Birchstone Brief for the week ended 29 September 2023

ATO Updates

Decision Impact Statement – Domestic Property Developments

The ATO has issued a Decision Impact Statement (DIS) concerning the AAT’s decision in Domestic Property Developments Pty Ltd as trustee for Dals Property Trust v FCT [2022] AATA 4436 (covered in the Birchstone Brief for the week ended 20 January 2023). In that case, the AAT held that the taxpayer’s active marketing for sale of residential premises (that it had rented out for five years) in the course of its development enterprise constituted “use” for the purposes of section 40-75(2)(a) of the GST Act, with the effect that those premises constituted new residential premises (the disposal of which was not input taxed). 

The DIS provides that the Commissioner considers the AAT’s decision:

• confirms the ATO’s view that marketing a premises for sale constitutes “use” of that premises for the purposes of section 40-75(2)(a); and
• is consistent with the views set out in GSTR 2009/4. 

However, as the AAT did not provide reasoning for its position regarding when the 5-year period commences for the purposes of section 40-75, the Commissioner will seek to clarify the issue at the first available opportunity before the AAT or Federal Court. 

Draft guidance on deductibility of self-education expenses

TR 2023/D1 sets out the Commissioner’s views regarding when self-education expenses incurred by an individual will be deductible under section 8-1 of the ITAA 1997. It provides numerous examples of expenditure that the Commissioner considers can be deducted as a self-education expense, as well as examples of that which cannot. 

The draft ruling replaces TR 98/9 and TR 92/8, both of which were withdrawn with effect from 27 September 2023. 

TR 2022/4 updated to reflect recent Full Federal Court decisions

The ATO has issued an addendum to TR 2022/4 (which sets out the Commissioner’s views regarding the application of section 100A of the ITAA 1936) to reflect the decisions in:

• FCT v Guardian AIT Pty Ltd as trustee for Australian Investment Trust [2023] FCAFC 3; and 
• B&F Investments Pty Ltd as trustee for the Illuka Park Trust v FCT [2023] FCAFC 89.

The main changes made are to clarify that:

• advisers may be a party to a reimbursement agreement (per Bblood); and 
• a beneficiary may need to be a party to a reimbursement agreement (per Guardian). 

Draft changes to ruling regarding superannuation income streams

The ATO has issued TR 2023/5DC1, which proposes changes to guidance regarding when a superannuation income stream commences and ceases as set out in TR 2013/5. The proposed changes reflect legislative amendments and are intended to clarify how the general principles expressed in TR 2013/5 apply in the context of successor fund transfers.

The Commissioner’s preliminary view is that a superannuation income stream will cease for income tax purposes when the liability to pay benefits under the income stream is transferred to a successor fund without the member’s consent. A new superannuation interest and superannuation income stream will arise if the successor fund is required to pay superannuation income stream benefits to the member as a result of the successor fund transfer. 

TR 2021/D5 finalised

TR 2023/3, originally issued in draft as TR 2021/D5, sets out the Commissioner’s view on the application of, and exclusions to, section 26-102 of the ITAA 1997. Section 26-102 limits deductions for losses or outgoings that relate to holding vacant land. TR 2023/3 has effect from 1 July 2019. 

Draft changes to PCG 2018/4 

PCG 2018/4DC1 proposes changes to PCG 2018/4, which deals with the ATO’s compliance approach regarding the legal liability of legal personal representatives for any outstanding tax-related liabilities of a deceased person. 

The changes proposed:

• increase the market value of estate assets threshold for an estate to be considered less complex from $5 million to $10 million; 
• set out additional guidance regarding when a legal personal representative will be taken to have acted reasonably; and 
• include additional examples. 

If finalised, the draft guideline is proposed to apply both before and after its date of issue. 

Class ruling and addendum issued

The ATO has issued:

• CR 2023/52 – Horizon Minerals Limited – Distribution of shares in Richmond Vanadium Technology Limited; and 
• PR 2022/7A1 – Addendum to PR 2022/7 – Bell Equity Lever – Instalment receipts. 

State Taxes

Duty (ACT): Revenue Circular on landholder duty updated 

The ACT Revenue Office has updated its Revenue Circular regarding how ACT landholder duty is calculated. LHD002.1 is effective from 1 October 2023 and takes account of changes to the landholder duty provisions which were made by the Revenue Legislation Amendment Act 2023 (ACT). 

Cases

Bendel v FCT [2023] AATA 3074 – AAT holds UPE not a loan within the meaning of section 109D(3)

In a significant development for Division 7A purposes, the AAT has ruled that an unpaid present entitlement owed to a corporate beneficiary that remained unpaid and not fully satisfied by the relevant lodgment date did not constitute a ‘loan’ within the meaning of section 109D(3) of the ITAA 1936.

In summarising its reasons for this conclusion, the Tribunal made the following statement at paragraph [101]: ” .… the necessary conclusion is that a loan within the meaning of s 109D(3) does not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) are created but not satisfied and remain unpaid. The balance of an outstanding or unpaid entitlement of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, is not a loan to the trustee of that trust”. 

This decision is undeniably noteworthy, as it directly contradicts the ATO’s longstanding position (expressed in TR 2010/3 (now withdrawn) and TD 2022/11) that UPEs owed to corporate beneficiaries constitute a loan for section 109D(3) purposes. However, it should be noted that no formal doctrine of precedent applies to AAT decisions. This will limit the precedential weight of the decision unless and until it is appealed to a higher court (which may or may not happen). 

Michael John Hayes Trading Pty Ltd as trustee for MJH Trading Trust v FCT [2023] AATA 3005 – No dividend stripping operation in absence of capital receipt & avoidance purpose 

The AAT has held that a distribution of fully franked dividends to relevant taxpayers was not made as part of a dividend stripping operation because: 

• although the taxpayers received the dividends free of tax, the original shareholders did not receive a capital sum as a substitute for taxable dividends; and 
• the required tax avoidance purpose was not present. 

As a result, the AAT set aside the objection decisions under review and allowed the taxpayers’ objections in full. 

Simplot Australia Pty Ltd v FCT [2023] FCA 1115 – Frozen foods marketed as prepared meals not GST-free

The Federal Court has held that certain frozen foods within the Birds Eye SteamFresh range (such as fried rice with vegetables and omlette and penne pasta with mediterranean vegetables in a napoli sauce) were marketed as prepared meals, with the effect that their supply was not GST-free pursuant to Schedule 1 of the GST Act.

The taxpayer sought to rely on evidence from their marketing and brand managers that, as the products were not packed in containers from which they could be consumed, they were not “prepared meals”. The taxpayer also contended that a “meal” was to be distinguished from foods which were not a “meal” but were “meal components”. 

The Court dismissed the taxpayer’s application, ruling that each relevant product was food of a kind that was marketed as a prepared meal and was therefore not GST-free. The Court found that the focus of the relevant legislative text was on how foods are marketed and not on how they are consumed. As such, the form of packaging was not determinative of whether a food item was of a kind marketed as a prepared meal. 

Legislation

Senate committee report on multinational reforms released

The Senate Economics Legislation Committee has released its report on the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 (Cth) (covered in the Birchstone Brief for the week ended 23 June 2023). The report recommends that:

• Schedule 1 to the Bill, which will amend the Corporations Act 2001 (Cth) to implement a measure requiring Australian public companies to disclose information about subsidiaries in their annual financial reports from 1 July 2023, be passed unamended; and
• Schedule 2 to the Bill, which will implement the reforms to Australia’s thin capitalisation rules announced in the 2022-23 October Budget, be passed with technical amendments. 

Exposure draft legislation and explanatory material – ACNC secrecy provisions

Treasury has released exposure draft legislation and explanatory material regarding proposed amendments to the secrecy provisions in the Australian Charities and Not-for-profits Commission Act 2012 (Cth). The purpose of the amendments is to allow for disclosures regarding ongoing ACNC investigations, subject to a safeguard of a public harm test.

The amendments will establish a new exception for the disclosure of protection ACNC information, and allow the Commissioner to authorise an ACNC officer to disclose information about an ongoing investigation where the disclosure would prevent or minimise the risk of significant harm. The public harm test is intended to balance the benefits of enhanced transparency with potential reputational risks to charities and the need to ensure personal and confidential information is handled appropriately.

The amendments are proposed to apply retrospectively if enacted (to allow the ACNC to disclose information about ongoing investigations at the date of commencement).