Birchstone Brief for the week ended 2 April 2021

Dan’s Deliberations

The decision of the Federal Court (Justice Logan) in Le v FCT [2021] FCA 303 (summarised below) provides a detailed explanation of what a taxpayer needs to do to win where the ATO has used an ‘asset betterment’ approach to assess the taxpayer.

The ATO can use an asset betterment approach where taxpayers have acquired expensive assets which cannot be explained by the income they have reported in their tax return or from non-income sources. Crudely, the ATO will determine the taxpayer’s net assets at the start of the year, compare that to their net assets at the end of the year, and, subject to some adjustments, assess the taxpayer on the increase in net assets for the year as income.

The amount of income the ATO determines using an asset betterment approach is invariably wrong but, because the onus of proof is on the taxpayer when challenging an assessment, the ATO does not need to prove that its methodology is correct. It is the taxpayer that must show that the assessment is excessive. To do this, the taxpayer can’t just critique the ATO’s assessing approach, even if that critique shows the amount that was assessed by the ATO is almost certainly wrong. The taxpayer must produce evidence which shows that the assessment is wrong by a particular amount.

In Le, the taxpayers asserted that increases in some of their bank accounts were merely the result of funds being moved from one account to another. In other words, their apparent increase in net assets could be explained from non-income sources. If this evidence was accepted, it could satisfy the taxpayer’s onus of proving the assessments were excessive. However, the Tribunal had not considered this explanation in its decision, and it needed to, and therefore the taxpayer’s appeal to the Federal Court was successful.

The case was remitted back to the Tribunal for rehearing. Whether the taxpayers will ultimately be successful in the rehearing will depend on whether the Tribunal accepts (amongst other issues) their explanation for the increases in their bank account balances. Regardless of the outcome, the decision of the Federal Court shows that it is possible to successfully challenge an asset betterment assessment where the taxpayer has actual evidence that shows the ATO’s assessment is wrong by a specific amount.

ATO Update

Draft Taxation Ruling TR 2019/D5 – Deferred start date for FBT car parking ruling

The ATO has announced that the application of Draft Taxation Ruling TR 2019/5 which focuses on the meaning of “commercial parking station” will be deferred until 1 April 2022.

GST Determination GSTD 2021/1 – Development works in the ACT

The ATO has issued GST Determination GSTD 2021/1 which sets out the GST treatment of arrangements between government agencies and private developers in the context of the development of land in the ACT. The Determination provides that the monetary amount paid by a developer to a government agency under a building arrangement on completion of the contract to acquire a Crown lease is consideration for the supply of the Crown lease under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999. However, the building works a developer completes under a building arrangement are not consideration for the supply of the Crown lease by the government agency under section 9-5.

GSTR 2015/2A1 – Addendum to GST ruling: Development lease arrangements with government agencies

The ATO has issued an Addendum to GST Ruling GSTR 2015/2 which explains the GST treatment of particular transactions arising in the context of development lease arrangements entered into between government agencies and private developers.

Class Rulings

The ATO has issued Class Ruling CR 2021/26 which sets out the income tax consequences for employees of the Qantas Group who participate in the 2020/22 Qantas Non-Executive Director Fee Sacrifice Share Acquisition Plan.

State Taxes

NSW: Land tax relief application date extended

Revenue NSW has extended the due date for Land Tax COVID-19 Relief Applications until 31 May 2021. The extension applies to relief for 2020 and 2021.

Cases

Le v FCT [2021] FCA 303 – Asset betterment case remitted back to AAT

The Federal Court has allowed the taxpayers’ appeal from the decision in NFGZ v FCT [2019] AATA 5410and remitted the matter back to the AAT for rehearing.

The taxpayers were a de facto couple and carried on multiple businesses in partnership, with the businesses primarily dealing in cash. Following an audit, the Commissioner issued amended assessments on the basis that the taxpayers must have had access to significant unreported income. The ATO utilised an ‘asset betterment approach’, and amongst other things, focused on bank account balances, real estate, vehicles, loans and casino expenditure. These amended assessments increased the taxable income of the taxpayers and were issued alongside administrative penalties for intentional disregard of the law (both of which were upheld in NFGZ v FCT [2019] AATA 5410).

The issues in dispute included whether (i) the AAT’s decision was irrational or illogical or (ii) the AAT failed to afford procedural fairness by failing to consider and respond to a substantial, clearly articulated argument. The court held that the AAT had failed to consider one of the taxpayer’s central arguments as to why in each year the amount of the assessment was excessive, in relation to the flow of funds into and out of bank accounts. The court also held that the AAT failed to decide the review by a logical process of reasoning in relation to the treatment of the loan transactions. For these reasons, the court allowed the appeal and remitted the matter to the AAT for rehearing.

Legislation

Superannuation Data and Payment Standards (Release Authorities, and SMSF Rollovers) Amendment 2021 – Data and payment standards for SMSF rollovers

The ATO has released the legislative instrument Superannuation Data and Payment Standards (Release Authorities, and SMSF Rollovers) Amendment 2021 which extends the operation of the Superannuation Data and Payment Standards 2012 to SMSFs. From 31 March 2021, trustees of SMSFs will be required to comply with the data and payment standards in relation to rollovers and transfers.

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