Separate ATO appeals unit needed to resolve tax disputes

The Inspector-General of Taxation has called for a separate appeals unit within the ATO following a review of the ATO’s management of tax disputes.

The Tax Inspector noted that while the ATO’s recent initiatives represent a positive step in tax dispute management, more could be done to help small businesses and individual taxpayers. Mr Ali Noroozi said a separate, dedicated appeals unit within the ATO, should be led by a new Second Commissioner.

The unit within the ATO proposed by the Tax Inspector would manage and resolve tax disputes for all taxpayers including the conduct of pre-assessment reviews, objections and litigation (including providing oversight on settlements), as well as championing the use of alternative dispute resolution. The Government said it would consider the recommendation along with any other recommendations to be made by a parliamentary committee that was examining tax disputes.

Single Touch Payroll consultation noted big changes afoot

Businesses need to be aware of big changes afoot with the implementation of the Government’s proposed Single Touch Payroll. Under Single Touch Payroll, employers will be required to electronically report payroll and superannuation information to the ATO when employees are paid, using Standard Business Reporting-enabled software.

According to the Government, Single Touch Payroll would cut red tape for employers and simplify tax and superannuation reporting.

TIP: Single Touch Payroll is expected to be launched in July 2016. In a brief public consultation period, the ATO highlighted potential impacts that the implementation of Single Touch Payroll could have on employers. Businesses or their payroll providers may be required to either purchase or upgrade existing software, potentially at an additional cost. Another concern is the immediate impact on cash flow, particularly during transition.

Time limits on trustee tax assessments clarified

The ATO has issued Practice Statement PS LA 2015/2 which outlines its practice of limiting the period within which it will raise an original trustee assessment. The practice means that returns lodged by trustees are broadly exposed to similar time limits for review as other taxpayers.

Generally, the ATO notes it will not issue an original trustee assessment more than four years after the relevant trust tax return was lodged, or more than two years after lodgment for the 30 June 2014 and later income years if the trust was a small business entity (and certain specific qualifications under the tax law do not apply). However, the ATO notes that the time limits can be extended in certain cases.

The following example illustrates the time limit within which the ATO can raise an original trustee assessment:

The 2010 income tax return for the Oak Family Trust was lodged on 9 May 2011. The trust was not a small business entity for the 2010 income year. An audit of the trust reveals that some of the trust net income should be assessed to the trustee. The Practice Statement provides that the Tax Office must issue an assessment to the trustee by 9 May 2015 (unless the time limit is extended).

GST credits for employee accommodation refused

The Federal Court has held in the recent decision of Rio Tinto Services Ltd v FCT [2015] FCA 94 (handed down on 19 February 2015) that the taxpayers are not entitled to input tax credits for providing remote region residential accommodation to employees who are required to live remotely in order to carry out their employment duties.

Broadly, the Federal Court held that the taxpayer, Rio Tinto, was not entitled to input tax credits for the acquisition made by Hamersley Iron Pty Ltd (Hamersley), a related company in Rio Tinto’s GST group, in providing and maintaining heavily subsidised residential accommodation for their employees in the remote Pilbara region of Western Australia, where they conducted mining operations.

The Federal Court was prepared to accept that Hamersley’s leasing activities may have been wholly incidental to its mining operation and merely a means to carrying on its business. However, the Court denied Hamersley input tax credits in relation to that activity on the basis of a narrower interpretation that the acquisition “relates to” the supply of residential accommodation by way of lease, being an input taxed supply (which means there is no GST credit).

TIP: At the time of writing, Rio Tinto has appealed to the Full Federal Court against the decision handed down by the Federal Court. The principles followed by the Federal Court could have wide-reaching implications for GST registered businesses, and the appeal process should be followed closely.

Penalty for promoting pharmaceuticals donations scheme

The Federal Court has imposed a $1.5 million penalty after finding a promoter of a scheme involving the purchase and donation of pharmaceuticals to charities with foreign operations engaged in conduct that resulted in himself and two other corporate entities being promoters of a tax exploitation scheme.

The ATO noted the penalty of $1.5 million was the “highest civil penalty to date”. In commenting on the decision of the Federal Court, ATO Deputy Commissioner Tim Dyce said the scheme involved the purchase and donation of AIDS pharmaceuticals to charities in Africa. “As we discovered, the purchasers only paid 7.5% of the grossly inflated price of the drugs, yet claimed tax deductions of 100%,” said Mr Dyce.

Tax concessions following business sale cancelled

The Administrative Appeals Tribunal (AAT) has confirmed that the general anti-avoidance rules under the tax law applied to a “scheme” carried out by taxpayers in order to enable them to qualify for the capital gains tax (CGT) concessions for small businesses on the sale of a business. In particular, the AAT examined the effect of a “restructure” of the business which occurred several weeks before the sale. An effect of the “restructure” was to enable the taxpayers to meet a requirement to access the CGT small business concessions.

Before the AAT, the taxpayers sought to argue that, contrary to the position they took on claiming the tax concessions on the lodgment of their tax returns, they did not qualify for the concessions. However, the AAT held the taxpayers did qualify for the concessions. It also held that, after finding that the steps to “restructure” the business constituted a “scheme”, the general anti-avoidance rules under the tax law applied to cancel the “tax benefit”. The AAT found the taxpayer entered into the scheme for the dominant purpose of obtaining a tax benefit (reduced tax) and not for any asset “protection purpose”.

TIP: The ATO uses data-matching to identify taxpayers that may be inappropriately seeking the CGT small business concessions. Business “restructures” which occur just prior to a particular transaction which result in significant tax benefits could potentially raise red flags. Where a restructure is effected for purposes such as asset protection (which the courts have said is a legitimate non-tax purpose), such benefits must be real and not simply illusory.

Small business tax review finds first steps for improvement

The results of a review into tax impediments affecting the success and growth of small businesses has been released by the Government. The review focused on small business tax reform and, in particular, simplifying processes and cutting excessive red tape. In releasing the review findings, the Minister of Small Business, Bruce Billson, said the ATO has already begun implementing most of the administrative recommendations identified in the review.

Mr Billson said the removal of tax impediments for small businesses will make it easier for businesses to start, enable established businesses to grow, and provide greater security for small business owners in retirement. He said the review findings will feed into the Government’s broader considerations on small business taxation and was particularly timely ahead of the Government’s release of the Tax White Paper.

The Small Business Minister also highlighted the review’s recommendations concerning superannuation, and accepted that superannuation penalties on small businesses can be harsh, with disproportionate outcomes. Mr Billson said the Government will ensure that penalties for paying super late or for short-paying super by a small amount would reflect the nature of the breach. He proposed that these changes would take effect from 1 July 2016 and that the Government will consult with stakeholders on implementation details.

Valuation reports for tax purposes could be easier

A review examining the ATO’s administration of valuation matters has found room for improvement. The review was undertaken by the Inspector-General of Taxation, Ali Noroozi. In his 129-page report, the Inspector-General identified inherent difficulties associated with the nature and associated costs of valuations. Given these issues, the Inspector-General made a range of recommendations to the ATO aimed at taking a more practical and transparent approach to assessing taxpayer valuations and developing administrative safe harbours.

According to the Inspector-General, disputes between taxpayers and the ATO may be purely attributable to the differing professional judgment of each party’s valuer. In these circumstance, and given the nature of the self-assessment regime, the Inspector-General was of view that the taxpayer’s valuation should be accepted notwithstanding that it is not exactly the same as the ATO’s valuation. In this regard, the Inspector-General recommended that the ATO provide guidance to its compliance officers to assist them in determining when to accept a taxpayer’s valuation. The Tax Office agreed with this recommendation, and many others aimed at reducing disputes.

Employee share scheme tax law changes on the way

The Government says it will improve the taxation arrangements for employee share schemes. According to the Minister of Small Business, Bruce Billson, the proposed changes to the tax law are designed to increase the international competitiveness of the country’s tax system and allow innovative Australian firms to attract and retain high-quality employees.

A key change proposed is to reverse some of the changes made in 2009 to the point at which rights issued as part of an employee share scheme are taxed for employees of all corporate tax entities. Another key change is to provide employees of certain small start-up companies with further concessions when acquiring certain shares or rights in their employer. These further concessions would be an income tax exemption for the discount received on certain shares and the deferral of the income tax on the discount received on certain rights, which are instead tax under the capital gains tax (CGT) rules.

The ATO has also commenced consultations with stakeholders on how to streamline the process of establishing and maintaining an employee share scheme.

TIP: The tax law amendments are proposed to commence on 1 July 2015. This could mean swift passing of legislative amendments through Parliament. Companies should keep a watch on the progress of the legislation.

ATO code of settlement

A code of settlement has been developed by the ATO. The code sets out the ATO policy on the settlement of tax and superannuation disputes, including disputes involving debt. It states that settlement negotiations or offers can be initiated by any party to the dispute and can occur at any stage including prior to assessments being raised.

The ATO notes that when deciding whether or not to settle, it will consider all the following factors:

• the relative strength of the parties’ position;
• the cost versus the benefits of continuing the dispute; and
• the impact on future compliance for the taxpayer and broader community.

According to the ATO, settlement would not generally be considered in situations where there is a contentious point of law which requires clarification, or when it is in the public interest to litigate, or when the taxpayer’s behaviour is such that the ATO needs to send a strong message to the community.

TIP: According to the code, a settlement agreement provides a reasonable basis for treating similar issues in future years unless it is specifically stated that it is not to apply to future years or transactions, or the taxpayer’s circumstances change materially, or the law remains either unclear or amended. However, the Code states the ATO can provide greater certainty to a taxpayer for future years if required.

Court confirms tax on transfer of land to joint-venture trust

A corporate trustee (the taxpayer) has been unsuccessful before the Full Federal Court in a tax matter concerning the transfer of land owned by the taxpayer to a joint-venture trust. The taxpayer had purchased the land in 1995 and began discussions with other adjoining lot owners in 1997 with the idea of commercially developing the combined lots and selling them off. In 1998, a joint venture agreement and the joint-venture trust were created among the landholders, and the land was transferred to the trust.

The ATO assessed the land transferred to capital gains tax (CGT). The taxpayer argued there was no taxing event under the CGT rules, or that there were exemptions to the rules that applied. Essentially, the taxpayer argued there had been no change in the beneficial ownership of the land. However, in disagreeing with the taxpayer, the Full Federal Court confirmed that the transaction effecting the transfer of the land from the taxpayer to the joint-venture trust for the purpose of redevelopment was taxable under the CGT rules and that the specific exemptions under those rules did not apply.

Personal services income when no service is provided

The ATO has determined that a payment received by a personal services entity (PSE) from a service acquirer during a period the service provider is not providing services to the acquirer until further called upon is personal services income (PSI) under the tax rules. The ATO says there may be circumstances where a payment made by a service acquirer to a PSE during a period in which the service provider is not called upon to do anything is not PSI because the payment appears to be in consideration for doing nothing. However, the ATO says such a view is “clearly not in accord with the intention of the legislature given the alienation measure is targeted at salary like payments”.

The following example illustrates the ATO’s point:

A sole director/shareholder (“Jim”) provides his expertise and skills to a client company for a flat monthly contractual fee that is non-contingent. During a specified period, a dispute arises between Jim and the client company which results in no work being performed for the period. However, Jim is still paid the monthly contractual fee. According to the ATO, the monthly fee during the dispute period is considered to be personal services income under the tax rules notwithstanding that the client company did not call upon Jim to undertake further services.