Birchstone Brief for the week ended 16 July 2021

Shivani’s Serve

The Taxing Uncertainties of Divorce

Parties to a family law property settlement may be quick to select their preferred assets but have they considered the potential tax implications attached to those assets? In any case, will the Family Court take into account an unrealised tax liability in determining the net value of an asset forming part of a property settlement?

The Family Court in Rosati v Rosati (1998) 23 Fam LR 288 considered whether an unrealised CGT liability should be included. In that case, the Court set out general principles which are summarised as follows:

1. whether CGT should be taken into account in valuing an asset varies according to the circumstances of the case, including:
   1. the method of valuation applied;
   2. the likelihood of that asset being realised in the foreseeable future;
   3. the circumstances of its acquisition; and
   4. the evidence of the parties as to their intentions in relation to that asset;
2. allowance should generally be made for any CGT payable on the sale of an asset in determining the asset’s value if:
   1. the Court orders the sale;
   2. the Court is satisfied the sale is inevitable or would probably occur in the near future; or
   3. if the asset was acquired as an investment with a view to profit;
3. if none of the circumstances in item 2 above apply, but the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to mid-term, then the Court may take that risk into account; and
4. there may be special circumstances where, despite the absence of any likelihood of a sale, it may be appropriate to take the CGT liability into account.

As is apparent from the above, the Court ultimately has broad discretion as to whether an unrealised CGT liability ought to be taken into account. However, it is important for parties to a family law property settlement to obtain tax advice to identify the tax risks associated with the pool of assets before determining the proposed division of the assets.

Our next webinar on “Tax Tips, Tricks and Traps for Family Law Property Settlements” will cover more recent application of the Rosati case as well as other tax issues to give family lawyers, accountants and financial advisors involved in the process the knowledge they need to identify tax issues that can derail a property settlement. The webinar will be run on Wednesday 28 July at 11am AWST and you can find out more details and register for free here.

Find out more about Shivani here.

ATO Update

Rulings

The ATO has issued the following rulings:

• Class Ruling CR 2021/44 – Museums Victoria – Early retirement scheme 2021;
• Product Ruling PR 2021/7 – Income Tax: Tax consequences for a Solar Gardener in a gardener-funded Enova Solar Garden Project; and
• Product Ruling PR 2021/8 – Income Tax: Tax consequences for a Solar Gardener in a philanthropic-funded Enova Solar Garden Project.

Data-matching program: Lifestyle assets

The ATO has registered a Gazette Notice to notify that it will acquire lifestyle asset data from insurance policies for the 2020-21 through to 2022-23 years when the value is equal to or exceeds nominated thresholds. The relevant asset classes include:

• marine vessels;
• motor vehicles; and
• thoroughbred horses.

State Taxes

Land Tax (NSW): COVID-19 relief

Revenue NSW has released guidance on the measures introduced to provide land tax relief to commercial and residential landowners who provided a reduction in rent between 1 July 2021 and 31 December 2021 to tenants who experienced financial distress as a result of COVID-19.

COVID-19 Economic Support Package (NSW): Tax measures

The NSW Government has announced an economic support package aimed at assisting businesses and individuals through the current COVID-19 lockdown. The relevant tax-related measures in the support package include:

• payroll tax waivers of up to 25% for eligible businesses that have experienced a 30% decline in turnover; and
• land tax relief for commercial, retail and residential landlords who have provided rent reductions to financially distressed tenants.

Duties and Land Tax (Tas)

The Bill which:

• introduces a 2-year waiver of duty on purchases of electric and hydrogen fuel cell vehicles;
• allows land tax bills of more than $500 to be paid in instalments; and
• makes changes to the land tax rate thresholds,

has received assent and is now law (covered in the Birchstone Brief for the week ended 9 July).

Cases

FCT v Ross [2021] FCA 766 – Shortfall penalties

The Federal Court has allowed the Commissioner’s appeal from the decision in MJPV v FCT [2020] AATA 1527 in which the AAT set aside the penalty uplift imposed on a taxpayer under section 284-220 of the Taxation Administration Act 1953 (Cth).

The taxpayers (husband and wife) were subject to an ATO audit for not disclosing all of their assessable income over a number of years. In 2015, the husband was issued with amended assessments that increased his assessable income for the relevant years. The husband was also issued with penalty assessments and a 20% uplift of the base penalty amount in relation to the shortfalls identified in each year. The wife was also issued with a default assessment and an amended assessment for two years, as well as being issued with penalty assessments in respect of the shortfalls. In 2020, the AAT set aside the additional 20% penalty uplift imposed on the husband.

The issue before the Court was whether the AAT erred in setting aside the imposition of the penalty uplift on the husband. The Court found in favour of the Commissioner, ruling that the AAT erred by setting aside the penalty uplift. The Court stated that on the natural meaning of the words under section 284-220, the preferable construction is that the uplift applies automatically and it is not a matter for the exercise of discretion by the Commissioner. On this basis, the Court ruled that the uplift penalties imposed upon the husband should not have been remitted by the Tribunal using the general power to remit penalties under s 298-20 of the Taxation Administration Act 1953 (Cth).

Singh v FCT [2021] AATA 2125 – Taxpayer denied input tax credits

The AAT has agreed with an ATO objection decision that a taxpayer should be disallowed from claiming input tax credits due to inadequate documentation. The taxpayer had claimed input tax credits of $206,509 from 2014 to 2017 as part of his freight transport business. The AAT agreed with the ATO that the taxpayer should be denied the input tax credits on the basis that:

• the taxpayer had no reliable system of record-keeping;
• there was a lack of supporting invoices; and
• the invoices that were provided lacked the requisite information.