The Budget delivered on 14 May 2-013 contains several measures the government intends to take to close the loopholes and prevent profit shifting.
Thin cap rules are to be amended with the safe harbour limited tightened. The worldwide gearing test will be extended to apply to inbound investors. The de minimis threshold will be increased from $ 250,000 to $ 2 m of debt deductions. All this in the wake of amendments on transfer pricing and anti-avoidance rules about to be passed into law.
This recent desire to get the wealthy and the multinationals to pay their fair share of tax is not new nor is it confined to Australia. In the US , President Obama’s budget proposals included the imposition of a new minimum tax called the Fair Share Tax (FST) on high income earners (to be effective for taxable years beginning after 31 December 2013) . The tax equals 30 percent of the adjusted gross income (AGI) of individuals less specified credits (charitable contributions). The tax kicks in when the AGI tops a million dollars and is fully phased in at $ 2 million AGI.
Another Presidential budget plan that is sure to go down to the wire in Congress is the financial crisis responsibility fee (to be effective 1 January 2015) . It is at 17 basis points on the covered liabilities of financial firms, including US based bank holding companies.
Will the announced Budget measures in Australia hamper investment and affect growth in the country, given the current ill health of economies around the world?
Shouldn’t these measures be taken cautiously not creating anxiety in the investment community already grappling with the imminent transfer pricing and anti-avoidance measures and the withdrawal of the CGT discount for non-residents?
For details of the Budget see CCH Budget night report
Contributed by Michael Patane, Consultant, Clayton Utz
On 1 May 2013, the High Court (at 2013 ATC ¶20-389) unanimously granted the Commissioner’s special eave application and allowed his appeal from the decision of the Full Federal Court in Unit Trend Services Pty Ltd v FC of T 2012 ATC ¶20-342 concerning the application of the anti-avoidance provisions in Div 165 of the GST Act. The court held that the GST benefit obtained by the taxpayer was not attributable to the making of a choice, election or agreement expressly provided for by the GST Act.
The effect of the decision is that the identification of a scheme and the scope of the scheme in determining whether the GST benefit is sourced in the choice or is “got” from the scheme.
The Unit Trend case involved the formation of a GST group under Div 48 of the GST Act following the intra-group sale of two substantially completed residential towers at market value as a GST-free going concern under s 38-325. The purchasers then completed the construction and sold the strata title
units to end buyers using the margin scheme under Div 75. Calculation of the margin was based on the difference between the uplifted market value of the intra-group sale and the consideration paid by the end buyers, and the uplift generated a GST benefit (saving) to Unit Trend of approximately $21m.
The Commissioner issued a declaration to Unit Trend under s165-40 negating the GST benefit.
At the relevant time, Div 165 did not contain s165-5(3), which deals with the creation of circumstances or a state of affairs to enable a choice, application or agreement to be made. Section 165-5(3) is similar in content to s 177C(2)(a)(ii) in Pt IVA of ITAA 1936.
Administrative Appeals Tribunal
The AAT identified a scheme, and Unit Trend did not dispute the arrangements as identified by the Commissioner at either the AAT or the Full Federal Court. The AAT found for the Commissioner and determined that the GST benefit was not explained by the choice made by the taxpayers to use the margin scheme. The AAT’s view was that the taxpayer would always have sold the units under the margin scheme and the GST benefit was explained by the internal transfers effected within the GST group.
Full Federal Court
The Full Federal Court (Bennett and Greenwood JJ with Dowsett J dissenting) held that Div 165 did not apply to supplies up to and including 16 March 2005. For supplies after 16 March 2005, the integrity amendments to s75-5(3) would apply to the circumstances. Their Honours held that the GST benefit was explained by the choices expressly provided for within the GST Act.
The majority focused on the word “attributable” and, by reference to the High Court decision in FC of T v Sun Alliance Investments Pty Ltd (In liq) 2005 ATC 4955, applied “a concept of causation in which the relevant choice etc is simply one of a number of contributory causes”. Causation was satisfied by “some connection” between the GST benefit and the exercise of a statutory choice.
Dowsett J was of the view that the provision contemplated a “direct link” between the benefit and the relevant choice. His Honour observed that the scheme which produced the GST benefit included the intra-group sales, which lay at the heart of the scheme, even if the various choices made under the GST Act were necessary integers of it. His Honour concluded the GST benefit was attributable to the intra-group sales which were a necessary part of the scheme. The benefit was attributable to the scheme and not to any particular choice expressly provided for by the GST law.
The High Court
The High Court (French CJ, Crennan, Kiefel, Gageler and Keane JJ) unanimously agreed with the conclusion of Dowsett J but considered it was not necessary to come to a final conclusion as to whether the reference in s 165-5(1)(b) to “a choice” includes multiple choices each expressly authorised by the GST Act [para 39 of the judgment].
The dispute before the High Court related to the interpretation of s 165-5(1)(b) and whether the GST benefit obtained by Unit Trend was not attributable to the making, by an entity, of a choice election, application or agreement that was expressly provided for in the GST Act. Section 177C (2)(a)(i) contains a similar provision in Pt IVA of ITAA1936 to s165-5(1)(b) of the GST Act.
In summary, the High Court read s165-5(1)(a) and (1) (b) together so that the test in s165-5(1)(b) may be read as, “the getting of the GST benefit by the avoider from the scheme is not attributable to the making of a choice” and the crucial phrase in s165-5(1)(b) was “not attributable to”. This construction and analysis then allowed the court to look at the source of the GST benefit which was “got” from the scheme by looking at the same factual and counterfactual analysis required by s165-5(1)(a).
The court found the GST benefit was not sourced in the choice. The GST benefit was not something that was entitled as a matter of exercise of any statutory choice. Rather, the GST benefit was sourced in the commercial choice to sell the properties after there had been a substantial increase in the properties values.
The court was of the view that the subsequent insertion of s165-5(3) in 2008 did not impact on the operation of s165-5(1)(b). The Court said s165-5(1)(b) may apply where the choice arises as a step in the scheme.
In reaching its decision the High Court made a number of comments on statutory construction, the “choice test” and the interaction of the choice test with s165-5(3).
The task of statutory construction must begin with a consideration of the statutory text. The object of statutory reconstruction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the State (see para47 of the judgment).
Section 165-5(1)(b): the choice test
With the above in mind, s165-5(1)(a) poses a question which must be answered before one enters on the enquiry invited by s165-5(1)(b). That question is whether “An entity…gets or got a GST benefit from a scheme“. Under the scheme, the amount of GST payable by Unit Trend was smaller than it would be without the scheme because of the intermediate sales. The GST benefit got from the scheme, and which Div 165 is being evoked to negate, is the benefit obtained as a result of the intermediate sales; the GST benefit associated with the choices to effect the sales as intra group sales of a going concern are not an issue (see para 48 of the judgment).
Section 165-5(1)(a) and (b) are to be read together so that s 165-5(1)(b) may be read exegetically as, “the getting of the GST benefit by the avoider from the scheme is not attributable to the making of a choice”, and it can be seen that the “non-attribution” with which s 165-5(1)(b) is concerned is the absence of statutory entitlement to get the GST benefit by the making of a choice authorised by the GST Act (see para 49 of the judgment).
The crucial phrase in s 165-5(1)(b) is “not attributable to“. To consider the application as if it were concerned with whether a GST benefit is “attributable” to a choice is to distort the enquiry invited by the text by leading one to embark on an enquiry as to whether the GST benefit in question is an effect of the making of a statutory choice as distinct from the scheme (see para 50 of the judgment).
Section 165-5(1)(b) is necessarily concerned with the GST benefit which has been “got” from a scheme by which is, nevertheless, “not attributable to” a choice expressly provided by the GST Act. The section is concerned to include, within the scope of Div 165, GST benefits got from the scheme in which the exercise of a statutory choice has had some operation. On this analysis the words “not attributable to” does not invite an enquiry as to causality to then differentiate the effects of the scheme from the exercise of a statutory choice. Rather, the phrase is concerned with whether the GST benefit in question, which (ex‑hypothesis has been got from the scheme), is not one to which the exercise of a statutory choice has entitled the taxpayer (see para 50 of the judgment).
The observations in Sun Alliance (on which the Federal Court relied), were made in a markedly different context. While the word “attributable” was considered in Sun Alliance to be concerned with a contributory cause rather than source, the phrase “not attributable to” is used in a context in which a causal link is assumed to have been established in terms of the getting of a benefit from a scheme in which a statutory choice is an element. The expression “not attributable to” is not concerned to identify another relationship of cause and effect which might or might not proceed on a different level of cause and effect from that expressed by “got…from“. Rather, the expression is, in its context, concerned with the absence of a statutory entitlement to the GST benefit in question (see para 51 of the judgment].
It was “a commercial election or choice” involving the transfer of properties in accordance with the scheme after the substantial increase in the value of the properties which brought about the uplift in the intermediate cost base from which the GST benefit was got (see para 58 of the judgment).
The determination for the purpose of s165-5(1)(b) involved consideration of how the entity referred to in s165-5(1)(a) got or is getting the GST benefit identified. It looks to the same factual and counter factual analysis required by s165-10(1)(a). The identified GST benefit is not attributable to the making of a choice by the entity or some other entity if:
(a) the GST Act or another relevant law does not operate to confer the identified GST benefit by reference to that choice; or
(b) the choice made in fact as part of the scheme would have been made in any event without the scheme (see paras 59-60 of the judgment).
The choices and agreements referred to by the taxpayer did not operate to confer the GST benefit which was identified by the Tribunal (see para 61 of the judgment).
It is important to bear in mind that s165-5(1)(b) is concerned with the actual GST benefit which has been “got” from the Scheme. By virtue of section 165-10(1)(a), that benefit is a matter of monetary value got from the scheme, rather than of legal forms or the timing of the getting of the benefit (see para 65 of the judgment).
Section 165-5(3) – creating circumstances
The insertion of s165-5(3) cannot be regarded as an acknowledgement by Parliament that, (absent such a provision), Div 165 would not have encompassed the situation such as that of present concern. Section 165-5(1)(b) may apply without the need to invoke s 165-5(3) where the statutory choice arises as a step in a Scheme. There may be cases where the avoider has not manipulated circumstances to confect the occasion for the making of a statutory choice, but nevertheless the GST benefit can be seen to be not attributable to that choice. Having regard to the Tribunal’s delineation of the terms of the scheme in question, this is such a case. On those findings, which were not challenged on the appeal to the Full Court or in this Court, it is clear that s165-5(3) was not necessary to bring the relevant GST benefit within Div 165 (see para 67 of the judgment).
Some observations in relation to the decision follow:
(a) in 2005 and 2008 the margin scheme provisions in Div 75 were amended to address the types of arrangements that appeared in the Unit Trend case. The application of those provisions would first need to be considered before the general anti-avoidance provisions in Div 165
(b) the High Court has left (for another day) questions whether a reference in s165-5(1)(b) to “a choice” includes multiple choices each expressly authorised by the GST Act. From reading the transcript the author suspects that the High Court did not address the question because the Commissioner conceded during the hearing that his case was not dependent on the argument around this point
(c) given the difference in the wording in s165-5(1)(b) (“not attributable to”) compared to s177C(2)(a)(i) (“attributable to”) in Pt IVA and the context of the two pieces of legislation, the author questions whether the High Court’s decision will have any impact on the interpretation of the latter provision
(d) the decision evidences the importance of the identification of the scheme and the scope of the scheme for the purpose of determining whether an entity gets or got a GST benefit from the scheme
(e) the decision does not affect the original policy of the use of a choice, election, application or agreement that is expressly provided for by the GST law, and
(f) the decision of the High Court is consistent with the AAT decision (Deputy President Forgie) in Case 14/2006, 2006 ATC 187 (VCE Pty Ltd), which was a play on the GST attribution provisions to bring forward an input tax credit where the supplier was on a cash basis and the recipient was on an accruals basis.
The Federal Court delivered some good news to non-resident investors in Australian mining stock in Commissioner of Taxation v Resource Capital Fund  FCA 363. It was held that:
- A limited partnership (established in Caymans Islands) cannot be considered as a company for tax purposes under Div 855 of Pt 4-5 of ITAA
- Shares in the Australian mining company cannot be taken as “indirect Australian real property interest” and therefore subject to CGT, because the “principle asset test” was not satisfied.
See CCH Commissioner of State Taxation v Nischu Pty Ltd (1991) 4 WAR 437, where the mining tenements were correctly valued on the basis that “the hypothetical vendor and purchaser of the land would have regard to the cost of regenerating or acquiring important mining information contained in various records and objects that would not otherwise be available to the purchaser after the sale and included it in the price for the land. Consequently the value of the land would be less than the consideration paid for it by the value of the information.
Referring to Federal Commissioner of Taxation v Murray (1998) 193 CLR 605 and Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2009) 239 CLR 27 it was said that goodwill in the legal sense is a non-TARP asset and if it is not goodwill in the legal sense and therefore not property of the vendor it will be neither a TARP asset nor a non-TARP asset. (See
Emotive phrases like “salary packaging” and “living away from home allowance” have occupied the psyche of employers and employees in Australia for well over a decade and any whiff of change in the law generates more heat than a meteorite shower.
Recent changes to fringe benefits tax (FBT) resulting in some crucial employee benefits losing tax advantages have been at the centre stage in business circles.
Undeniably, fringe benefits impact strongly on employee recruitment and retention and therefore the tax on them is a significant influence on remuneration policy.
Accordingly, FBT has never failed
to excite the minds of employers and employees alike.
However, employers are increasingly voicing concern about compliance issues associated with the tax, both time and cost related.
The recent CCH FBT Survey shines a light on the prevailing attitude of business to FBT and provides some timely advice.
Since its introduction into the Income Tax Assessment Act 1936 in 1998 , Div 7A has been sanctioned, censured and reviled by shareholders, trustees and beneficiaries alike. The impact of Div 7A on companies and trusts used in business structuring has been the main cause of such reaction. During the past decade and more, several issues surrounding Div 7A have
risen requiring a concerted effort by the government.
Now the Board of Taxation has been commissioned to undertake a post-implementation review of the Division and to present its report by 30 June 2013. The Board is examining:
- whether Div 7A gives effect to the policy of preventing shareholders (or their associates ) of private companies from ‘inappropriately’ accessing the profits of those companies in the form of payments, loans or debt forgiveness transactions
- whether current operation of Div 7A, including its interaction with other areas of tax laws are producing unintended outcomes or disproportionate compliance and administration costs
- options for resolving any problems so that tax laws operates effectively.
Division 7A was introduced to prevent shareholders of private companies and their associates inappropriately accessing the profits of those companies via payments, loans or debt forgiveness. This allowed the use of corporate profits subject only to the current corporate tax rate of a flat 30% as compared to the progressive rates applicable to shareholders.
The effect of Division 7A is to deem that a private company has paid an assessable dividend where it pays an amount to, or makes a loan to, or forgives a debt owed by a present or former shareholder of the company (or present or former associate of a shareholder). The deemed dividend will be unfrankable unless in exceptional circumstances.
However, the deemed dividend will be limited by its distributable surplus and is proportionately reduced if the total of all Division 7A dividends taken to be paid by the company for any income year exceeds the distributable surplus.
Distributable surplus is basically the net assets of the company plus Div 7A amounts that the company is deemed to have received less specified deductions. A recent decision of the Full Court has held that a company’s tax liability for an income year should be deducted when calculating the net assets of the company, thus further reducing distributable surplus (FC of T H 2010 ATC 20-218).
Although Division 7A discouraged streaming corporate profits to shareholders without the amounts being deemed dividends, it was possible to indirectly pass on the benefits of business conducted by a trust to the shareholders of an interposed company with an unpaid present entitlement (UPE) in the trust.
ATO changes its mind -Taxation Ruling TR 2010/3
The view that Division 7A applied only when payments were made by a company underwent a drastic change with the release of Taxation Ruling TR 2010/3.
The Ruling effectively classifies the company’s UPE as deemed dividend for Division 7A purposes, unless specified action was taken in time.
Practice Statement PS LA 2010/4 provides three options that may be used to avoid the application of Div 7A. Two of them require the repayment of the loan within a 7 or 10 year period.