Offshore income tax “amnesty” nearing its end

The deadline to take advantage of the ATO’s initiative to allow eligible taxpayers to come forward and voluntarily disclose unreported foreign income and assets with reduced penalties is nearing. The ATO has urged taxpayers with offshore assets to declare their interests ahead of a global crackdown on people using international tax havens.

The Tax Commissioner Chris Jordan earlier this year announced the initiative to allow eligible taxpayers to come forward and voluntarily disclose unreported foreign income and assets. In announcing the initiative, known as “Project DO IT: disclose offshore income today”, the Commissioner warned that it provides a last chance opportunity for those who haven’t declared their overseas assets and income, to come back into the tax system before 19 December 2014, to avoid steep penalties and the risk of criminal prosecution for tax avoidance.

TIP: It should be emphasised that Project DO IT covers both “inadvertent” and “intentional” actions to hide offshore income and/or gains. The ATO has advised that where taxpayers may be unsure as to their eligibility for the initiative, they can contact the ATO’s Project DO IT team to discuss the issue and this can be done anonymously. Please contact our office for further information.

Subsidy to encourage employers to hire mature workers

The mature age worker tax offset will be abolished by the Government from the 2014–2015 income year and later income years. However, a new expenditure program being delivered by the Department of Employment, Restart, will provide alternative support by way of subsidy of up to $10,000 to employers who hire mature age job seekers.

The Restart program offers a wage subsidy of up to $10,000 (including GST) to eligible employers of mature age job seekers. The job seekers must be 50 years of age or older, and have been unemployed and receiving income support for six months or more. To receive the full payment, a business must employ the same employee for at least 30 hours per week for an ongoing period of two years. The Restart wage subsidy can also be claimed on a pro-rata basis if you hire a mature age worker part time, for at least 15 hours a week.

Doctor obtains tax relief for olive-growing activities

A medical practitioner has been, in the main, successful before the Administrative Appeals Tribunal (AAT) in seeking to have losses from his olive growing activities deducted from his other assessable income. The taxpayer had carried on an olive growing and olive oil production business for 15 years.

The taxpayer had applied to the Tax Commissioner to be relieved from the “non-commercial loss provisions” under the tax law for the 2010 to 2014 income years, inclusive. Under those rules, unless he is granted relief, he has to wait until the olive oil business starts to generate profits before he can claim his losses. The Commissioner refused the taxpayer’s application.

The AAT held the Commissioner’s decision not to allow the taxpayer immediate access to his losses was not the correct or preferable decision. The AAT decided the taxpayer should be allowed the relief from the “non-commercial loss provisions” under the tax law for the 2010 to 2013 income years, but not the 2014 income year.

The AAT also made several recommendations to the Commissioner as a result of issues raised during the proceedings. These were that the Commissioner:

• considers the use of an alternative approved form for applications of this nature;
• ensures, as far as possible, that any alternative approved form:

• asks applicants to provide all the information the Commissioner considers necessary for a proper consideration of the application; and
• takes into account the legislative amendments enacted in 2009 (ie the income requirement which means that taxpayers with taxable income over $250,000 have to rely on the Commissioner’s discretion).

• provides additional guidance to the Commissioner’s officers.

Tax claims for R&D costs mostly allowed

The AAT has mostly allowed a company’s deduction claims for research and development (R&D) expenditure at the 125% premium rate, but disallowed other claims in respect of overlapping expenditure.

Over an extended period, the taxpayer conducted various plant trials to test possible ways to improve its copper and lead concentrators and its copper smelter. The taxpayer sought to deduct a considerable part of its expenditure incurred during those plant trials at the premium rate of 125% as “research and development expenditure”.

The Commissioner refused most of the taxpayer’s claims arguing they were not deductible at the premium rate because they were “feedstock expenditure”, which is expressly excluded from the statutory definition of “research and development expenditure” under the tax law. The Commissioner also argued that, due to an overlap of the taxpayer’s R&D activities at its Mt Isa copper concentrator and Mt Isa smelter, certain expenditure became “feedstock expenditure” and was not deductible at the 125% rate.

The AAT allowed most of the taxpayer’s claims, but accepted the Commissioner’s arguments on the overlap issue.

The Commissioner has appealed to the Federal Court against the decision.

Compensation for providing domestic help taxable

The AATl has affirmed a decision of the Commissioner that a payment made to an individual for compensation for domestic assistance was assessable as ordinary income under the tax law.

In 1997, the taxpayer’s husband suffered a serious injury while white-water rafting during a team-building exercise organised by his employer. The husband was unable to work and the taxpayer gave up full time work to become a carer.

In 2012, the husband lodged a claim for compensation for domestic assistance under the Workers Compensation Act 1987 (NSW) in respect of the domestic assistance provided by the taxpayer. The Workers Compensation Commission awarded the taxpayer a lump sum of around $179,000.

The AAT said there was no basis that the compensation payment could be described as a loss of income earning capacity as argued by the taxpayer – rather, it was of the view that the payment was to ensure that the taxpayer was provided with a sufficient payment to cover her loss of income.

Perfecting a security interest over corporate property

A security interest in corporate property must be registered on the Personal Property Securities Register (PPSR) as soon as possible.

A recent Federal Court decision involving a loan from a self-managed super fund (SMSF) to a company which was later placed into voluntary administration has highlighted the importance of understanding the new Personal Property Securities regime. The Federal Court held the SMSF trustee was merely an unsecured creditor in relation to the commercial loan to the company after finding that its security interest had not been registered on the PPSR in time to avoid the interest vesting in the company (in liquidation).

TIP: The take-home message from the case is that a failure to register a security interest on the PPSR within 20 business days of the creation of a security agreement over corporate property leaves the lender/mortgagor in the hands of the gods in terms of later perfecting the security. For corporate property, a failure to register within 20 business days means that the security interest must have been registered at least six months before the administration or winding up of the grantor company.

Mining tax gone but watch for associated tax changes

The mining tax has been repealed. However, in order to pass the legislation through the Senate, the Government made a deal with the Palmer United Party and Senator Muir to defer the abolition of:

• the Income Support Bonus to 31 December 2016;
• the Schoolkids Bonus to 31 December 2016 (and restrict the Bonus to families earning less than $100,000 per annum); and
• the Low Income Super Contribution to 30 June 2017.

The Government also agreed to freeze the superannuation guarantee rate at 9.5% for seven years. Under the changes, the rate will increase to 10% from 1 July 2021 and by 0.5% per year from 1 July 2022 until it reaches 12% for the year beginning 1 July 2025.

No other changes were made to the legislation, meaning the abolition of the associated measures such as loss carry-back (from 1 July 2013 for 30 June balancing companies), and geothermal expenditure deduction (from 1 July 2014), will proceed.

The reduction of the instant asset write-off threshold for small businesses (from $6,500 to $1,000), and the discontinuation of the accelerated depreciation arrangements for motor vehicles, will also go ahead (from 1 January 2014).

TIP: The abolition of the loss carry-back, the reduction of the instant asset write- off threshold for small businesses and the discontinued accelerated depreciation for cars apply retrospectively. Taxpayers who have made these claims for the 2013–2014 year are now required to amend their returns. The ATO has indicated that it will not impose penalties on those taxpayers who amend their returns if the amendments are lodged within “reasonable time”. Also, in light of the superannuation changes, individuals may want to consider reviewing their retirement savings strategy. Please contact our office for further information.

Professional firms and profit distribution under scrutiny

The ATO is investigating arrangements involving the allocation of profits from a professional firm carried on through a partnership, trust or company, where the income of the firm is not personal services income. Firms which could be affected include, but are not limited to, those that provide architectural, engineering, financial, legal, and medical services.

In particular, the ATO wants to take a closer look at arrangements where practice income is treated as being derived from a business structure, even though the source of that income remains, to a significant extent, from the provision of professional services by one or more individuals. The ATO said it was concerned that the general anti-avoidance rules under the tax law could apply to a scheme which is designed to ensure that the individual practitioner professional is not directly rewarded for the services they provide to the business, or receives a reward which is substantially less than the value of those services. The ATO further indicated that the lower the effective tax rate achieved by the scheme, the higher the risk of attracting the Commissioner’s attention.

Dividend washing compliance still on ATO’s radar

The ATO has been chasing up individuals who did not respond to its initial letter indicating that the individual may have entered into dividend washing transactions. The ATO has reiterated its position that obtaining two sets of franking credits from one dividend event was not allowed. In March 2014, the ATO issued letters to these individuals asking them to amend their returns in order to reverse franking benefits they may have received from dividend washing transactions.

Having obtained new information, the ATO has also issued new letters to more individuals that it believes may have entered into dividend washing transactions. The ATO said it will continue to monitor dividend washing and apply the law to disallow additional franking credits.

Rental property deductions – avoid common errors

The ATO has warned landlords that it is increasing its focus on rental property deductions. The ATO has identified a number of common errors made by rental property owners. Key errors include claiming rental deductions for properties that are not genuinely available for rent, or incorrectly claiming deductions for properties only available for rent part of the year, such as a holiday home.

TIP: If a property is only available for rent for part of a year, a partial deduction reflecting when the property was available for rent could be available. The correct apportionment needs to be made with the relevant documentation to substantiate the claim. Contact our office for further information.

Data-matching offshore bank accounts

The ATO is widening the breadth of data it obtains on individuals from financial institutions, possibly revealing hidden or undisclosed offshore income. The ATO has recently announced a data-matching program targeting offshore bank accounts. Under the program, the ATO will collect account details of bank customers from various financial institutions to identify Australian resident taxpayers with offshore bank accounts which may indicate evidence of undeclared income and/or gains.

TIP: The Tax Commissioner earlier this year announced a tax “amnesty” called Project DO IT which aims to encourage individuals to disclose previously undeclared offshore income or assets. Under the program, individuals could be offered reduced penalties for disclosing their offshore income. The ATO has been warning individuals to come forward before 19 December 2014, which is when the project will end.

Settlement for damages subject to capital gains tax

The Administrative Appeals Tribunal (AAT) has held that an individual was liable to capital gains tax on a settlement payment of $350,000 received in respect of litigation she pursued for damages for breach of contract and negligence. The litigation was in relation to an agreement to facilitate the retirement of a partner of a law firm and to hand over the clients to another solicitor. The AAT was of the view that the taxable assets in question were the various claims made in her statement of claim. It also held the individual had failed to establish any relevant cost base for legal expenses, which meant she could not reduce the amount to be taxed on.

In making its decision, the AAT said it was clear law that damages received by way of settlement of a legal claim could be subject to capital gains tax. It also affirmed the Commissioner’s decision to impose an administrative penalty of 50% of the shortfall amount for “recklessness”. The AAT noted the taxpayer took no steps to seek independent legal advice in relation to whether tax may be payable on the amount, as well as her failure to keep records as required by tax law.

Bitcoin tax guidance from the ATO

The ATO has released its views on the tax treatment of Bitcoins. Users of Bitcoins and businesses transacting with Bitcoins should be aware that the ATO has confirmed that it does not consider Bitcoins to be money or a foreign currency – rather, the ATO considers Bitcoins to be property. This means, the ATO will treat Bitcoin transactions as barter transactions, with similar tax consequences.

Taxpayers will need to keep transaction records such as the date of the transaction, the amount in Australian dollars (taken from a reputable online exchange), what the transaction was for, and who the other party was (eg their Bitcoin address).

TIP: If you are considering transactions involving Bitcoins and other crypto-currencies, it would be prudent to seek advice on how the transaction would be treated for tax purposes. If you have any questions, please contact our office.

Share transfer to family partnership ineffective

A husband and wife have been unsuccessful before the Administrative Appeals Tribunal (AAT) in arguing that they had transferred shares in a family company to a family partnership, and that therefore they should not be assessed on dividends issued by the company to themselves. The AAT examined the partnership agreement and was of the view that, under the terms of the agreement, the couple was not required to actually transfer their shares in the family company to the family partnership. It was also emphasised that the couple remained the full registered owners of the shares. In doing so, the AAT affirmed the Tax Commissioner’s decision that the couple were each assessable on the dividends of some $1.8 million. The taxpayers are seeking to appeal the decision in the Federal Court.

Property developers and use of trusts under scrutiny

The ATO is examining arrangements where property developers use trusts to return the proceeds from property development as capital gains instead of income on revenue account. ATO Deputy Commissioner Tim Dyce said the ATO has “begun auditing property developers who are carrying out activities which conflict with their stated purpose of capital investment”. He said a “growing number of property developers are using trusts to suggest a development is a capital asset to generate rental income and claim the 50% capital gains discount”. Mr Dyce warned that penalties of up to 75% of the tax avoided can apply to those found to be deliberately using special purpose trusts to mischaracterise the proceeds of property developments. The ATO said it has made adjustments to increase the net income of a number of trusts. It said penalties will be significantly reduced if taxpayers make a voluntary disclosure.

Residency depends on facts and circumstances of each case

The ATO has issued a Decision Impact Statement following an individual’s legal win in arguing that he was not a tax resident of Australia during the 2009 to 2010 income years. The taxpayer had moved to Saudi Arabia to work on a project for a number of years before moving back to Australia. Key factors that were taken into account by the AAT in deciding in favour of the taxpayer were the man’s intentions at the relevant time to live and work indefinitely in Saudi Arabia. The ATO said the decision was reasonably open to the AAT. However, it said the decision does not change its approach to residency cases. It said these matters involve questions of fact and degree and different facts may result in different conclusions as to residency. The ATO said it will continue to approach residency cases by weighing all the relevant facts and circumstances and applying the relevant tax law and authorities to those facts.

Billions in lost super waiting to be claimed

According to the ATO, more than $14 billion in lost super is waiting to be claimed. The ATO said $8 billion in super was sitting in accounts that have not received a contribution in five years. A further $6 billion in super was sitting in accounts where funds have not been kept up-to-date with changes to personal details. ATO Assistant Commissioner John Shepherd said it was “easy for this to happen because when people get married or move house, the last thing on their mind is updating their name and address details with a super fund”. However, he said it was important to provide funds with tax file numbers (TFNs) which can help individuals be reunited with their super.

TIP: The ATO’s Superseeker service enables individuals to enter their name, TFN and date of birth to conduct an online search of the Tax Office’s Lost Members’ Register available at www.ato.gov.au/Calculators-and-tools/SuperSeeker.

ASIC eye on SMSF property investment advice

The Australian Securities and Investments Commission (ASIC) has raised concerns about advice being given to self managed superannuation funds (SMSFs) to invest in property. ASIC Commissioner Greg Tanzer said the regulatory body was aware there had been a sharp rise in promoters recommending that investors either set up or use an existing SMSF to invest in property. ASIC is concerned these promoters may not be complying with the law. Mr Tanzer said ASIC was concerned that, with the increased popularity of SMSFs and property investment, real estate agents and property advisers may not realise they may be carrying on a business of providing financial product advice and may need an Australian financial services (AFS) licence, or authorisation under an AFS licence, when making recommendations or statements of opinion to a person to use an SMSF to invest in property. Mr Tanzer said ASIC is now working with individual businesses suspected of engaging in unlicensed conduct to help them understand their obligations.

Bad debt deduction for “unpaid trust entitlements” refused

A taxpayer has been unsuccessful before the AAT in a matter concerning bad debt deduction claims for the 2012 income year in relation to certain trust distributions. The taxpayer, a beneficiary of a trust, had claimed bad debt deductions under the tax law for debts he argued were unpaid trust entitlements. He argued the debt written off had the same character as the trust distributions included in his assessable income in the 2005 and 2007 income years. Following analysis of the distribution transaction and the trust deed, the AAT was of the view the taxpayer’s entitlement was paid in the manner prescribed by the deed, and once paid, lost its character as unpaid entitlement. The AAT concluded the debt written off was different in character to the income included in the taxpayer’s assessable income in the 2005 and 2007 income years.

Family fails to prove assessments excessive

Six members of a family have been unsuccessful before the AAT in arguing that various amended and default tax assessments were excessive. The AAT heard details of unexplained moneys flowing through family bank accounts, sums paid from an overseas business arrangement, as well as the acquisition of various residential properties in the names of family members, despite the taxpayers’ claim they earned very little income. The Tax Commissioner used the “asset betterment” analysis to raise the assessments. Despite acknowledging inherent flaws in the method used by the Commissioner to derive the tax assessments, the AAT found the family members had failed to establish that the assessments were incorrect and that the amount of money for which tax was levied by the assessment exceeded the actual substantive liability of the taxpayers.

TIP: In making a default assessment, the Commissioner is not required to follow the ordinary processes of ascertaining assessable income and allowable deductions and need not make inquiries of the taxpayer (or the taxpayer’s agent). However, the assessment may be invalid if the Commissioner estimates the taxpayer’s assessable income upon no intelligible basis or simply plucks a figure out of the air.

Tax consequences following marriage break-up

The ATO has recently released a taxation ruling on the tax effects of matrimonial money or property transfers. According to some commentators, the game-changing ruling may affect the manner in which property settlements are able to be arranged for family groups under s 79 of the Family Law Act 1975.

In Taxation Ruling TR 2014/5, the ATO confirmed that payments or transfers of property under Family Court orders to a husband or wife from a private company will be considered a distribution of profits from the company. Such transactions will therefore be assessed as dividends either pursuant to the ordinary dividend assessing provisions (s 44 of the Income Tax Assessment Act 1936) or Div 7A in almost every matrimonial property or cash settlement, regardless of whether the parties are shareholders (or associates of the shareholders) in the private company or whether the private company is a party to the Family Court order.

TIP: The rules can be complex and various different taxation consequences could arise depending on the type of Family Court order that has been made. Please contact our office if you have any questions.

Budget Levy from 1 July 2014

The Government’s Temporary Budget Repair Levy is now law. The levy is be payable at the rate of 2% of each dollar of an individual’s annual taxable income over $180,000. The levy is active for three financial years, starting on 1 July 2014 and ending on 30 June 2017. That means the top marginal tax rate is effectively 49% (including the 2% Temporary Budget Repair Levy plus the 2% Medicare levy).

For example: Individuals with taxable income of $200,000 will pay 2% of $20,000 (ie a levy of $400). Those with taxable income of $300,000 will pay 2% of $120,000 (ie $2,400 of levy).

A number of other taxes are also affected by the levy. According to the Government, these other changes are important to maintain integrity and fairness in the tax system. Notably, the fringe benefits tax (FBT) rate will be increased from 47% to 49%. As the FBT year commences on 1 April and concludes on 31 March, the increase in the FBT rate is to be applied from 1 April 2015. The increase in the FBT rate will cease on 31 March 2017.

TIP: High-income earners may want to review salary sacrificing arrangements and the possible effect of the levy. Please contact our office for further information.

PAYG instalment threshold changes

The ATO has confirmed the Government’s recent announcement that the pay-as-you-go (PAYG) instalment thresholds will change with effect from 1 July 2014. Following the Minister’s announcement, the ATO advised the following instalment threshold changes:

• the business or investment income threshold is increased from $2,000 to $4,000;
• the balance of assessment threshold is increased from $500 to $1,000;
• the notional tax threshold is increased from $250 to $500; and
• the requirement for entities registered for GST to remain in the system even if they have a zero instalment rate is removed.

As a result, many taxpayers will no longer have to pay PAYG instalments. According to the Minister of Small Business, around 32,500 small businesses that have no GST reporting requirements will no longer have to lodge a business activity statement (BAS) where to date lodgements have been made only to report PAYG instalments. In addition, around 340,000 small businesses with modest or negative income which are required to lodge a BAS, will no longer have to interact with the PAYG instalment system.

TIP: If taxpayers still wish to pay instalments towards their end-of-year tax liability, they may voluntarily re-enter PAYG instalments by contacting the ATO. Please contact our office for further information.

ATO mining data to find offshore tax evaders

The ATO says it is mining data to identify individuals with undisclosed offshore income and assets. “The net is closing for people who have undeclared offshore income – we’re looking at all our data and will be in touch with financial institutions, advisers and thousands of people over the coming months,” said Deputy Commissioner Michael Cranston. As at 30 June 2014, the ATO’s Project DO IT initiative to encourage voluntary disclosure has received 166 disclosures, raising an additional $13 million in tax liabilities. The ATO has also obtained more than 250 expressions of interests from taxpayers indicating that they will be making a disclosure.

TIP: The last day to make a disclosure under Project DO IT is 19 December 2014. The ATO had previously warned that, until it receives a disclosure, its normal compliance activities will continue. Individual taxpayers detected first by the ATO will not be able to participate in Project DO IT.

Deductions for employee welfare fund denied

The Administrative Appeals Tribunal (AAT) has refused a taxpayer’s claim for deductions for contributions made to an offshore “employee welfare fund”. The taxpayer and a number of related companies carried on an automotive repair and spare parts business. The fund was set up in 1998 and its beneficiaries were the two employee-operators of the business and a spouse. In 1998 the taxpayer contributed $400,000 to the fund. In 1999 the taxpayer contributed a further $25,000 and also claimed carried-forward losses resulting from the contribution from the previous year.

The AAT rejected the taxpayer’s claim that the contributions to the fund were deductible. It also highlighted a number of concerns in the way the fund was set up and how it operated. Among other things, the AAT noted there were no documents to show that the trustee ever admitted anyone as a member of the fund and, furthermore, there was doubt and confusion about the identity of the trustee. However, the AAT found that while the Commissioner could issue amended assessments for the1998 and 1999 income years in 2012, an amended assessment issued for the 2002 income year was out of time to deny a deduction for further carried-forward losses.

Hunger relief organisation wins FBT exemption case

Hunger Project Australia (HPA) has been successful before the Full Federal Court in seeking endorsement as a “public benevolent institution” (PBI) for fringe benefit tax (FBT) purposes. This was despite the organisation being predominantly engaged in fundraising, and not providing aid or relief directly. As a result, the provision of benefits to one of its employees is to be taken to be exempt benefits for FBT purposes.

HPA is a member of a worldwide collaboration of organisations operating under the name “The Hunger Project” whose principal aim is the relief of hunger. The activities of HPA are to raise funds, which are then disseminated to Hunger Project members in the developing world.

The Commissioner argued that an entity that merely engages in fundraising activities and does not materially perform charitable works directly for the benefit of the public is not a PBI. The Full Court rejected the Commissioner’s arguments requiring a PBI to directly dispense relief. The fact that such an institution does not itself directly give or provide that relief, but does so via related or associated entities, is no bar to it being a PBI, the Court said.

Damages assessable to director personally

The High Court has affirmed that damages received by an individual following a failed joint venture project were assessable to him personally. Broadly, the individual and others had sought for the company of which they were the directors to become an equity participant in the project and become the ultimate purchaser of the golf course. However, the other joint venturers in the project disputed this and made other arrangements to purchase the golf course.

The individual then successfully sued the other joint venturers and was awarded damages by the Victorian Supreme Court for the loss of a business opportunity. The Commissioner then assessed the individual on this amount (around $860,000). The individual argued that he had received the money as trustee of the company and it was therefore assessable to the company.

The High Court held the individual was liable to income tax on the damages received in satisfaction of the Supreme Court judgment. It was of the view the individual did not receive the amount as a constructive trustee of the company.

Winemaker not taxable on property sale

The Administrative Appeals Tribunal (AAT) has held that an individual taxpayer who was the controller of several trusts through which he operated a winemaking business, and who was also a beneficiary of the trusts, was not presently entitled to an amount of over $480,000 in profit that one of the trusts made from the sale of business premises.

The profit had been deposited into accounts which the taxpayer controlled for his personal benefit. The Commissioner had issued an assessment to include the profit in the taxpayer’s assessable income on the basis that the amount represented revenue profit of the trust and that, as a beneficiary of the trust, the individual was presently entitled to the amount under certain rules concerning the tax treatment of trust income.

However, the AAT did not agree with the Commissioner’s decision. It concluded that another of the trusts (of which the taxpayer was trustee) was beneficially entitled to the profit as a beneficiary of the trust that made the profit from the sale, and not the taxpayer in his personal capacity.

Tax debt release on serious hardship grounds refused

In a recent case, the Administrative Appeals Tribunal (AAT) refused an individual’s application to be released from his tax debt of $58,000 on the grounds of serious hardship.

The AAT noted that no explanation was offered for the taxpayer’s failure to meet his tax liabilities as they arose. The AAT said that instead of paying what it considered to be manageable tax assessments, the taxpayer “largely ignored his tax liabilities over the last five or six years, and has allowed the amounts due to accumulate with interest”.

TIP: The Tax Commissioner has a discretion to release individuals from eligible tax debts. However, even if the Commissioner is satisfied that serious hardship would result from payment of the tax debt, he is not obliged to exercise the discretion in the taxpayer’s favour.

Broadly, serious hardship is said to exist when payment of a tax debt would leave an individual unable to provide basic living necessities for themselves and their dependants. Ultimately, it is a question of fact whether payment of an eligible tax liability would result in serious hardship – and the onus is on the taxpayer to prove their case before a tribunal.

GST credits for property development project managers denied

Two taxpayers have been denied GST input tax credits they had claimed in respect of purported acquisitions made in relation to property developments. The Commissioner had refused the taxpayers’ claims for input tax credits on the basis that neither taxpayer carried on an enterprise.

The AAT heard from the taxpayers that they were “principal contractors” in relation to the property developments. However, the AAT said that exactly what the “principal contractors” did in respect of the properties remained the subject of “quite profound mystery”.

It said that an entity is not a “project manager” simply because someone says it is. Further, the AAT said that to carry on an enterprise, an entity must “do” something, and that in this case, the AAT was unable to identify the activity that the taxpayers were doing in respect of the properties.

TIP: This case demonstrates the need for multiple parties, and in particular related parties, who are involved in large property development projects to clearly articulate and document the role of each party and the agreements they have with each other, particularly if one party intends to seek GST input tax credits.

Individual working overseas not a tax resident

An individual has been successful before the AAT in arguing that he was not a “resident” of Australia for tax purposes for the 2009 and 2010 income years. This was despite being an Australian citizen, maintaining an Australian bank account for his salary, and retaining his house in Queensland.

During the years in question, the taxpayer had signed up with a company to work on a project in Saudi Arabia. The project was expected to last three years and the taxpayer had an expectation that upon completion of the project, he would move on to another project located in Saudi Arabia.

In making various findings of fact, the AAT largely accepted the taxpayer’s evidence. It said that the taxpayer’s presence in Saudi Arabia “was hardly casual or passing”. The AAT accepted that the taxpayer had formed an intention to make Saudi Arabia his home for the duration of the project and beyond.

TIP: This case demonstrates that proving tax residency requires a detailed examination of various facts, and the weighing up of those facts, to come to a conclusion that an individual is (or is not) a tax resident. It also demonstrates the importance of having corroborating evidence to prove the taxpayer’s case.

ATO debt collection approach under review

The Inspector-General of Taxation, Mr Ali Noroozi, has announced that he will review the ATO’s approach to debt collection. To facilitate his review, Mr Noroozi has called for interested parties to submit comments. Public consultation closes on 18 July 2014.

“Despite the ATO’s debt assistance programs, its approach to collecting taxes has been a persistent source of taxpayer complaint”, Mr Noroozi said. He noted that the ATO’s approach to collecting debts accounted for 23% of all ATO-related complaints received by the Commonwealth Ombudsman in 2012–2013.

Furthermore, Mr Noroozi said some stakeholders believe that the ATO has recently taken a firmer approach to debt collection despite continuing economic pressures, while others are of the view that the ATO allows debts to accumulate for too long before taking action.

New ATO approach to identifying SMSF risks

Trustees of self managed superannuation funds (SMSFs) need to be aware of how the ATO gathers information about them in order for the ATO to assess whether their SMSF poses a tax compliance risk, and how the ATO may respond if it perceives a risk.

The ATO has recently announced that it will take a new risk-based approach to how it treats auditor contravention reports (ACRs). This approach will be based on the overall risk posed by the SMSF. Using new risk models, the ATO will analyse multiple indicators of possible non-compliance, including regulatory and income tax matters, information from the SMSF annual return, ACRs and other data such as trustee and member records. The ATO will then use this information to determine appropriate actions to take regarding each SMSF.

The ATO has also reminded SMSF trustees that from 1 July 2014 it will have more flexibility in how it deals with SMSFs that breach the super law – including new powers to issue penalties. The ATO says that SMSF trustees should therefore rectify any contraventions of the law as soon as possible, or have plans in place by 1 July 2014 to do so.

TIP: While the new SMSF trustee penalties start from 1 July 2014, the ATO has noted that contraventions of the law (such as loans to members or relatives) that exist on 1 July 2014 will come under the new penalty regime.

New integrity rule targeting dividend washing

The government has proposed to amend the law to introduce an integrity rule that will curtail taxpayers’ ability to obtain a tax benefit from “dividend washing”.

Broadly, “dividend washing” is a scheme that allows a taxpayer to obtain multiple franking credits in respect of a single economic interest by selling the interest after an entitlement to a franked dividend has accrued and then immediately purchasing an equivalent interest with a further entitlement to a corresponding franked dividend. The amendments, once formally enacted, are proposed to apply with effect from 1 July 2013.

Administrator of deceased estate breached duty

The Supreme Court of Queensland has ruled that an administrator of a deceased estate breached her fiduciary duty by applying for her deceased son’s superannuation benefits to be paid to her personally, rather than on behalf of his estate.

The Court had granted the woman Letters of Administration over her son’s estate after he died, aged 40, intestate and without a spouse or children. However, she applied to her deceased son’s superannuation funds for any death benefits to be paid to her personally.

The deceased’s father (the woman’s ex-husband) submitted that she had allowed a conflict of interest to occur by seeking the superannuation death benefits for herself personally. In finding against the woman, the Court ordered that she transfer all of the superannuation death benefits in dispute (approximately $450,000) to the son’s estate, where it would be shared equally with her former spouse under the rules of intestacy.