Project DO IT nearing end, taxman focus on non-disclosure

The ATO has reassured taxpayers that disclosing under Project DO IT will not give them a “red flag”.

Project DO IT, the ATO’s offshore voluntary disclosure initiative, offers benefits to taxpayers who bring their undeclared offshore income and assets back into Australia’s tax system by 19 December 2014.

The ATO said feedback had raised taxpayer concerns that if they disclose they will be “red flagged” for future investigation. ATO Deputy Commissioner Michael Cranston said this was not the case and that the ATO was far more concerned with the taxpayers who don’t disclose, rather than those who do. Mr Cranston said that the aim of Project DO IT was to provide one last chance for taxpayers to disclose before the net closes completely on offshore tax evasion. “These disclosures will enable us to put our resources onto the taxpayers who don’t come forward,” said Mr Cranston.

It should be emphasised that Project DO IT covers both “inadvertent” and “intentional actions” to hide offshore income and/or gains. The ATO has advised that where taxpayers may be unsure as to their eligibility for the initiative, they can contact the ATO’s Project DO IT team to discuss the issue and this can be done anonymously.

Under Project DO IT, people disclosing their offshore assets will:

• only be assessed for applicable (open) periods of review (generally only the last four years);
• be liable for a shortfall penalty of 10% (low-level disclosures will attract minimal or no penalties);
• be liable for full shortfall interest charges;
• not be entitled to utilise any losses that arose in years for which they are not being assessed;
• be able to seek assurance regarding the ATO’s tax treatment of repatriated offshore assets;
• be able to enter into a settlement deed to obtain additional certainty (where circumstances call for additional surety); and
• not be investigated or referred for criminal investigation by the ATO on the basis of their disclosures.

To receive the benefits of Project DO IT, the ATO said taxpayers must make a “truthful disclosure” before 19 December 2014 (or seek an extension). The ATO has issued a “disclosure statement” (available on the ATO website) to facilitate this. Until the taxpayer lodges, the ATO said its normal compliance activities will continue and if the taxpayer is detected first they will not be able to participate.

The ATO acknowledged that there may be circumstances where it could take some time to get all the required records. However, it said if taxpayers need time, they must inform the ATO as soon as possible that they want to make a disclosure, and to do this, they must lodge an “expression of interest” to participate in the initiative.

Disclosure numbers

As at 6 November 2014, Project DO IT has seen more than 1,650 people come forward. Just 1,000 people have made disclosures of more than $190 million in income and over $1.1 billion in assets with more than 600 yet to make their disclosure.

Sources: ATO publication, Project DO IT: Disclose offshore income today, 21 July 2014, https://www.ato.gov.au/General/Correct-a-mistake-or-dispute-a-decision/In-detail/Project-DO-IT/Project-DO-IT; ATO media release, 27 October 2014, https://www.ato.gov.au/Media-centre/Articles/No-red-flag-for-coming-forward-under-Project-DO-IT; Commissioner’s address to the Tax Bar Association, 6 November 2014, https://www.ato.gov.au/Media-centre/Speeches/Commissioner/Commissioner-s-address-to-the-Tax-Bar-Association/.

Inbound tour operators to contact the ATO

The ATO has released a Decision Impact Statement on the Full Federal Court’s decision in ATS Pacific Pty Ltd v FCT (2014) 219 FCR 302. In this case, the Full Federal Court unanimously upheld the ATO Commissioner’s argument that a supply made by an Australian inbound tour operator (ITO) to overseas customers was fully subject to GST. The High Court refused the taxpayer special leave to appeal the Full Federal Court’s decision.

ATO view of the decision

Although the decision relates to specific facts, the ATO said the Commissioner remains of the view that the decision applies to all ITOs that:

• transact as principal (and not as an agent of a non-resident travel agent); and
• are engaged by non-resident travel agents to enter into contracts with Australian providers for the provision of products to non-resident tourists.

The ATO was of the view that, under the Court’s reasoning, the supplies made by the ITOs to their non-resident travel agent clients are properly characterised as supplies of promises to ensure products are provided, and the supplies are wholly taxable.

In relation to agency arrangements, the ATO said the Court’s decision has no implications for an ITO in relation to the supply of any given product if:

• the contract for the supply of that product is between the non-resident travel agent and the Australian provider, with the result that the non-resident travel agent has rights against the Australian provider in the event the product is not provided; and
• the ITO acts as an agent of the non-resident travel agent, and is not itself a party to the contract.

The ATO said the Commissioner considers that an ITO would fit within this scenario if, in documentation with both the non-resident travel agent and each Australian provider, the ITO indicates that it is acting as an agent for the non-resident travel agent and the arrangements as a whole are not inconsistent with the conclusion that the contract for the supply of the product is between the provider and the non-resident travel agent.

If the documentation between the parties does not expressly indicate that the ITO is acting as agent, the ATO said the Commissioner may not conclude that the contract for the supply of the product is between the non-resident travel agent and the Australian provider. However, it said each case would need to be assessed on its merits.

The ATO said the Court’s reasonings were consistent with its views in GST Rulings GSTR 2001/8, GSTR 2005/6, GSTR 2006/9, and GST Determination GSTD 2004/3. It said it will update these GST Rulings and GST Determination to include references to the Court’s decision. The ATO said the Court’s reasonings were also generally consistent with Goods and Service Tax Industry Issue: Land product supplied to non-residents (as principal). The ATO said it will update this public ruling to reflect the Court’s characterisation of the taxpayer’s supply as the supply of a promise to ensure the products would be provided. It will also expand the scope of the ruling so that it covers the agency arrangements.

Tour operators to contact ATO

The Commissioner has requested that all ITOs that have transacted as principal and have an outstanding amount due to the ATO to contact the ATO within 28 days of the publication of the DIS (ie by 10 December 2014) to discuss payment of the amount owed. In working out the total amount owed, the Commissioner will have regard to any entitlement an ITO has to a refund of overpaid income tax that arises because it did not take into account the correct amount of GST payable in working out its assessable income.

ITOs that consider they are not affected by the decision on the basis that they operate as an agent are also asked to contact the ATO within the 28-day period.

Following the expiration of the 28-day period, the ATO said the Commissioner will take steps to identify any ITO with an outstanding liability that has not approached voluntarily. The Commissioner may commence recovery action without any further notice being provided to these entities, it said.

In determining whether remission of GIC and penalties (if applicable) is warranted for any ITO that has an outstanding liability, the ATO said the Commissioner will have regard to all relevant factors including the steps taken by an ITO to engage with the ATO and resolve their outstanding liability.

The ATO contact is: Craig Morelande, phone (07) 3149 5173 or email craig.morelande@ato.gov.au.

Source: ATO Decision Impact Statement on the Full Federal Court’s decision in ATS Pacific Pty Ltd v FCT (2014) 219 FCR 302, http://law.ato.gov.au/atolaw/view.htm?docid=%22LIT%2FICD%2FNSD991of2013%3BNSD994of2013%2F00001%22.

Tax win for retirement village operators

The ATO has released a Decision Impact Statement on Re Retirement Village Operator and FCT [2013] AATA 887. In this case, the AAT ruled that a taxpayer that owns and manages a number of retirement villages was entitled to a deduction for payments it was contractually required to make to “outgoing residents”. The AAT concluded that such payments were properly characterised as an ordinary part of carrying on the business and were not capital or of a capital nature and therefore deductible under s 8-1 of the ITAA 1997.

The ATO said the AAT’s conclusion was contrary to the current ATO view expressed in para 50 of Taxation Ruling TR 2002/14. The ATO said it will issue an addendum to TR 2002/14 to reflect the AAT’s decision. The new paragraph will confirm that, where a retirement village operator makes a payment to an outgoing resident (or to their legal personal representative) that represents a share of any increase in the entry price payable by a new resident (ie the difference between the initial entry price paid by the outgoing resident and the entry price payable by the new resident), such payments will be deductible under s 8-1 of the ITAA 1997.

Taxpayers may request amendment

The ATO said taxpayers may request the Commissioner amend an assessment subject to s 170 of the ITAA 1936. Any such amendment request can be made through the Business Portal, a registered tax agent, or by post to: Australian Taxation Office, PO Box 3004, PENRITH NSW 2740. The ATO has asked that the words “Retirement Village” appear in the description field explaining the reason for the amendment.

Source: ATO Decision Impact Statement on , Re Retirement Village Operator and FCT [2013] AATA 887 http://law.ato.gov.au/atolaw/view.htm?docid=%22LIT%2FICD%2F*2013*AATA887%2F00001%22.

Crowdfunding could have GST implications, says ATO

The ATO has released information on its views on the GST treatment of crowdfunding. Crowdfunding involves using the internet and social media to raise funds for specific projects or particular business ventures. Typically the promoter of the project or venture will engage an intermediary to operate an online platform that allows the promoter to connect to potential funders. Various models are used to attract funding.

The ATO said supplies by a promoter may not be subject to GST if either the promoter or the funder is not in Australia.

The ATO noted that the main crowdfunding models to emerge so far involve:

• donation-based funding;
• reward-based funding;
• equity-based funding; and
• debt-based funding.

The ATO information covers the GST implications of each of these crowdfunding models including examples.

ATO examples

Donation-based model

James carries on an enterprise of designing health-related products. He develops a concept for a health-related apparatus, but requires funding for product development. To raise funds, he engages an intermediary to raise funds through a crowdfunding platform. The proposal is marketed for its social benefits, and funders receive nothing apart from having their contribution acknowledged on James’s website.

James has no GST liabilities as payments by funders are not consideration for any supply in return. Funders are not entitled to input tax credits. The intermediary makes a taxable supply of services to James which is subject to GST. James is entitled to an input tax credit for the services he acquires from the intermediary.

Reward-based model

Members of The Incumbents, an Australian rock band, have formed a partnership which is registered for GST. They want to record an album by raising funds from their Australian fan base. They engage an intermediary to raise funds through a crowdfunding platform to help pay for recording the album.

Depending on the level of contributions, The Incumbents will provide funders with goods or services, which may extend to a CD, merchandise, concert tickets or advertising rights. These supplies, made in return for payments, are taxable supplies for which The Incumbents have a GST liability.

A funder who acquires advertising rights is entitled to an input tax credit if the funder is registered for GST to the extent that they are acquired for a creditable purpose. The intermediary makes a taxable supply of services to The Incumbents which is subject to GST. The Incumbents are entitled to an input tax credit for the services acquired from the intermediary.

Equity-based model

Investment Pty Ltd is a start-up company involved in development of green energy products. It engages an intermediary to raise funds through a crowdfunding platform. Under the arrangement, funders will be allocated shares in Investment Pty Ltd in return for payments.

Supply of the shares in return for a payment is an input taxed financial supply and is not subject to GST. The funder is not entitled to an input tax credit. The intermediary makes a taxable supply of services to Investment Pty Ltd which is subject to GST. As the acquisition of the services provided by the intermediary relates to the input taxed financial supply of the shares, Investment Pty Ltd will only be entitled to an input tax credit for the acquisition of the services where certain requirements are satisfied.

Debt-based model

Fiona is a fashion designer who is starting carrying on her business. Fiona needs to buy material for her business, for which she requires short-term finance. Rather than asking her bank, Fiona engages an intermediary to raise funds through a crowdfunding platform.

Under the arrangement, funders loan funds to Fiona in return for agreed interest. Both Fiona and the funder make input taxed financial supplies and no GST arises. Neither Fiona nor the promoter are entitled to an input tax credit. The intermediary makes a taxable supply of services to Fiona which is subject to GST. As the acquisition of the services provided by the intermediary relates to Fiona making an input taxed financial supply, Fiona will only be entitled to an input tax credit for the acquisition of the services if certain requirements are satisfied.

Source: ATO publication, “GST and Crowdfunding”, 13 November 2014, https://www.ato.gov.au/Business/GST/In-detail/Rules-for-specific-transactions/GST-crowdfunding/

Couple refused small business tax concession

The AAT has confirmed that ETPs paid to husband and wife taxpayers who owned a private healthcare company were not to be taken into account as liabilities for the purposes of the maximum net asset value test in determining whether they each qualified for the CGT small business concessions. Instead, the AAT found that the ETP liability was not an enforceable liability that had arisen “just before” the relevant CGT event as required. In any event, the AAT also found that the liability did not “relate” to any CGT assets of the business for the purposes of the test.

Background

The husband and wife taxpayers were the sole shareholders and directors of a private healthcare company which they sold, via their shareholding, for some $14 million in the 2007 income year. The taxpayers claimed they were entitled to the CGT small business concessions in Div 152 of the ITAA 1997 in respect of the capital gain made on the sale of their shares. In particular, they claimed that they satisfied the $6 million maximum net asset value (MNAV) test “just before” the relevant CGT (namely, CGT event A1) as required by s 152-15, on the basis that the liability of the company to pay them ETPs totalling some $2.75 million were liabilities to be taken into account for the purpose of the MNAV test, asthe liabilities arose just before the CGT event and that they were “related” to the assets of the company.

In the alternative, the taxpayers argued that their contractual right to the payment of the ETPs out of the company funds were assets “used solely for the personal use and enjoyment” of the taxpayers and therefore were CGT assets that were specifically excluded from the MNAV test by s 152-20(2)(b). In addition, the Commissioner also argued that any company obligation to pay the ETPs to the taxpayers formed part of the capital proceeds from the sale of the assets and therefore helped generate the capital gain, rather than being a liability in respect of the sale. Finally, the taxpayers contested the imposition of 25% shortfall penalties for failing to take reasonable care.

Decision

The AAT first examined the key issue of when the contract for the sale of the shares was actually made (noting that in terms of CGT event A1, the “time of the event” is when the contract is made, and not settled). After extensively examining established case law on the matter and applying it to the facts in question, the AAT concluded that the contract was made on 24 November 2006. In arriving at this conclusion, the AAT emphasised that the issue depends on the intention of the parties as objectively ascertained from the terms of the relevant documents and that the existence of a “condition precedent” (such as a “due diligence” enquiry, in this case) will usually only be a condition precedent to the “performance” of the contract and not its “making”. Accordingly, the AAT concluded that, on the facts, any requirement to pay ETPs to the shareholders occurred after the contract of sale was made and that therefore the ETPs, even if relevant liabilities, could not be taken into the MNAV test because they had not arisen “just before” the relevant CGT event.

Furthermore, the AAT found that the requirement to pay the ETPs were not “enforceable” liabilities, even though the company had made resolutions (via the husband and wife directors) to pay them. In this regard, the AAT stated that “the passing of a resolution by the Board of Directors of a company cannot, by itself, create a legal or equitable liability that is enforceable against the company by persons who stand to benefit should the company act in accordance with the resolution. The resolution simply authorises the company to take particular action. Therefore, a company may be authorised by resolution to enter into a contract with a particular person or persons for a particular purpose. However, unless there is an enforceable agreement between the company and, for example, its employees regarding certain payments, no liability can arise.

In any event, the AAT also found there was no documentary evidence between the company and the taxpayers creating a legal obligation to make the payment – and, instead, the evidence pointed to the payments having the hallmarks of a gratuitous payment in the circumstances. As a result, the AAT found that the requirement to pay the ETPs was not enforceable liabilities that could be taken into account for the purposes of the MNAV test.

The AAT then found that if such an enforceable liability did in fact exist at the appropriate time, then it could not be said to be “related” to the CGT assets of the company in terms of the requirement in s 152-20(1) for the purposes of ascertaining the net value of the CGT assets of a taxpayer and related entities (in this case, the respective husband and wife taxpayers plus their spouse as a “small business CGT affiliate” as then defined and the company itself). In particular, the AAT said that liabilities related to such assets refers to expenditure incurred by the entity in obtaining those assets and that in this case while borrowings and interests on loans were incurred to acquire the assets of the business were such liabilities, the obligation to pay ETPs to the taxpayers were clearly not such liabilities (especially as the payments were not taken into account in working out the net value of the company for sales purposes and as they were made in recognition of past work of the taxpayers).

The AAT also readily dismissed the taxpayers’ argument that their right to the payment of the ETPs were assets “used solely for the personal use and enjoyment” of the taxpayers and therefore were specifically excluded from the MNAV test by s 152-20(2)(b). In this regard, the AAT first noted that as it had previously found that there was no enforceable contractual liability for the payment of the ETPs. It then found that, even if it was wrong on this matter, a “right” to a payment could not be equated with it “being used” as required by the exclusion and that therefore the exclusion had no application.

The AAT also agreed with the Commissioner’s contention that, on the assumption that the requirement to pay the ETPs to the taxpayers was a contractual right that formed part of the sale agreement, then the ETPs to the taxpayers formed part of the capital proceeds for the CGT event and therefore helped generate the capital gain, rather than being a liability in respect of it. In this regard the AAT noted, among other things, that the purchase price for the shares included adjustments for various debts of the business, but not for the payments of the ETPs to the taxpayers. Finally, the AAT affirmed 25% shortfall penalties for failing to take “reasonable care” primarily on the grounds that the position they adopted was not reasonably arguable and that there were no grounds for remission.

Appeals update

The taxpayers have lodged a notice of appeal to the Federal Court against the decision.

Re Scanlon and FCT [2014] AATA 725, http://www.austlii.edu.au/au/cases/cth/AATA/2014/725.html.

Employee share scheme reform on the way

On 14 October 2014, the Government announced that it will reform the tax treatment of employee share schemes to support start-up companies and boost entrepreneurship. The Government said it will unwind the tax changes introduced by the previous Government in 2009. Specifically, it said it will reverse the changes made in 2009 to the taxing point for options. The change will apply to all companies and will mean that discounted options are generally taxed when they are exercised (converted to shares), rather than when the employee receives the options.

The Government said it will also allow employee share scheme options or shares that are provided at a small discount by eligible start-up companies to not be subject to up-front taxation, so long as the shares or options are held by the employee for at least three years. Options under certain conditions will have taxation deferred until sale. Shares (issued at a small discount) will have that discount exempt from tax. Criteria to define eligibility for this concessional treatment will include the company having aggregate turnover of not more than $50 million, it being unlisted and being incorporated for less than 10 years. Furthermore, the Government will extend the maximum time for tax deferral from seven years to 15 years.

The Government said it will also update the “safe harbour” valuation tables, which are used by companies to value their options, so they reflect current market conditions. The integrity provisions introduced in 2009 and the $1,000 up-front tax concession for employees who earn less than $180,000 per year will be retained.

The Government noted the ATO will work with industry to develop and approve standardised documentation that will streamline the process of establishing and maintaining an ESS.

The Treasurer is expected to consult with industry on draft legislation and the changes are proposed to commence on 1 July 2015.

Note that as part of the announcement, the Government issued a Factsheet entitled Improving taxation arrangements for employee share schemes. The Factsheet contains four examples which illustrate when options are eligible for the start-up concession and when shares are eligible for the start-up concession. It also contains a summary of taxing points for options and shares provided by a qualifying ESS under the new proposed arrangements.

Example – Options that are eligible for the start-up concession

Kerry works for a small company that meets the eligibility criteria for the start-up concession*. On 1 July 2015, Kerry is given 10,000 options to purchase shares in her employer’s company for $5 per share (ie the exercise price is $5) between 1 July 2018 and 1 July 2019 under a qualifying ESS.

The market value of shares in her employer’s company on 1 July 2015 is $4 per share (which is less than the exercise price of the options) so the shares are “out of the money”.  Because the shares are not “in the money” (which occurs when the exercise price is lower than the market value of the shares), Kerry is eligible for concessional treatment under the start-up concession.

Kerry does not pay anything for the options, but they are worth $0.50 each (total value of $5,000) when they are provided to her. The total discount provided to Kerry is $5,000, equal to the market value of the options ($5,000) minus any amount paid by Kerry ($0).

Under the old rules, and assuming there was no risk that Kerry could forfeit the options, Kerry would have had to pay income tax on the discount component ($5,000) in the income year that she received the options (2015–2016).

Under the new concessional start-up rules, Kerry will be able to defer any tax on this ESS arrangement until she sells the underlying shares, unless another taxing point** occurs first. If Kerry sells the shares for more than $5 per share (the exercise price, which will also likely be her cost base for CGT purposes), she will be liable for CGT upon sale of those shares. In this example, if Kerry sells the shares for $8 per share, she will pay CGT on her gain of $3 per share when she sells the shares (the sale price of $8 minus what she paid for each share, $5).

*Eligibility criteria include: the three-year minimum holding period; company having aggregated turnover of not more than $50m; being unlisted; and being incorporated for less than 10 years.

**Another taxing point will occur if a non-sale CGT event occurs to the options or shares before the sale event occurs (eg Kerry stops being an Australian resident taxpayer).

Source: Government Factsheet entitled “Improving taxation arrangements for employee share schemes”, http://www.dpmc.gov.au/publications/Industry_Innovation_and_Competitiveness_Agenda/employee_share_schemes.cfm

Industry Innovation and Competitiveness Agenda: Govt

Encouraging employee share ownership is one of the key initiatives forming part of the Government’s Industry Innovation and Competitiveness Agenda announced on the same day. Among other things, the Agenda aims to create “a lower cost, business friendly environment with less regulation, lower taxes and more competitive markets”. Other key initiatives forming part of the Government’s Agenda include:

• reforming the vocational education and training sector;
• promoting science, technology, engineering and mathematics skills in schools;
• accepting international standards and risk assessments for certain product approvals;
• enhancing the 457 and investor visa programs; and
• establishing Industry Growth Centres.

The Industry Innovation and Competitiveness Agenda Report and accompanying Factsheets are available on the Department of the Prime Minister and Cabinet website at: http://www.dpmc.gov.au/publications/Industry_Innovation_and_Competitiveness_Agenda/index.cfm.

Source: PM, Treasurer and Small Business Minister’s joint press release, http://bfb.ministers.treasury.gov.au/media-release/055-2014/

Important: Clients should not act solely on the basis of the material contained in Client Alert. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.