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1. The Finance Ministers meeting held in Paris to discuss offshore tax non-compliance
On 21 October, Australia attended the Finance Ministers meeting on Transparency and Exchange of Information in Paris. Australia was one of 17 OECD countries to attend the meeting which was convened by France and Germany. In a press release, the Assistant Treasurer, the Hon Chris Bowen, said that Australia is at the forefront of global action on enhancing tax transparency and information exchange.
The Australian Government supports the meeting’s call for the OECD to draw up lists of countries that meet and those that do not meet the OECD standards on tax transparency and information exchange. Key outcomes of the meeting were that the participants:
- favour action against jurisdictions whose legal and administrative frameworks facilitate tax fraud and evasion.
- are very concerned that the overall progress in implementing the present international standards on transparency and exchange of information has been slow.
- recognise the efforts made by certain jurisdictions that have set out a new direction for their financial centres and have signed Tax Information Exchange Agreements, which constitute effective instruments for fighting international tax fraud and evasion.
- urge all countries and territories that have not committed to the OECD standards yet, including significant financial centres, to do so.
- ask the OECD to establish a methodology to provide a clear distinction between the countries and territories which have substantially implemented the OECD standard on exchange of information and those which have not, and to publish its conclusions in 2009.
The participating countries will meet again before the summer of 2009 in Berlin, to review the progress made and provide further assistance to countries to protect their tax base from jurisdictions that fail to meet the OECD standards.
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2. Meeting with Australia’s Future Tax System Review Panel
Bill Palmer and Susan Cantamessa of the Institute, together with KPMG representatives Matt Hayes and Rick Asquini, met with members of Australia's Future Tax System Review Panel and Treasury on 22 October to discuss our joint submission, "Thinking beyond borders - tax reform for the 21st century". A copy of the joint submission is available on the Institute's website.
Submissions received by the Panel and discussions held with interested parties will be used in developing areas of focus for the consultation paper to be released in December this year. The Panel is scheduled to deliver its final report to the Treasurer at the end of calendar year 2009.
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3. Submission on Part C of the Guide to R&D Concession and withdrawal of R&D IT rulings
On 22 October, the Institute lodged a submission with the ATO regarding the withdrawal of Taxation Rulings IT 2442, IT 2451 and IT 2552 (the IT rulings). The withdrawal notice states that the contents of these rulings are ‘now included in Part C of the Guide to the R&D Taxation Concession’ (the Guide).
A copy of the Institute’s submission is available here.
Key comments and recommendations in the submission include the following:
- A number of statements in Part C of the Guide are unclear and have the potential to alter taxpayers’ rights or create confusion as to the ATO’s position on certain issues.
- Part C of the Guide does not offer taxpayers the same level of certainty as the IT rulings which, while not legally binding, were ‘administratively binding’ on the Commissioner.
- It would be preferable if all of the principles outlined in Part C of the Guide were supported by public rulings that are issued following a robust consultation process.
- Specific issues which should be covered by rulings include costing of expenditure, sale of products, overseas expenditure and collaborative arrangements.
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4. Scheme had substantially the same effect as a dividend stripping scheme - Lawrence v Commissioner of Taxation [2008] FCA 1497
The Federal Court (Jessup J) has dismissed the taxpayer’s appeal against an amended assessment as a result of a decision by the Commissioner to make determinations under Part IVA based upon s 177E(1) of the Income Tax Assessment Act 1936 (ITAA 1936) concerning dividend stripping.
The Commissioner contended that ‘companies controlled by the applicant had participated in dividend stripping schemes, or in schemes having substantially the effect of such schemes, the end result of which was that profits which were held for distribution by companies in which the applicant was the only shareholder were effectively converted into capital sums held by another company on trust for a class of discretionary beneficiaries which was confined to the applicant and members of his family’.
After considering case law such as the High Court's decision in Consolidated Press, the court concluded that the schemes were not by way of or in the nature of dividend stripping, as required by subparagraph (i) of s 177E(1)(a) of the ITAA 1936. However, the court did find that ‘both for the taxpayer and for the revenue, the effects of the schemes in the present case were substantially the same as the effect of a scheme by way of or in the nature of dividend stripping’ for the purposes of subparagraph (ii) of s 177E(1)(a) so that the amended assessments should stand.
The court then reduced penalties finding that the taxpayer’s position was reasonably arguable (so that the base penalty amount was 25 per cent of the scheme shortfall amount) and that this should be reduced by 80 per cent due to voluntary disclosure of the schemes by the taxpayer. In this respect, the court noted in particular that the issuance of a s 264 notice did not amount to notification of a tax audit.
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5. Amounts received in relation to service warrants scheme constituted ordinary income - Pre Paid Professional Administration Ltd v Deputy Commissioner of Taxation [2008] FCA 1580
The Tribunal has dismissed the taxpayer’s application with costs and held that the amounts at issue were ordinary income.
The taxpayer was a subsidiary of a United States corporation called Pre-Paid Professionals LLC (‘PPP’). In the 2005 and 2006 income years, the taxpayer received amounts of around $4.7m and $634,500 respectively and claimed that they were received in its capacity as an agent, at first as agent for the persons paying the monies and then as an agent for PPP.
The Commissioner assessed these amounts as ordinary income within the meaning of s 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that they were administration fees to which the taxpayer was entitled as “Administrator” under a business scheme relating to “service warrants”.
After examining a number of contracting clauses entered by the taxpayer with PPP and Business Agents (who in effect were retailer of the warrants), the Tribunal considered that the taxpayer had not made a case that it was holding the funds purely as agent on behalf of the Business Agent and then PPP.
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6. Commissioner’s decision not to make a personal services business determination affirmed - The Engineering Company v Commissioner of Taxation [2008] AATA 934
The Tribunal has affirmed the Commissioner’s decision not to make a personal services business (PSB) determination under ss 87-65(3B) or 87-65(6) of the ITAA 1997.
The applicant was a company providing engineering and related services to clients. In relation to the 2006 income year, the applicant sought a personal services business determination under Part 2-42 of ITAA 1997, which would have had the effect of not attributing certain income of the applicant to ‘Mr Engineer’ (a director of the applicant) under the personal services income (PSI) rules.
The applicant contended that it was entitled to a determination because, but for unusual circumstances in the 2006 income year, it would have satisfied the “employment test” in s 87-25 of the ITAA 1997 or the “unrelated clients test” in s 87-20 so that either the so-called “second alternative” in s 87-65(3B) or the so-called “fourth alternative” in s 87-65(6) of the ITAA 1997 should apply.
In affirming the Commissioner’s decision not to make such a determination, the Tribunal decided that:
- The PSI of Mr Engineer under s 84-5(1) should be determined as the amounts invoiced to Client A that related solely to work carried out by him. Amounts not capable of dissection that related to work carried out by both Mr Engineer and Mr O (another employee of the applicant), should only form part of Mr Engineer’s personal services income if the work invoiced was ‘mainly’ a reward for his personal efforts or skills.
- The applicant had met the employment test in each of the 2003, 2004 and 2005 income years and for the 2006 income year, the applicant satisfied the first condition of the second alternative. However, the applicant failed s 87-65(3B)(b) as no part of the applicant’s income was from the conduct of the relevant activity by Mr Engineer, that is, the conduct of engaging one or more other entities to perform work.
- The applicant had two broad approaches to obtaining work, one was to respond to advertisements, and the other was to make direct approaches to companies that the applicant thought might be able to use Mr Engineer’s or Mr O’s skills. Neither kind of approach amounted to making offers or invitations to the public at large or to a section of the public, thus failing the unrelated clients test.
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7. Penalty affirmed as no reasonably arguable position regarding outgoings and tax avoidance purpose - Faigenbaum and Ors v Commissioner of Taxation [2008] AATA 946
The Tribunal has affirmed the Commissioner’s decision with respect to the imposition of penalties, finding that the ATO correctly applied a penalty at the rate of 50 per cent of the tax shortfall amount.
The Tribunal originally handed down its decisions on this case in July 2007, in which it affirmed the Commissioner’s assessment, except in relation to the imposition of penalties. The Commissioner appealed to the Federal Court on that part of the Tribunal’s decision not to affirm the penalty imposition.
The Federal Court set aside that portion of the Tribunal’s decision, remitting the matter to the Tribunal to reconsider the legality of the imposition of the penalty in accordance with the relevant law, namely sections 226 and 226L of the ITAA 1936. The Federal Court decision was reported in Edition 14/2008 of the tax bulletin
On reconsidering the matter, the Tribunal concluded that the penalties were not excessive and were properly imposed, as it was not reasonably arguable that the outgoings in relation to the Satcom Financial Services Project were deductible. This was because there was no business being carried on and, in any event, the outgoings were capital in nature. Furthermore, the Tribunal found that the purpose of entering into the scheme was to obtain a tax saving, not to obtain a return, and therefore the project was a tax avoidance scheme.
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8. Decision Impact Statement (DIS) - Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation
On 24 October, the ATO published a DIS on the High Court's decision in Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21. That case considered inter alia whether both the apparent appointment of the trustee of a loss trust as a tertiary beneficiary and the distributions of income to that beneficiary were a sham, or otherwise ineffective in equity, in this complex case.
In setting out the ATO's view of the decision (where the High Court dismissed the taxpayer's appeal), the DIS states that: 'This decision confirms and reinforces the Commissioner's ability to challenge trust loss trafficking arrangements by ascertaining the true intentions of the parties. As such, the case demonstrates that it will not always be necessary to look to complex anti-avoidance rules to defeat tax avoidance arrangements'. The DIS then proceeds to explain the Commissioner's understanding of the case with respect to the sham issue and the application of prior year losses made by a trustee of a trust. Comments on the DIS are due by 19 December 2008.
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9. Taxation Ruling
TR 2008/8: - Income tax: the taxation treatment of ship and aircraft leasing profits under the ships and aircraft articles of Australia’s tax treaties. This ruling was released in draft form as TR 2008/D3.
The joint submission lodged by the Institute and various other professional bodies on the draft ruling, and the ATO’s response, is available on the Institute website.
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10. Miscellaneous Taxation Ruling - Withdrawal
MT 2024 - Fringe benefits tax: dual cab vehicles eligibility for exemption
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11. Draft Determination
TD 2008/D15 - Income tax: (a) are credits for United Kingdom interest withholding tax paid allowable under Article 22.1(a) of the 2003 United Kingdom Convention to an Australian resident financial institution which enters into an arrangement of the kind described in Taxpayer Alert TA 2007/3; and (b) would the Commissioner consider the application of Part IVA of the Income Tax Assessment Act 1936 to the arrangement?
The Institute will be preparing or co-ordinating the preparation of a submission to the ATO in respect of this Draft Goods and Services Tax Determination. If you have any comments please e-mail them to us at Tax Group by 11 November 2008.
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12. Class Rulings
CR 2008/62 - Income tax: BHP Billiton Group – Global Employee Share Plan
CR 2008/63 - Income tax: scrip for scrip: merger of St George Bank Limited and Westpac Banking Corporation
CR 2008/64 - Income tax: St George Bank Ltd – Employee Reward Share Plan – proposed merger with Westpac Banking Corporation
CR 2008/65 - Income tax: private practice arrangements for salaried medical officers in South Australian public hospitals
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13. Product Rulings
PR 2008/70 - Income tax: Kiri Park Projects – 2009 Growers
Addendum
PR 2008/13 - Income tax: tax consequences of investing in Next Financial Instalments – Series NF 330
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14. ATO Interpretative Decisions
ATO ID 2008/138 - Capital Gains Tax: small business concessions - control of discretionary trust income paid or applied
ATO ID 2008/139 - CGT: small business concessions - whether appointor controls discretionary trust
ATO ID 2008/140 - Royalty withholding tax: lease payments to United States tax treaty resident for hiring substantial equipment - royalty withholding tax
Withdrawal
ATO ID 2008/117 (Withdrawn) - Permanent establishment of a US Limited Liability Company
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15. Law Administration Practice Statement
PS LA 2008/15 - Taxpayer Alerts
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16. Senate Committee report tabled on Tax Laws Amendment (Political Contributions & Gifts) Bill 2008
On 20 October, the Senate Standing Committee on Economics tabled a report on its inquiry into the Tax Laws Amendment (Political Contributions & Gifts) Bill 2008. The Bill amends the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936 to remove tax deductibility for contributions and gifts to political parties, independent members and independent candidates.
The Committee recommended that the Senate refer to the June 2008 report (majority and minority) of the Joint Standing Committee on Electoral Matters on Schedule 1 of the Tax Laws Amendment (2008 Measures No.1) Bill 2008 in its deliberations on the Bill.
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17. 2009 Federal Parliamentary sitting program
The dates of the Federal Parliamentary sittings for 2009 have been released. Parliament will resume sitting from 3 February 2009 and conclude on 26 November 2009. The 2009-2010 Federal Budget will be handed down on 12 May 2009.
A copy of the Federal Parliament sitting dates for 2009 is available on the Parliament of Australia website.
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18. Recent ATO publications
Booklets and publications
Tax crime investigations and results - Find out about tax crime; how we are dealing with it and how you can help.
Tax practitioner webcasts - Tax practitioner webcasts are short video streaming presentations that cover current and relevant topics of interest to tax practitioners. Updated with new topics 21 October 2008.
Floor sanding and polishing benchmarks and examples - Industry endorsed benchmarks for floor sanding and polishing.
Administration
Prescribed private funds statistics - A summary of the donations received and distributions made by prescribed private funds including details of the categories of the deductible gift recipients.
One week to lodge your income tax return - The Tax Office today reminded people who prepare their own tax return that the Friday 31 October deadline is only one week away.
The BAS service provider - edition 19, October 2008 - Issued 3 October 2008. This edition includes information about eligibility for GST instalments, Quarter 1 super payments, GST Ruling update, lodgment concessions for BSP Portal and ECI users and usefule links and key dates for BSPs and their clients.
The BAS service provider - edition 18, September 2008 - Issued 2 September 2008. This edition includes information about The Compliance program 2008-09, Metal roofing industry benchmarks, processing of GST refunds and useful links and key dates for BSPs and their clients.
Minutes of meetings and related matters
Small Business Consultative Group draft minutes - 17 July 2008 - Draft minutes of the Small Business Consultative Group meeting held on 17 July 2008.
North Queensland Regional Tax Practitioner Working Group minutes - Current and previous minutes of the North Queensland Regional Tax Practitioner Working Group.
NTLG FBT Sub-committee minutes - 14 August 2008 - Minutes of the National Tax Liaison Group (NTLG) Fringe Benefits Tax (FBT) Sub-committee meeting held on 14 August 2008.
NTLG GST Sub-group minutes - Current and previous minutes of the National Tax Liaison Group (NTLG) GST Sub-group meetings.
FBT
Fringe benefits tax (FBT) - exempt car benefits - Explanation of when the use of certain motor vehicles is exempt from FBT, and a list of vehicles that qualify for the exemption and those that do not.
GST
GST annual compliance arrangements - Explains GST annual compliance arrangements
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19. ANZ signs Australia’s first Annual Compliance Arrangement with the ATO
On 20 October, the ATO and ANZ signed Australia’s first Annual Compliance Arrangement (ACA). The ACA covers income tax matters, which supplements the existing compliance and risk management arrangements previously signed by the two parties for goods and services tax (GST) and fringe benefits tax (FBT) under the Forward Compliance Arrangements.
In a joint press release issued by ANZ and the ATO, ANZ’s CFO Mr Peter Marriott said that all of these arrangements are sensible compliance and risk arrangement undertakings aimed at enhancing compliance, reducing risk, and increasing certainty for both parties. The ATO also noted ANZ’s strong commitment to corporate governance standards and sound tax risk management processes.
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20. Further convictions under Project Wickenby
The ATO issued a media release on 22 October announcing the recent convictions of two former Brisbane company directors, Christopher Cornell and Ian Cameron, for tax fraud charges by using offshore tax havens. The Tax Commissioner said that Project Wickenby taskforce is committed to tackling tax haven abuse, and these convictions should send a clear message to participants and promoters involved in abusive tax haven schemes that they can expect to face the force of the law.
Project Wickenby investigations have so far resulted in:
- 23 criminal investigations
- 28 people charged on indictable offences
- 249 completed tax audits (and a further 352 underway)
- $207.16 million in tax liabilities raised
- $79.06 million in tax collected (as well as $70.7 million in improved compliance by people reviewed under Project Wickenby)
- $75.7 million worth of assets restrained.
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21. Tips on claiming refund of excess imputation credits
On 23 October, the ATO published a document entitled Refund of excess imputation credits: companies to provide tax practitioners with tips on claiming refundable credits. It noted that a review of 2006 company tax returns shows that some companies are incorrectly claiming a refund for excess franking credits through label Z of the company tax return. Tax practitioners are reminded that label Z should only be used to report the following amounts:
- the company’s share of credit from a partnership or trust for tax withheld where an ABN was not quoted;
- the refundable amount of franking tax offsets for life insurance companies;
- franking credits for endorsed income tax exempt charities and deductible gift recipients; or
- any refundable amount of the film tax offset.
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22. Capital gains tax relief for the demutualisation of friendly societies
On 24 October, the Assistant Treasurer, the Hon Chris Bowen MP, issued a media release announcing that from 1 July 2008, the Government will provide relief from capital gains tax (CGT) for policyholders of friendly societies, including joint health and life insurers, which demutualise to for-profit entities. The Government will provide a cost base for shares issued to policyholders based on:
- The market value of the health insurance business; and
- The embedded value of the life insurance business and any other business of the friendly society.
In addition, consistent with the relief that is available when a health insurer demutualises to a for-profit entity, the Government has stated that it will:
- disregard any other tax consequences that may otherwise arise to policyholders under their friendly society’s demutualisation;
- extend the same treatment to executors and beneficiaries of a deceased policyholder’s estate who receive the shares, rights or a cash payment in the place of the deceased policyholder;
- disregard any capital gains or losses that may arise to the friendly society under its demutualisation;
- provide an exemption to the share tainting rules as it applies under other demutualisation rules but with reference to the market value/embedded value cost base; and
- provide a legislative framework for a lost policyholders’ trust.
It is also intended to provide for certain other transactions that are related to a friendly society’s demutualisation. The design of these amendments will be subject to consultation and a discussion paper will be released shortly on the Treasury website.
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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.
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ATO’s omitted income project
One member writes, with reference to a member’s input in Edition 40/2008:
Regarding the omitted income project, we had the same problem but it was easily resolved. We suggested a fix and were advised by the ATO to lodge a subsequent amendment to claim the deduction against the allowance (assuming within the gazetted allowance) thereby offsetting the additional income. This way we are both correct and no objection required.
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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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