Sanchez v Commissioner of Taxation [2008] AATA 896
The Tribunal has set aside the Commissioner’s objection decision, and in substitution, found that the sum of $8,337.34 comprising overseas travel expenses and local food and incidentals were allowable deductions under s 8-1(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997).
The Commissioner had disallowed tax deductions claimed by the taxpayer for his overseas travel expenses of $9,985 for the 2005 income year, under s 8-1(1)(a) of the ITAA 1997.
During 2004/2005, the taxpayer worked as a sales consultant for STA Travel and undertook travel on three occasions, namely, a Round the World trip, Northern Territory trip and the US trip. The deductions at issue consisted of actual travel expenses of $8,480 and an estimate of food and incidentals of $1,505. The taxpayer contended that to survive in the travel industry, “you have to be passionate about travel” and “you have to travel at every available opportunity”.
After examining a range of evidence, including the taxpayer’s itinerary for the three trips and a statement about the travel industry by the CEO for the Youth Hostels Association of South Australia, the Tribunal concluded that the overseas travel expenses claimed by the taxpayer, not only contributed to developing his knowledge and skills as a travel sales consultant, but also resulted in improved proficiency and increased income.
The Tribunal was also satisfied that none of the overseas travel expenses claimed were of a private or domestic nature.
With respect to the unsubstantiated expenses claimed, the Tribunal agreed that the taxpayer had not obtained and retained sufficient written evidence to satisfy the substantiation rules in Division 900 of ITAA 1997, however, it was satisfied that the discretion under s 900-195 of ITAA1997 should be exercised given the nature and quality of the evidence available, except for overseas food and incidentals which could not be established.
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8. Capital gain on sale of property assessable to applicant, no trust relationship - Bottazzi v Commissioner of Taxation [2008] AATA 890
The Tribunal has affirmed the decision of the Commissioner in respect of a capital gain made on the sale of a residential property but has reduced the penalty imposed to 25 per cent of the tax shortfall (from 75 per cent).
The applicant unsuccessfully argued that he had purchased the property as trustee for a friend. However, there was no documentary evidence of the existence of any trust relationship and to the contrary, all documents showed Mr Bottazzi as the legal and beneficial owner. Furthermore, Mr Bottazzi had included rental income from the property in 1996 and 1997 and had claimed deductions for interest and other property expenses. Mr Bottazzi then contended, in relation to the purchase of the property, that the parties (he and the friend) were not dealing with each other at arm’s length. This argument was also rejected as no evidence of the market value at that time was presented.
The Tribunal also rejected the applicant’s contention that the cost base of the property should include the cost of improvements as there was no evidence as to the date or cost of the alleged improvements. The applicant also challenged the validity of the assessment as it was made well outside the 4-year limitation period. However, the Tribunal considered that on balance there was avoidance of tax due to evasion so that the time limit did not apply and the amended assessment was valid.
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9. No off-road credit or fuel tax credit for use in dredge - McQuade Marine No. 2 Pty Ltd v Commissioner of Taxation [2008] AATA 902
The Tribunal has determined that the vessels of the applicant were both dredges and thus excluded under section 36(7) of the Energy Grants (Credits) Scheme Act 2003.
The applicant, therefore, was not entitled to an off-road credit in respect of fuel it acquired between 1 July 2003 and 30 June 2006. For the same reason, the applicant was also not entitled to a fuel tax credit under the subsequent fuel tax scheme for the period 1 July 2006 to 30 June 2008.
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10. Class Rulings
CR 2008/61 - Income tax: implications of the Centennial Coal Company Limited return of capital for participants in the Centennial Deferred Employee Share Plan
Withdrawal
CR 2007/113W - Income tax: merger between the Mulgrave Central Mill Company Limited and TQ Sugar Limited
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11. Product Rulings
PR 2008/65 - Income tax: Great Southern 2009 High Value Timber Project
Withdrawal
PR 2008/15W - Withdrawal - Income tax: Mediterranean Olives Project 2008 - (Joint Venture Growers)
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12. ATO Interpretative Decisions
ATO ID 2008/136 - GST and motel apartments
ATO ID 2008/137 - Separate Net Income: account-based pensions
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13. Legislation update
The following tax-related Bills received Royal Assent:
- First Home Saver Accounts (Further Provisions) Amendment 2008 (Act No.92 of 2008) – 30 September
- First Home Saver Account Providers Supervisory Levy Imposition 2008 (Act No.93 of 2008) – 30 September
- Tax Laws Amendment (2008 Measures Nol.4) 2008 (Act No.97 of 2008) – 3 October
- A New Tax System (Luxury Car Tax Imposition – Customs) Amendment 2008 (Act No.98 of 2008) – 3 October
- A New Tax System (Luxury Car Tax Imposition – Excise) Amendment 2008 (Act No.99 of 2008) – 3 October
- A New Tax System (Luxury Car Tax Imposition – General) Amendment 2008 (Act No.100 of 2008) – 3 October
- Tax Laws Amendment (Luxury Car Tax) 2008 (Act No.101 of 2008) – 3 October
- International Tax Agreements Amendment (No.1) 2008 (Act No.102 of 2008) – 3 October
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14. Senate’s draft legislation program – 2008 Spring sittings week 5
The Senate has released its draft legislation program for the period 13 to 16 October and it is expected to resume debate on the following tax related Bills:
- Tax Laws Amendment (Medicare Levy Surcharge Thresholds) Bill (No.2)* - 14 October
- International Tax Agreement Amendment Bill (No.2) 2008 - 16 October
*Subject to passage through the House of Representatives
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15. Recent ATO publications
Administration
Education tax refund - This measure will amend the Income Tax Assessment Act 1997 to allow families to claim for certain costs of educating their primary and secondary school children where certain eligibility requirements are met.
Superannuation
Self-managed super funds and binding death benefit nominations - How the super law applies to self-managed super fund trustees accepting a binding death benefit nomination from their members.
Super member tax file number notification - electronic reporting specification - Specifications on the system requirements necessary for the Super member tax file number (TFN) notification to be received electronically.
Health Funds
Demutualisation of MBF - This information applies to you if you had a private health insurance policy with MBF on 8 November 2007 and receive a payment of cash under the demutualisation of MBF which took place on 16 June 2008.
Demutualisation of NIB - This information applies to you if you had a private health insurance policy with NIB on 20 March 2007.
Luxury Car Tax
Luxury car tax - The Government announced in the 2008-09 Budget that it will increase the luxury car tax from 25 per cent to 33 per cent from 1 July 2008.
Luxury car tax - The Government announced in the 2008-09 Budget that it would increase the luxury car tax from 25 per cent to 33 per cent from 1 July 2008.
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16. Terry Murphy appointed to the role of Tax Office Special Counsel
On 9 October, the Commissioner of Taxation appointed Terry Murphy to the role of Special Counsel at the ATO, commencing 1 December 2008. Mr Murphy will complement the existing Special Counsel, the Hon. Daryl Davis QC, who will remain in that role until December 2009.
Mr Murphy has practised at the Victorian Bar since 1990. He is a member of the Committee of the Tax Bar Association, a member of the Taxation Committee of the Business Section of the Law Council of Australia, a former State Councillor of the Taxation Institute of Australia and a frequent presenter at state and national conferences.
In his role as Special Counsel, Mr Murphy will undertake court appearances, provide assistance in mediations, prepare advice and assistance on complex technical issues and provide training and guidance to ATO staff. He will also participate on rulings and other panels.
The relevant press release is available here.
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17. Cash economy: ATO update
As part of the strategy to address the cash economy, the ATO is increasing direct contact with businesses that have high volumes of cash transactions. The ATO has sent 44,000 letters to relevant businesses throughout July, August and September and will be sending a further 2,000 letters in October. The letters outline assistance available for businesses, including practical tools that can help with record keeping.
The ATO will also be advising tax agents who have multiple clients identified. Some tax agents may have already received letters from the ATO and it is possible they may receive additional letters regarding this over the next few months. The ATO encourages tax agents to discuss potential compliance issues with any clients identified under this program.
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18. Garnaut Climate Change Review Final Report released
On 30 September, the Garnaut Climate Change Review released its final report. The final report followed the release of the draft and supplementary draft reports in June and September 2008, and provided recommendations on the policy options for Australia to most effectively respond to climate change.
As previously reported, the Review was an independent study conducted by economist Professor Ross Garnaut, commissioned by Australia's Commonwealth, State and Territory Governments in 2007.
Chapter 14 of the final report deals with Australia’s emission trading scheme. The Institute has previously lodged a submission on the tax-related aspects of the proposed emissions trading scheme in response to the Australian government’s Green Paper on the Carbon Pollution Reduction Scheme (CPRS).
For detailed information on the Review, including a copy of the final report, go here.
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Chartered Accountants Tax Update for Business
Throughout November 2008 and March 2009 in Sydney, Melbourne, Adelaide, Perth and Brisbane. In just 3 hours, explore the current and impending legislative changes across all areas of taxation relative to business.
Chartered Accountants Managing the Payroll Function Workshop
Throughout November in Sydney, Melbourne, Adelaide, Perth and Brisbane. Legislative changes resulting from the Federal Budget have impacted payroll. Be able to confidently deal with the myriad of issues affecting you.
Chartered Accountants Trusts and Tax for Property Seminars
Throughout November in Sunshine Coast, Cairns, Mackay, Hobart, Launceston, Canberra, Albury, Moree, Dubbo, Port Macquarie and Lismore. Unlock the tax benefits in trusts. Analyse the key tax attributes of trusts and recent litigation developments, and learn how those tax attributes can be used effectively in a commercial environment.
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Help us to improve the bulletin by sharing your tax issues and experiences that might be of interest to other members. Responses should be emailed to taxgroup@charteredaccountants.com.au
Disclaimer
The Institute has created and maintains this tax bulletin as a service to its members and the community. While some of the information provided is about legal issues and legislation, it is not legal advice. The Institute does not expect or invite any person to act or rely on any statement, view or opinion expressed in this bulletin, and readers should make and rely on their own inquiries in making any decisions or giving any advice.
The Institute accepts no responsibility for any errors or omissions contained in this bulletin, and disclaims all warranties with regard to the information at this bulletin, including all implied warranties of merchantability and fitness for a particular purpose. In no event shall the Institute be liable for any loss or damage arising out of or in connection with the use of this bulletin or the information contained in it, including special, indirect or consequential loss or damage, and whether such loss or damage arises in contract, negligence, tort, under statute, or otherwise.
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Any information provided to the Institute in connection with this bulletin shall be provided by the submitter and received by the Institute on a non-confidential basis. The Institute shall be free to reproduce, use, disclose and distribute this information to others without limitation.
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