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Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue (NSW) [2024] HCA 20 – High Court unanimously approves NSW Court of Appeal’s ‘use-for-a-purpose’ approach
The High Court has unanimously dismissed the taxpayer’s appeal against the NSW Court of Appeal’s decision reported at [2023] NSWCA 44 (covered in the Birchstone Brief for the week ended 31 March 2023).
In that case, a majority of the NSW Court of Appeal was not satisfied that the taxpayer had proven its dominant use of land on which it conducted a business of breeding, training, racing and selling thorough bred racehorses was maintaining animals for the purpose of selling them, their natural increase or bodily produce in the relevant years.
In dismissing the appeal, the High Court unanimously approved of the ‘use-for-a-purpose’ approach that had been adopted by a majority of the Court of Appeal. That is, the High Court concluded that the land tax exemption was not available to the taxpayer in the relevant land tax years as, while it had used the land to maintain horses, it could not be said on the facts that the dominant purpose of that use was for the sale of the horses, their progeny, or their bodily produce (as the taxpayer had accepted that it could not prove that its use of the land for that purpose was anything more than a ‘significant’ use).
Merchant v FCT [2024] FCA 498 – Related schemes subject to Part IVA & dividend stripping provisions
In what appears to be the first judicial decision to have considered the dividend stripping provisions, the Federal Court has held that a number of related schemes involving:
- the sale of over 10 million shares in Billabong by a discretionary trust (MFT) controlled by one of the co-founders of that business (Mr M) to a related superannuation fund (GMSF) in order to crystallise a capital loss in MFT of approximately $56 million;
- the subsequent sale of the MFT’s shares in a start-up company, Plantic Technologies Ltd (Plantic), which resulted in a significant capital gain of approximately $85 million (that was largely offset against the capital loss from the MFT’s disposal of the Billabong shares to the GMSF); and
- the forgiveness of approximately $55 million in loans owed to three related companies (in which Mr M was the sole shareholder) by Plantic as a condition precedent to the completion of the sale of MFT’s shares in Plantic,
fell foul of both Part IVA and the dividend stripping provisions.
The Court ultimately rejected the commercial rationale for the Billabong share sale that was advanced by the taxpayers and affirmed the Commissioner’s Part IVA determination, ruling that the evidence established that the predominant reason for the transaction was to crystallise a capital loss in the MFT.
The Court also agreed with the Commissioner that the dividend stripping provisions applied to a broadly identified dividend stripping scheme, finding that:
- the taxpayers had failed to discharge their onus of proving that the debt forgiveness by the three related companies had not been motivated predominantly because of a desire to avoid the payment of top-up tax on the undistributed profits of those companies (which would, absent the debt forgiveness, have been substantial) upon the subsequent payment of dividends to Mr M; and
- the effect of the dividend stripping scheme was, in substance, to transfer the undistributed profits of the related companies to MFT, from where they could be distributed at substantially lower rates of tax.
Furthermore, the Court also made the following notable observations in relation to the operation of the dividend stripping provisions:
- an assessment issued to give effect to a determination made by the Commissioner under section 177E will not necessarily be excessive simply because it is established that a particular step in the relevant scheme, viewed in isolation, did not have the dominant purpose of tax avoidance;
- the application of section 177E is not to be determined on the basis of events that did not occur – and, as such, the question of purpose posed by the section is to be assessed objectively with reference to the events that actually occurred;
- section 177E does not require a complete or substantially complete avoidance of tax to apply – rather, it is capable of applying where the tax avoidance purpose was to avoid the imposition of a higher rate of tax than that which was payable as a result of a dividend stripping scheme; and
- a dividend stripping scheme does not cease to be one simply because every party who played a role in the scheme was not involved in ‘careful planning’ or did not act ‘in concert’ with others.
For those interested, the Court also considered whether the TOFA provisions applied to the expiry of certain future payment rights held by Mr M as a result of MFT’s disposal of its shares in Plantic.
We note that the taxpayers have since appealed against this decision to the Full Federal Court.
FCT v Michael John Hayes Trading Pty Ltd ATF MJH Trading Trust [2024] FCAFC 80 – Full Federal Court overturns AAT’s dividend stripping decision
The Full Federal Court has held that the AAT erred in reaching its decision reported at [2023] AATA 3005 (first covered in Birchstone Brief for the week ended 29 September 2023). In that case, the Tribunal had determined that a distribution of fully franked dividends to corporate taxpayers following a group restructure was not made as part of a dividend stripping scheme because:
- although the corporate taxpayers received the dividends free of tax, the original (individual) shareholders did not receive a capital sum as a substitute for taxable dividends; and
- the required tax avoidance purpose was not present.
The Full Federal Court allowed the Commissioner’s appeal, holding that the AAT:
- had erred in its interpretation of section 207-155 of the ITAA 1997 by failing to give proper effect to the words ‘by way of, or in the nature of’ in that section as words of expansion (that is, while the Tribunal had relevantly observed that the original individual shareholders did not receive a capital benefit as a result of the relevant scheme, the Tribunal had erred in not considering whether the receipt by the corporate taxpayers of a capital sum was sufficient for a conclusion that the relevant scheme was ‘by way of, or in the nature of dividend stripping’); and
- had also erred in its analysis of the dominant purpose of the scheme by hypothesizing that tax might have been paid at some future time on the relevant amounts the subject of the scheme, rather than determining whether the scheme involved a dominant purpose of avoiding tax on a distribution of profits to the original shareholders.
However, the Full Court rejected the Commissioner’s additional ground that an ‘incidental purpose’ of tax avoidance could be sufficient to justify concluding that a scheme was by way of, or in the nature of, dividend stripping, finding that a scheme could not be such if it lacked the essential characteristic of avoiding tax as its sole or dominant characteristic.
As the Full Court was ultimately not satisfied that the Tribunal had fully found all of the relevant facts, or that there was only one conclusion reasonably open on the facts as fully found, the case was remitted to the AAT for redetermination according to law.
Liang v FCT [2024] FCA 535 – AAT failed to perform statutory task
The Federal Court has ruled that the AAT failed to perform its statutory task in affirming objection decisions made in relation to amended assessments issued under section 166 of the ITAA 1936.
The Court held that:
- The AAT’s rejection of the taxpayer’s evidence did not automatically lead to the conclusion that the objection decision should be affirmed, nor relieve the AAT from its obligations to review the objection decisions based on the material before it, as well as in light of particular concessions that had been made by the Commissioner.
- On the basis of the material before it and the concessions made by the Commissioner, the AAT should have concluded that the disputed deposits were not income and overturned the objection decisions.
We note that the Commissioner has since appealed against this decision to the Full Federal Court.
Mesha Feet Pty Ltd v Allen [2024] FCA 680 – Federal Court confirms promissory notes and bills of exchange cannot validly discharge tax liabilities
In this case, the Federal Court dismissed a taxpayer’s application to set aside a statutory demand issued by the Commissioner in relation to its outstanding tax liabilities, holding that:
- the taxpayer had not validly discharged its taxation liabilities by providing a “promissory note” and “bill of exchange” to the Commissioner (as payment of tax-related liabilities by such means was not approved of by regulation 21(2) of the Taxation Administration Regulations 2017 (Cth));
- a promissory note is not “cash”; and
- a bill of exchange is not a “cheque”.
BQKD v FCT [2024] AATA 1796 – No FBT on luxury cars provided to directors
The AAT has set aside FBT assessments issued to a corporate trustee of a family trust in respect of non-cash benefits constituted by the use of luxury cars by its three directors who were also beneficiaries of the relevant family trust. The reasons for this were that the Tribunal considered:
- the evidence did not establish that the directors were employed by the trustee company; and
- even if the directors were found to have been in an employment relationship, the non-cash benefits were not made available to them due to their employment with the trustee company, but rather were taken advantage of by the directors as they genuinely believed they were entitled to the use of the vehicles as beneficiaries of the family trust.
Doery v FC of T [2024] AATA 1493 – Taxpayer on welfare with no assets denied release of tax debts
The AAT has affirmed the Commissioner’s decision not to release a taxpayer who was on Centrelink benefits with no assets to his name from his tax liabilities on the grounds of serious hardship.
The reasons underlying the Tribunal’s decision were as follows.
- Medical evidence adduced by the taxpayer failed to substantiate that the taxpayer had, at the relevant time, lacked the capacity to manage his financial affairs or adhere to a budget.
- The taxpayer had consciously prioritised purchasing a property over addressing his tax debts, and furthermore had favoured paying non-tax debts owed to other creditors ahead of meeting his tax liabilities.
- On the evidence before it, the Tribunal considered that the taxpayer’s financial hardship would continue irrespective of whether he was released from his tax liabilities.
Appeals – Buzadzic
The taxpayer has applied to the High Court for special leave to appeal against the decision reported at [2024] FCAFC 50, which was itself an appeal against the decision reported at [2023] FCA 954 (covered in Birchstone Brief for the week ended 18 August 2023). In rejecting the taxpayer’s appeal, the Full Federal Court had affirmed the primary judge’s decision that the AAT (in its decision reported at [2021] AATA 4820) had not:
- applied the wrong test in respect of the burden of proof in;
- made conclusions that were unreasonable; or
- misconstrued or misapplied section 6-5 of the ITAA 1997 (in relation to ordinary income) or item 5 of section 170(1) of the ITAA 1936 (which relates to fraud or evasion).
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