Birchstone Brief for the weeks ended 15 and 22 March 2024

ATO Updates

Decision Impact Statement on the Bowerman case

The ATO has issued a Decision Impact Statement (DIS) regarding the AAT’s decision in Bowerman v FCT [2023] AATA 3547 (first covered in the Birchstone Brief for the week ended 3 November 2023).

In that case, the Tribunal affirmed that the taxpayer (a self-funded retiree who managed her own investment portfolio) was entitled to claim a deduction for the loss incurred on the sale of a residential unit originally purchased for a profit-making purpose, despite the fact that she had also temporarily treated the unit as her primary residence before selling it. In light of TR 97/7, the Tribunal also allowed the taxpayer (who accounted for tax purposes on a cash basis) to claim the loss on the sale of the unit in the 2020 income year, notwithstanding the fact that it otherwise would have found that the loss was only incurred for the purposes of section 8-1 in the 2021 income year (when the contract of sale for the unit completed).

The DIS sets out that the Commissioner:

• acknowledges that the AAT’s factual findings were open on the evidence, and agrees with the Tribunal that both the facts and outcome of the case were ‘unusual’;
• accepts that the application of the Myer Emporium principles regarding profit-making intention depends on the facts of a particular case, and as such notes that the unusual factual findings in the Bowerman case should limit the broader application of the Tribunal’s decision;
• agrees with the AAT’s observation that existing authority supports the conclusion that the taxpayer did not legally incur the loss on the sale of the unit for the purposes of section 8-1 until the contract of sale had completed;
• takes a different view from the Tribunal as to the interpretation of TR 97/7; and
• will review the impact of the Bowerman decision, if any, on related advice and guidance products, and consider whether to update TR 97/7 to clarify when a loss (as distinct from an outgoing) is legally ‘incurred’ for the purposes of section 8-1.

Draft Update to GSTR 2006/6

The ATO has released a draft update to GSTR 2006/6 to reflect the Full Federal Court’s decision in FCT v Landcom [2022] FCAFC 204 (covered in the Birchstone Brief for the week ended 2 January 2023). The draft update contains amendments to clarify, consistently with the Landcom decision, that each freehold title is to be considered separately for the purposes of applying sections 38-445, 38-450 and 75-10(3) of the GST Act. Example 2 in GSTR 2006/6 has also been removed.

Draft Guidance regarding the ‘liable entity’ and ‘hybrid payer’ definitions in Division 832

The ATO has issued TD 2024/D1, which sets out the Commissioner’s view regarding the application of certain aspects of the ‘liable entity’ and ‘hybrid payer’ definitions relevant to the hybrid mismatch rules that are contained in Division 832 of the ITAA 1997.

The draft Determination provides that the Commissioner considers that:

• a ‘liable entity’ or entities can be identified wholly on the basis of hypothetical income or profits within the income tax base of the relevant country (which will be necessary where, for example, the entity has not actually derived any income or profits within a particular period which fall within the tax base of the relevant country); and
• consistently with the overarching purpose of Division 832 (that is, preventing tax advantages from the exploitation of differences in the tax treatment of entities or financial instruments under the laws of two or more jurisdictions), a ‘non-including country’ for the purposes of section 832-320(3) of the ‘hybrid payer’ definition can be a jurisdiction other than the country where the payee of the relevant payment is located or resides.

It is proposed that the Determination will apply both before and after its date of issue if finalised.

Class Rulings Issued

The ATO has issued:

• CR 2024/17 – Invex Therapeutics Ltd – Return of capital;
• CR 2024/18 – Newcrest Mining Limited – Scrip for scrip roll-over, final ordinary dividend and special dividend; and
• CR 2024/19 – Symbio Holdings Limited – Employee share scheme – shares disposed of under scheme of arrangement. 

State Taxes

Payroll Tax (Qld): Ruling on relevant contract provisions & medical centres updated

The Queensland Revenue Office (QRO) has issued PTAQ000.6.3, which updates the Office’s existing ruling on the application of the relevant contract provisions to medical centre businesses with operations in Queensland (first covered in the Birchstone Brief for the week ended 2 January 2023).  
The main change is that the ruling now highlights that the QRO considers that any amounts received by a medical practitioner (including Medicare benefits and out-of-pocket fees) may constitute deemed wages paid or payable by a medical centre to the practitioner under a relevant contract pursuant to section 13E(1) of the Payroll Tax Act 1971 (Qld) if the practitioner’s ability to access the funds is conditional upon the approval or direction of the medical centre.

Cases

Minerva Financial Group Pty Ltd v FCT [2024] FCAFC 28 – Full Court allows Pt IVA appeal

In a unanimous judgment, the Full Federal Court has allowed the taxpayer’s appeal against the primary judge’s decision reported at [2022] FCA 1092 (covered in the Birchstone Brief for the week ended 23 September 2022).

In that case, the primary judge ruled that the taxpayer (who was part of a group of companies and trusts which carried on a financial services business) had:

• transferred its units in an Australian unit trust (MFGT) to its non-resident parent company; and
• following that transfer, only exercised its discretionary power as trustee of another associated Australian unit trust (MHT) to distribute nominal amounts of Australian interest income to Australian resident corporate unitholders holding special units, and instead directed the majority of that income to its non-resident parent company via MFGT (resulting in an effective Australian withholding tax rate of 10% instead of 30% for the non-resident parent company on the interest income),

for the dominant purpose of obtaining a tax benefit. Accordingly, the primary judge found that the relevant schemes were subject to the general anti-avoidance rule contained in Pt IVA of the ITAA 1936.

In allowing the taxpayer’s appeal against the primary judgement, the Full Court held that while it was clear a tax benefit had been obtained, an objective consideration of the application of the factors in section 177D to the circumstances of the case (including where the taxpayer as trustee of MHT had discretionary power to make distributions to the special unitholders and the special unitholders had no entitlement to any of the income of MHT absent the exercise of the taxpayer’s discretion as trustee) led to the conclusion that none of the parties to any of the schemes identified by the Commissioner had entered into or carried out those schemes or any part of them for the sole or dominant purpose of obtaining a tax benefit.

Bechtel Australia Pty Ltd v FCT [2024] FCAFC 33 – Full Court affirms ‘otherwise deductible’ rule did not apply to FIFO travel expenses

The Full Federal Court has unanimously dismissed the taxpayer’s appeal against the primary decision reported at [2023] FCA 676 (first covered in the Birchstone Brief for the week ended 23 June 2023), in which it was held that the ‘otherwise deductible’ rule did not apply to reduce the taxable value of residual fringe benefits provided by the taxpayer to its employees by paying for their FIFO travel expenses to and from their workplace on Curtis Island.

In upholding the primary decision, the Full Court held ruled that:

• the primary judge had not erred in distinguishing the taxpayer’s case from the circumstances in John Holland Group Pty Ltd v FCT [2015] FCAFC 82 on the basis that the taxpayer’s employees did not commence to perform their employment duties prior to arriving at Curtis Island; and
• consequently, given that the travel expenses would therefore not have been incurred in the course of gaining or producing assessable income if they had been incurred by the employees personally, the primary judge was correct to conclude that the travel expenses were not otherwise deductible for FBT purposes.

Singapore Telecom Australia Investments Pty Ltd v FCT [2024] FCAFC 29 – Full Court upholds denial of $894m in interest deductions due to transfer pricing benefit

The Full Federal Court has unanimously dismissed the Australian resident corporate taxpayer’s appeal against the primary judgment reported at [2021] FCA 1597 (first covered in the Birchstone Brief for the week ended 14 January 2021), and in so doing confirmed assessments issued by the Commissioner disallowing the taxpayer $894 million in interest deductions pursuant to the transfer pricing rules. The reason for this was that the Full Court agreed with the primary judge that the taxpayer had obtained a transfer pricing benefit from a Loan Note Issuance Agreement entered into with a related overseas company, under which the taxpayer was charged an interest rate of 13.2575% on funds advanced to it.

Konebada Pty Ltd ATF the William Lewski Family Trust v FCT [2024] FCAFC 42 – Full Court upholds decision that legal services were not acquired in carrying on an enterprise

The Full Federal Court has dismissed the taxpayer’s appeal against the primary decision reported at [2023] FCA 257 (covered in the Birchstone Brief for the week ended 31 March 2023), where the primary judge ruled that the taxpayer was not entitled to input tax credits for acquisitions of legal services that were not made in carrying on an enterprise.

In upholding the primary decision, the Full Court affirmed the primary judge’s findings that the taxpayer’s activities were not carried out in a systematic and organised manner so as to stamp them with a commercial character, and also found that there was no error or procedural unfairness in the way the primary judge had assessed the evidence given by the individual who controlled the taxpayer.

Huang v FCT [2024] AATA 397 – Taxpayer fails to overturn default assessment, succeeds in having penalties remitted

In this default assessment case, the Tribunal held that, due to inadequate and unconvincing evidence, the taxpayer had failed to discharge their onus (pursuant to section 144ZK(b)(i) of the TAA 1953) of proving that the default assessments issued by the Commissioner were excessive or otherwise incorrect and what the assessments should have been.

However, notwithstanding this, the taxpayer was successful in convincing the Tribunal that the penalties that had been imposed by the Commissioner (50% of the tax shortfall amount for reckless disregard of the taxation law) were excessive.  This was because the Tribunal considered that the tax shortfall had not resulted from the reckless behavior identified by the Commissioner. Consequently, the taxpayer’s objection against the Commissioner’s imposition of the shortfall penalties was allowed.

Appeals – AusNet Services

The taxpayer has appealed to the Full Federal Court against the primary judgment in AusNet Services Ltd v FCT [2024] FCA 90 (covered in the Birchstone Brief for the week ended 23 February 2024). In that case, the primary judge dismissed the taxpayer’s submissions that the conditions of the Division 615 rollover had not been met in relation to a 2015 restructure of the stapled group of which it was the parent company, as a result of which it was interposed as the head company of two previously separate income tax consolidated groups (and was consequently unable to claim an uplift in the cost bases of the assets held by subsidiary members of the unified tax consolidated group).

Legislation

Exposure draft legislation – 15% global minimum corporate tax rate

Treasury has released exposure draft legislation and associated explanatory materials for feedback and consultation. The draft legislation is designed to implement a 15% global and domestic minimum tax as part of Australia’s participation in the OECD Two-Pillar Solution to base erosion and profit shifting.

Bill to improve tax accountability and fairness passes House

The Treasury Laws Amendment (Tax Accountability and Fairness) Bill 2023 (Cth), covered in the Birchstone Brief for the weeks ended 17 and 24 November 2023, has been passed by the House of Representatives.  

Bills to establish Administrative Review Tribunal pass House

The following bills, covered in the Birchstone Brief for the week ended 1 March 2024, have been passed by the House of Representatives:

• the Administrative Review Tribunal Bill 2024 (Cth) (with government amendments);
• the Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Bill 2024 (Cth) (with government amendments); and
• the Administrative Review Tribunal (Consequential and Transitional Provisions No. 2) Bill 2024 (Cth) (without amendments).

Superannuation (Objective) Bill passes House

The Superannuation (Objective) Bill 2023 (Cth), first covered in the Birchstone Brief for the weeks ended 17 and 24 November 2023, has been passed by the House of Representatives.

Bill to replace Victorian stamp duty for industrial and commercial properties introduced

The Commercial and Industrial Property Tax Reform Bill 2024 (Vic) has been introduced into the Victorian Parliament to implement the replacement of stamp duty on commercial and industrial properties in Victoria with an annual commercial and industrial property tax based on unimproved land value. The proposed changes were originally announced in the 2023-24 Victorian Budget (covered in the Birchstone Brief for the week ended 26 May 2023).