Birchstone Brief for the week ended 11 June 2021

Dan’s Deliberations

  1. A non-resident makes a capital gain on an asset they own personally that is not Taxable Australian Property. Result = not taxable.
  2. A non-resident beneficiary receives a distribution from an Australian resident fixed trust of a capital gain on an asset that is not Taxable Australian Property. Result = not taxable.
  3. A non-resident beneficiary receives a distribution from an Australian resident discretionary trust of a capital gain on an asset that is not Taxable Australian Property. Result = taxable at 45%.

The Full Federal Court confirmed the outcome from the third scenario in the Greensill appeal (summarised below).

While the assets in question in Greensill were shares in ‘non-land rich’ Australian companies, based on the Court’s reasoning, the outcome would be the same even if the asset in question had no connection with Australia (e.g. shares in a foreign company).

We’ll leave the analysis through the maze-like provisions of Division 6 & Division 6E of the ITAA 1936 and Subdivision 115-C & Division 855 of the ITAA 1997 for another time.

The key takeaway from Greensill (which may still be appealed to the High Court) is that trustees of Australian discretionary trusts need to consider the tax implications very carefully before distributing capital gains to non-resident beneficiaries.

The outcome from Greensill means an Australian discretionary trust will often be a poor choice of structure for non-residents looking to invest in assets (other than Australian land – which will be taxable regardless of the structure). If you are in a position of wanting to distribute a capital gain from an Australian discretionary trust to a non-resident beneficiary there are a few things you can look at to possibly improve the tax outcome.

Firstly, you could consider distributing the capital gain to an Australian resident (either an individual or a company) to obtain access to the general 50% discount or the lower corporate tax rate. However, if the funds ultimately make there way to a non-resident the anti-avoidance rules (particularly section 100A – reimbursement arrangements) will need to be carefully considered.

Secondly, you could consider ‘converting’ the discretionary trust into a fixed trust which will then open up access to the specific exemption for fixed trusts in section 855-40. Obviously, there are a number of complex trust and tax law issues that will need to be worked through if you’re considering this path. These include, whether the variation power in the deed allows the necessary variations to be made, whether the conversion will cause a resettlement or otherwise result in a capital gain or be dutiable and whether Part IVA could apply.

As always, please get in contact with us if these issues are relevant to you/your clients or, if like us, you just find these issues endlessly interesting and would like to have a chat about the technicalities.

ATO Update

TD 2021/D1 – Aggregated turnover and different accounting periods

The ATO has released Draft Taxation Determination TD 2021/D1 which sets out how to calculate aggregated turnover under section 328-115 of the Income Tax Assessment Act 1997 (Cth) where a connected entity or affiliated entity has a different accounting period. The Draft Determination outlines that when an entity calculates the annual turnover of its connected or affiliated entities, it is for the relevant period that aligns with their income year, even if those entities have a different accounting period.

Draft LCR 2021/D1 – Temporary full expensing 

The ATO has released Draft Law Companion Ruling LCR 2021/D1 which outlines the operation of the temporary full expensing (TFE) measure for depreciating assets. The LCR also provides views on interpretive issues, explains the interaction of TFE with the instant asset write-off and backing business investment measures and illustrates how the TFE applies to small business entities. 

STP 2021/D1 – Single Touch Payroll reporting exemption

Entities that do not have an ABN, but have been assigned a withholding payer number by the ATO, are exempt from Single Touch Payroll reporting obligations for 2021-22.

Advice under development

The ATO has listed a new issue for superannuation: “Super guarantee – Part 7 penalties”.  The proposed Practice Statement will outline the Commissioner’s revised approach in relation to the remission of additional super guarantee charge imposed under Part 7 of the Superannuation Guarantee (Administration) Act 1992 (Cth). PS LA 2020/4 (remission of additional superannuation guarantee charge) which was released last year and deals with the same issue, only applies to quarters ending on 31 March 2018 and earlier which were subject to the superannuation guarantee amnesty.

Rulings

The ATO has issued the following class and product rulings:

Cases

Peter Greensill Family Co Pty Ltd (Trustee) v Commissioner of Taxation [2021] FCAFC 99 – Trustees assessed on gains distributed to non-resident beneficiaries

The Full Federal Court has dismissed the taxpayers’ appeals from the decisions in Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation [2020] FCA 559 and N&M Martin Holdings Pty Ltd v Commissioner of Taxation [2020] FCA 1186.

In the appeals from these two cases, which the Full Federal Court heard together, resident discretionary trusts had made capital gains on the sale of shares that were not regarded as ‘taxable Australian property’. The trustees of the two resident trusts then distributed the respective capital gains to foreign resident beneficiaries. The ATO assessed the trustee on these amounts under section 98 of the ITAA 1936 by forming the view that section 855-10 of the ITAA 1997, which disregards capital gains made by foreign residents or foreign trusts on non-taxable Australian property, does not apply.  The Federal Court agreed with the ATO’s assessment in each of these cases.

The issue before the Full Federal Court was whether section 855-10 applied to the gains made by the trustees. It was held that section 855-10 did not apply because neither of the trusts were foreign trusts. Further, the provision did not apply to the foreign beneficiaries because the amounts distributed were not capital gains from a CGT event, rather they were amounts calculated by reference to a CGT event which occurred in respect of CGT assets of a trust. On this basis, the Full Federal Court dismissed the appeals with the result that the trustees are assessed on the relevant amounts.

Cobanov v Josifovski (No 2) [2021] ACTSC 111 – Tax avoidance term in partnership agreement

It was stated in this case that a partnership agreement which contained a term that a party would live in the property for one year to avoid capital gains tax would have been void for illegality or unenforceable as it was against public policy reasons. Even though the plaintiff’s claim that they had entered into a partnership with the defendant was rejected, Loukas-Karlsson J said that the partnership agreement would’ve been void anyway because the term was designed to avoid the payment of capital gains tax to the Australian Tax Office in direct contravention of the ITTA 1997.

VNBM v FCT [2021] AATA 1626 – Cash flow boost payment denied

The AAT found that the applicant company was not entitled to the first cash flow boost (CFB) payment because:

  1. the AAT was not persuaded the wages were actually paid; and
  2. the AAT was satisfied the company had entered into a scheme with the sole or dominant purpose of obtaining the CFB.

The activity statement records for the company for the previous 5 years reported wages paid to a director of $100 a week. After the introduction of the CFB, the company reported it paid one week’s wage of $108,700 to a director and reported $50,009 of PAYG withholding (which was not paid to the ATO).

Appeals

Legislation

Data-matching Program (Assistance and Tax) Rules 2021 – Data-matching for TFNs

The Australian Information Commissioner has issued data-matching rules which regulate how the ATO and government agencies such as the Social Services Department use tax file numbers to detect incorrect payments.

Data Matching Program – Cryptocurrency

The ATO has registered a notice that it will acquire account identification and transaction data from cryptocurrency designated service providers for the 2021 to 2023 financial years.

Data Matching Program – Novated Leases

The ATO has registered a notice that it will acquire novated lease data from certain finance companies for 2018-19 to 2022-23.

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