Birchstone Brief for the week ended 9 April

Dan’s Deliberations

Dan is on leave so there’s no Dan’s Deliberations this week. Dan’s Deliberations will be back next week.

ATO Update

Practice Statement Law Administration PS LA 2021/1 – Application of the promoter penalty laws

The ATO has issued Practice Statement Law Administration PS LA 2021/1 which provides guidance on the application of the promoter penalty laws. Amongst other things, the Practice Statement outlines:

  • some of the indicators of potential promoter behaviour;
  • how decisions about the promoter penalty laws are made; and
  • the application of the promoter penalty laws.

Practical Compliance Guideline PCG 2020/5Non arm’s length expenditure for superannuation entities: Compliance approach extended

The ATO has extended its transitional compliance approach in PCG 2020/5 for applying the non arm’s length rules to superannuation entities until the 2022 income year.

ATO releases superannuation rates and thresholds: 2021-22

The ATO has released the superannuation rates and thresholds for the 2021-22 year. The concessional contribution cap will increase from $25,000 to $27,500, while the non-concessional contribution cap will increase from $100,000 to $110,000.

Cases

PKWK v Innovation and Science Australia (Taxation) [2021] AATA 706Pyrolysis technology deemed to be core R&D activities

The AAT has held that an applicant’s activities relating to the development of soil treatment technology qualified as core R&D activities.

The applicant company was established to open and operate a soil treatment facility in Victoria. In the latter stages of construction of the soil treatment facility, the taxpayer began investigating whether pyrolysis technology could be applied to the processing of municipal solid waste (MSW). The applicant company subsequently signed a consultancy agreement with a company to, amongst other things, develop a process to enable the pyrolysis of MSW. The applicant applied to Innovation and Science Australia for registration of the pyrolysis activities as R&D activities, which was rejected.

The issue in dispute was whether the applicant company’s activities were core or supporting R&D activities. The AAT held that the development of the pyrolysis technology qualified as core R&D activities, as they were experimental activities whose outcome could not be known or determined in advance on the basis of current knowledge, information or experience. The AAT also pointed to the fact that the activities were carried out for the purpose of generating new knowledge. In turn, the AAT also held that the ‘project evaluation document’ and ‘product management’ activities were supporting R&D activities.

Watts v FCT [2021] AATA 758Retired company director did not have standing

The AAT has held that a retired company director did not have standing to seek review of the issuing of assessments imposing superannuation guarantee charges.

The taxpayer was the director of a company until he retired in 2014. Following the taxpayer’s retirement, the Commissioner commenced an audit of the company’s affairs. The audit resulted in the Commissioner issuing assessments imposing superannuation guarantee charges (SGC) to the company, with a director penalty notice also being issued to the taxpayer claiming these same unpaid SGC amounts. The company was subsequently liquidated, with the liquidators being partially successful in objecting to the assessments imposing SGC amounts. The liquidators chose to not challenge the objection decision, following which the taxpayer applied to the AAT.

The issue in dispute was whether the taxpayer had standing to seek review of the issuing of the SGC. The AAT held that the taxpayer did not have standing. Only the employer has the right to object to an SGC assessment, which in this case was the liquidated company.

Coronica v FCT [2021] AATA 745SMSF trustee disqualification set aside

Despite affirming a non-compliance notice for various breaches of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act), the AAT has set aside the ATO’s decision to disqualify the applicant from acting as a trustee of a superannuation fund.

In 1975, the taxpayer’s company that carried on an accountancy practice set up an SMSF. The taxpayer was the sole trustee and beneficiary of the fund, as well as being the sole director and shareholder of the company. In 2009, the ATO alleged that there was multiple contraventions of the SIS Act. In particular, the ATO pointed to the acquisition by the fund of all of the applicant’s shares in the company for consideration of $100,000, which the ATO submitted was higher than market value and thus contravened s 66 (acquisition of assets from fund members) and Pt 8 (in-house asset rules) of the SIS Act. The ATO issued a notice of non-compliance and disqualified the applicant from acting as a trustee of the superannuation fund.

The AAT affirmed the non-compliance decision that was made by the ATO, stating that the opinions and competence of the applicant was not at a level that would be expected from a professional in the applicant’s position. The AAT, however, exercised their discretion to rescind the disqualification notice issued to the applicant. Despite the non-compliance, the AAT formed the view that the applicant was likely to comply with enforceable undertakings going forward. Moreover, it was proposed that the fund be changed to:

  • appoint an independent accountant and tax agent;
  • engage a suitably experienced firm of lawyers to sign of on all new investments.

FCT v Rowntree (No 3) [2021] FCA 306Significant penalties for promoters of tax exploitation schemes

The Federal Court has imposed penalties of over $9.4 million for promoters of a tax exploitation scheme. In FCT v Rowntree [2020] FCA 1322, a lawyer, accountant and financial planner were found to be in breach of the promoter penalty laws relating to the sale of REDD (reducing emissions from deforestation and forest degradation) credits.

PDXS v FCT [2021] AATA 725AAT upholds amended assessments

The AAT has upheld amended and default assessments issued by the ATO because the taxpayer failed to show that they were excessive.

In 2014, the taxpayer was stopped by police who found a firearm and $2,200 cash. Following a subsequent police search, a further $79,500 was found alongside pills and vials of steroids. In the resulting police interview, the taxpayer admitted that the cash was income from his businesses: a tattoo shop, a hairdressing salon and the sale of encrypted BlackBerry mobiles. After being provided with this information, the ATO issued default and amended assessments for the 2011 to 2014 income tax years, as well as failure to lodge and shortfall penalties.

The issue before the AAT was whether the default and amended assessments as well as the administrative penalties were excessive. The AAT held that the taxpayer did not show that the assessments were excessive, because:

  • the taxpayer did not keep any accounting records of the cash he received for the business between 2011 and 2014;
  • the taxpayer did not account for the cash found by the police, meaning it was unclear how much cash related to each business; and
  • the taxpayer’s methodology of calculation did not include an analysis of amounts deposited in his business accounts.

The AAT also found that the penalty assessments were not excessive because the taxpayer knowingly provided false information about his income to the Commissioner for the 2012 and 2013 income years.

Appeals

The High Court of Australia has refused to grant the Commissioner special leave to appeal from the Full Federal Court’s decision in ACN 154 520 199 Pty Ltd (in liquidation) v FCT [2020] FCAFC 190 (Gold refiner entitled to input tax credits worth $122 million – covered in the Birchstone Brief for the week ended 20 November 2020).

Legislation

Taxation Administration Amendment (Updating the List of Exchange of Information Countries) Regulations 2021 – Information exchange countries

The Taxation Administration Amendment (Updating the List of Exchange of Information Countries) Regulations 2021 have been registered to amend the list of jurisdictions which are ‘information exchange countries’ for the purposes of the Taxation Administration Regulations 2017. The withholding rate for payments made by the trustee of a managed investment trust (MIT) to a foreign resident will depend on whether the foreign resident resides in one of these listed ‘information exchange countries’. MIT income paid to a foreign resident of an information exchange country will generally be subject to a withholding rate of 15%, otherwise it will be the default rate of 30%.

Treasury Laws Amendment (Reuniting More Superannuation) Regulations 2021 – Amendments to regulations for eligible rollover funds

Legislative instrument Treasury Laws Amendment (Reuniting More Superannuation) Regulations 2021 has been registered, which amends multiple regulations based on the changes introduced in the Treasury Laws Amendment (Reuniting More Superannuation) Act 2021 (Closure of eligible rollover funds – covered in the Birchstone Brief for the week ended 26 March). The regulations amended are:

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