Significant Rulings And Cases 2006

Transcription

1 Copyright notice The Taxation Institute of Australia website and all the content downloaded (except Third Party Products*) from the Taxation Institute of Australia website remains the property of the Taxation Institute of Australia and shall not be reproduced, distributed, displayed or disclosed without the written permission of the Taxation Institute of Australia. *Copyright of the Third Party product applies Disclaimer notice Significant Rulings And Cases 2006 The material published in this paper is published on the basis that the opinions expressed are not to be registered as the official opinions of the Taxation Institute of Australia. The material should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests. Harry Patsias FTIA - Thomson Playford OVERVIEW Personal Services Income PSI: business premises test passed SIGNIFICANT ISSUES JANUARY TO SEPTEMBER INCOME DEDUCTIONS CAPITAL GAINS TAX TRUSTS COMPANY / SHAREHOLDER ISSUES PART IVA GST FBT SUPERANNUATION ADMINISTRATIVE ISSUES OTHER Dixon Consulting Pty Ltd v FCT Business premises consisting of a garage with upstairs offices located at a residential premise physically separated & had business signage. Business Test at section 87-30(1) satisfied if taxpayer maintains and uses business premises: from which PSI in gained; exclusively used; physically separated from private premises; and physically separated from service acquirer The AAT held that the business premises test was satisfied. Termination and Compensation Payments Payment from employer was an ETP Termination and Compensation Payments Settlement payment not assessable McCunn v FCT TP alleged lack of professional courtesy, professional mistreatment and physical assault. TP argued payment was in respect of personal injury AAT held TP did not prove that she suffered any personal injury. McNally v FCT TP was admitted to accounting partnership, had disagreement with other partners and left the firm. Received a settlement amount. ATO assessed TP on settlement sum plus opening timing differences. Opening timing differences included prepayments, opening and closing balances of work in progress which was not assessable for tax purposes until the relevant invoices had been issued (last year s closing timing differences) of the partnership. AAT held that the settlement sum was a capital receipt. However AAT held that opening timing differences should have been included as income

2 Termination and Compensation Payments Compensation payments assessable Trading Stock Property constituted trading stock - losses not transferable Case 9/2006 TP injured at work and employment was terminated. TP was awarded compensation including an amount for aggregated weekly payments. AAT held that payment was capable of dissection and lump sum payments for weekly earnings paid in arrears was ordinary income because they were payments of earnings to substitute for what the injured worker might have been earning had he not been injured. R & D Holdings Pty Ltd v DFCT Diagram: Losses Transferred Trading Stock Revaluation Distribution TP Co CR Co PROPERTY U/T Third Party Unit trust made an income distribution to TP Co including a $20M amount for revaluation of trading stock. Trading stock was a Sydney CBD property. CR Co transferred losses of $26M to TP Co. The ATO accepted the trading stock revaluation as income and disallowed the transferred losses. The ATO argued that: excess interest was of a capital nature and CR Co carried on no business for the purposes of the same business test Trading Stock General Deductions Property constituted trading stock - losses not transferable No deduction for abnormal clothing expenses Federal Court held: Unit trust s property was trading stock. The excess interest was merely interest on a loan and was an allowable deduction to TP Co s subsidiary, CR Co. The interest losses could be transferred to TP Co subject to satisfying the relevant loss transfer provisions. As a consequence of the 50% change in beneficial ownership of TP Co in July 1997, TP Co did not satisfy the continuity of beneficial ownership test. Additionally, CR Co did not satisfy the same business test. TR Co was unable to use the transfer losses from CR Co. Case 3/2006 Female CEO total clothing footwear and accessories $81,800. Sought to claim $38,800 as abnormal work related expense. AAT held that no deduction was allowable. General Deductions Deduction for management fees allowed General Deductions High Court affirms concession fees deductible BCD Technologies Pty Ltd v FCT FCT v City Link Melbourne Limited TP Co incurred a management fee to Co 2 of $1.165M. Calculated on Co 2 s expenses plus a 15% mark-up. No written agreement executed until the following year, however directors of both companies considered the arrangement as enforceable. ATO denied deduction of $1.165M to TP Co and argued there was no commitment to make the payment, the payment was not incurred for a business purpose and the agreement in the following year did not refer to earlier oral agreement. TP Co was the project vehicle for the $3B Melbourne City Link. TP Co claimed a deduction in respect of its issue of concession notes. ATO denied deduction. Features of the concession notes. AAT held that TP Co was allowed the deduction in full.

3 General Deductions High Court affirms concession fees deductible General Deductions Hearse not subject to car limit HCA held by majority that the concession fees, represented by the concession notes were deductible in full. Principles: It has long been recognised that an outgoing may be 'incurred', but not 'discharged', in the relevant year of income. A condition affecting the timing of the discharge of a liability (but not its creation) does not render the liability contingent in any business or commercial sense. The amount of the liability for concession fees corresponded precisely to the period to which a concession fee related. In any event, the legislation does not require that the purposes of an outgoing be the gaining or production of income in the year the outgoing is claimed as a deduction. The concession fees were periodic licence fees in respect of the City Link infrastructure assets. Taxation Determination TD 2006/39 A bit of light relief from the ATO. Non-Commercial Losses No special circumstances Olive Trees Non-Commercial Losses No special circumstances Olive Trees Delacy v FCT and Hall v FCT Concerning olive tree plantations and non-commercial losses. Overview of non-commercial losses rules in Div 35 - can deduct if satisfy following tests: If primary production business, TP s other income < $40K; or Assessable Income of business is $20K; or Profit in business 3 out of 5 years; or Real property used in business $500K; or Other assets used in business $100K. Otherwise Commissioner has discretion : Special circumstances. An objective expectation. Delacy v FCT TP was legal practitioner and initially planted 320 trees followed by 280 trees. Because of drought was not able to plant the other 1400 trees as planned. AAT held that the initial planting of 320 trees could not be expected to produce income to satisfy the AI test in future years. AI test would have been satisfied if initial planting was at least 1,430 trees. Non-Commercial Losses No special circumstances Olive Trees General CGT Provisions CGT: consideration assessed on entitlement Hall v FCT TP planted 2720 trees in 1999, incurred losses and was not expected to show a profit until 2008 year. AAT held that for the loss years, the Commissioner should not have exercised discretion as the activity was unlikely to produce any commercial crop within 4 to 5 years. Case 2/2006 TP Co owned shares in X Co which it sold for $480M less any payments in respect of X Co s liabilities not yet emerged or crystallised (including tax claims). TP Co amended its capital gain reducing its proceeds received. AAT rejected ATO s arguments and held that the capital gain was represented by the final calculation made by the taxpayer after reimbursement to purchaser in accordance with the agreements.

4 General CGT Provisions CGT: exception for same beneficiaries and trusts: Taxation Ruling TR 2006/4 General CGT Provisions CGT: insurance on the life of an individual: Considers the circumstances in which the beneficiaries and terms of two trusts are considered to be the same for the purpose of applying the exceptions to CGT events E1 and E2. Things that do not need to be the same: Trustee, Name of Trust, Commencement Date, Settlor and Trust property (except the transferred asset) Things that must be the same: the beneficiaries and terms of both trusts - even minor differences will prevent application of the exception must have the same meaning and effect identity of the appointor and their successors FTE or an IEE (if made) TD 2006/D36 Ruling considers that a "policy of insurance on the life of an individual" in s of ITAA1997 is not limited to a life insurance policy within the common law meaning of that expression. General CGT Provisions Demergers: reallocating ownership interests: Small Business Concessions TD 2006/D19 Commissioner considers that the apportionment will be reasonable if a taxpayer calculates the new cost base of each post demerger interest in accordance with the market value of that interest relative to the total market value of all of their post demerger interests (relative market value method). Federal Treasurer announced in May that for the 2006/7 year onwards: the controlling individual test is to be replaced by a new significant individual 20% test ; and the net assets threshold is to be increased from $5 million to $6 million. Service Trusts Beneficiary not presently entitled to trust income In April, the ATO released the long-awaited ruling on service trusts to supplement IT 276. TR 2006/2 is also accompanied by a guide entitled "Your service entity arrangements". Main point is that there must be an objective commercial explanation for the whole of the expenditure made under the service arrangement. The characterisation of expenditure under a broader inquiry must always be resolved by a commonsense or practical weighing of the whole set of objects and advantages which the taxpayer sought in making the outgoing. After all the dust has settled what is the final wash-up for clients? Pearson v FCT TP was a primary beneficiary of a discretionary trust (Trust). Trust held units in two unit trusts, UT1 and UT2. ATO issued amended assessments to UT1 and UT2 income. ATO issued amended assessment to Trust and TP. TP argued that the Trust was not presently entitled to income of UT1 and UT2 as there had been no effective determination of the net income. ATO argued that the Trust was presently entitled to the income of both UT1 and UT2.

5 Beneficiary not presently entitled to trust income Trust losses not deductible; loans treated as distributions Pearson v FCT Full Federal Court held: The Trust was presently entitled to the whole of the net income of UT1. The Trust was not presently entitled to the net income of UT2. In relation to UT2, also found that Commissioner could not rely on the rule in Saunders v Vautier as that rule could not apply in relation to unit trusts such as UT1 and UT2 on the basis of what was said by the High Court in CPT Custodian Weyers & Ors v FCT TPs acquired a trust for $155K which had accumulated losses of $2.65M. TPs conducted their business through the trust and used the losses to offset profits. Trust lent moneys to the TPs. Issues to be decided were: Whether the trust losses were deductible; Whether loans were assessable as distributions to TPs. FCA held: The trust losses were not deductible. The loans were distributions and assessable to the TPs. Division 7A PS LA 2006/2 GA Loans that become statute barred Division 7A Distribution of shares in subsidiary assessable as dividend ATO to take no active compliance to treat statute barred private company and trustee loans made before the enactment of Div 7A as giving rise to a deemed dividend. Practical approach adopted by ATO. FCT v Condell HP Co transferred assets and liabilities to a subsidiary A Co. HP Co then approved a distribution of shares in A Co to the shareholders of HP. TP received shares in A Co. ATO assessed the distribution of the shares as a dividend to TP. The Federal Court held that: shares received in A Co were assessable. it was sufficient that the source of the distribution was profits by way of earnings retained by HP Co from previous years. s 44(1)(a) requires only consideration from the company s viewpoint not the taxpayer s. Consolidations Same business test & consolidated groups: Consolidations Consolidation & disposal of membership interests: TR 2006/D4 Sets out the ATO s view on how the "same business test" (SBT) applies in determining whether deductions are available to the head company of a consolidated group for prior year tax losses, bad debts or net capital losses. The head company needs to show that the one overall business carried on by that head company is the same. The one overall business of the head company is to be identified by examining all of the activities, enterprises or undertakings carried on by the head company. TD 2006/36 The Commissioner considers that the profit on the disposal of membership interests in a subsidiary member of a consolidated group can be income according to ordinary concepts or a capital gain to the Head Company, depending on the facts and circumstances of the particular case.

6 Consolidations Consolidation & deregistration/liquidation of subsidiaries: Consolidations Consolidation & market value of business goodwill: TD 2006/58 and TD 2006/59 TD 2006/58 provides that a subsidiary company that is deregistered under the Corporations Act 2001 will cease to be a member of a consolidated group with the consequence that it is treated as a leaving entity. TD 2006/59 states that the unsatisfied debts of a subsidiary at the time of deregistration are recognised as accounting liabilities under s (1). TD 2006/D43 Not yet finalised. The determination considers that the market value of the goodwill of a business of an entity that becomes a subsidiary member of a consolidated group (the joined group) at the joining time is usually worked out by applying the residual value approach (see Murry s case (98 ATC 4585)). Part IVA applied to capital loss GST on Security Deposits Cumins v FCT A was the trustee of a family trust (Trust 1) which acquired listed company shares for $4.3M funded by way of bank loan. Trust 1 sold some other shares and realised a gain of $787K. Trust 2 was established ( A being the trustee) on similar terms on the day following the gain was realised) and Trust 1 executed a transfer of the listed company shares to Trust 2, realising a capital loss of $800K. FCA held: Transfer of shares from Trust 1 to Trust 2 was legally effective for CGT and was not a sham. a reasonable person would conclude that the taxpayer, as trustee of trust 1, carried out the scheme for the sole purpose of obtaining the tax benefit that was the capital loss. GSTR 2006/2 The Ruling discusses the characteristics of a security deposit to which Division 99 applies and explains: the meaning of a security deposit; the difference between a security deposit and a part payment; the need for reasonableness in the amount of the security deposit; and the meaning of forfeiture of a security deposit. Query - does your client receive a security deposit or part payment? Different GST outcomes. GST: no review opportunity for lessor GST: ATO will not follow Toyama FCT v DB Rreef Funds Management Ltd TP leased commercial premises to a tenant for a term of two years effective from 24 January Option to renew for a number of additional terms, each of two years. The Commissioner claimed that the TP was liable to pay GST in respect of the "supply" of the lease for each of the renewed terms. The Commissioner submitted that the TP had an opportunity to conduct a "general review of... the consideration" in 2001 and The TP argued that the constraints on the rent review process meant it never had an opportunity under the lease to conduct a "general review of... the consideration". The Full Court held that the concept of a "general review" required a complete or almost universal consideration of the same subject. Toyama Pty Ltd v Landmark Building Case Development site with residence, parties had a falling out Trustee appointed to sell site which it did for $2.76M Inc GST. ATO ruling was given to one party which said sale was not subject to GST because site was residential, not sold as part of an enterprise and trustee not required to be registered. Party sued trustee to recover loss Supreme Court found: Sale was properly described as a taxable supply Not an input taxed supply of residential premises Most important factor is the intention of the purchaser ATO not following Decision as it is difficult for a vendor to be aware of the purchaser s intention. Will continue to apply GSTR 2000/20 pending a further judicial clarification.

7 Employee shares not subject to FBT Loan repayments not subject to FBT Indooroopilly Children Services (Qld) Pty Ltd v FCT 2006 ATC 4303 The Federal Court held the proposed issue of shares by the parent company of a franchisor to the trustee of its employee share plan for the benefit of the franchisees employees did not give rise to a fringe benefit. the definition of "fringe benefit" required the identification of a particular employee in connection with the benefit said to be provided, as reflected in the definition of a benefit being provided "in respect of the employment of the employee". the words "in respect of the employment" required the link between the benefit and the employment of the employee to be sufficient or material, and in this case, the link was not sufficient. Slade Bloodstock Pty Ltd v FCT In Slade Bloodstock Pty Ltd v FC of T 2006 ATC 2348, a taxpayer company has successfully argued before the AAT that payments made to its shareholders were: nothing more than loan repayments not made in the course of employment therefore, not subject to FBT. SGC and Settlement Payment SG paid for subcontractors refunded to employer ATO ID 2006/6 The ATO is of the view that the payment of the court settlement on termination of employment did not relieve the employer of the obligation to pay the SGC. Personalised Transport Services Pty Ltd v AMP Superannuation Ltd & Anor The NSW Supreme Court in January held that a freight courier was entitled to a refund of superannuation contributions mistakenly paid to a superannuation fund. Journal Entry is not a death benefit payment Special income derived by complying super funds ATO ID 2006/132 The ATO is of the view that journal entries will not be sufficient to establish that a SMSF has paid an ETP. To be an ETP, the benefit must be paid to the taxpayer. Journal entries are secondary evidence. Taxation Ruling TR 2006/7 The ATO issued Taxation Ruling TR 2006/7 in August explaining what amounts are considered to be "special income" under s 273 of ITAA Section 273 sets out the following different types of special income: dividends paid by a private company, including income derived indirectly from a dividend and non share dividends income from a transaction where the parties are not dealing at arm s length income received from a trust in the capacity of a beneficiary other than by virtue of holding a fixed entitlement non arm s length income received from a trust in the capacity of a beneficiary holding a fixed entitlement.

8 PAYG PAYG withheld from compensation for unfair dismissal PAYG Solicitor s tax debt released due to hardship Bennett & Anor t/as Fitness Painting & Property Maintenance v Higgins The WA Court of Appeal has held in January that an award of compensation made to an employee for unfair dismissal was an eligible termination payment (ETP) from which the employer was required to deduct PAYG. FCT v Taxpayer FC of T v Taxpayer 2006 ATC 4393, a solicitor earning $250,000 a year has had his tax debt partially released on the grounds of serious hardship. Facts include: Complicated financial distributions in a law firm Distracted by wife s illness Cost of caring for wife, educating children, unemployment if made bankrupt. PAYG Solicitor s tax debt released due to hardship Negligence Accountant s advice negligent but not materially FCT v Milne FC of T v Milne 2006 ATC 4503, the Federal Court has affirmed the decision of the Small Taxation Claims Tribunal (STCT) to grant a solicitor relief from his income tax liabilities on the basis that, otherwise, he would suffer serious hardship. Facts include: Fraud of former partner Large amount of debt Poor performance of current partnership Serious and continuing health problems Leda Pty Ltd & Anor v Weerden NSW Supreme Court held that an accountant was negligent in giving tax advice to a client but as the advice was not a material cause of any loss or damage, he was not liable to damages in negligence or under the Fair Trading Act 1987 (NSW). Held: writing the letter without the advantage of due diligence and without expressly qualifying his statement that the quantum of losses shown in the tax returns was available to be carried forward to offset future assessable income a trust, the accountant failed to meet the standard of a prudent and reasonable taxation adviser. INSOLVENCY Property was transferred to defeat creditors The Trustees of the Property of JD Cummins v Cummins & Anor The High Court has unanimously held that the transfer by a former barrister of his half interest in his matrimonial home to his then wife was for the purposes of defeating his creditors (particularly the ATO). Never lodged a tax return since Transferred home and shares in 1987 The transfers were void as against the barrister s trustees in bankruptcy.