Tax debt release on serious hardship grounds refused

A taxpayer has been unsuccessful before the Administrative Appeals Tribunal (AAT) in seeking to be released from his tax liabilities under s 340-5 of Sch 1 of the Taxation Administration Act 1953.

As of 4 May 2014, the taxpayer’s outstanding tax debts amounted to around $58,000. However, the AAT was not satisfied that the taxpayer’s situation, if the taxpayer were required to pay the tax debts, would entail serious hardship. The AAT said that even if it were a case of serious hardship, the AAT would not exercise the discretion to grant relief. The AAT noted that no explanation was offered for the failure by the taxpayer to meet his tax liabilities as they arose. When comparing household income with expenses, the AAT was of the view that, although outlays were not extravagant, there was a level of discretionary spending that, if necessary, could be reduced.

The AAT said that instead of paying what it considered to be manageable tax assessments, the taxpayer “largely ignored his tax liabilities over the last five or six years, and has allowed the amounts due to accumulate with interest”. It added that the taxpayer “simply failed to give proper priority to paying his tax” and that “since entering the PAYG instalment system in 2008 he has paid only four of 22 assessments”. Further, the AAT said that the taxpayer had made no “sustained effort to clear arrears and achieve compliance”. It noted that since the “middle of last year he has been paying $150 per fortnight but he has not been meeting current assessments”.

Re Power and FCT [2014] AATA 343, www.austlii.edu.au/au/cases/cth/AATA/2014/343.html.

GST credits for property development project managers denied

Two taxpayers have been unsuccessful before the AAT in a matter concerning claims for input tax credits (ITCs) in respect of purported acquisitions made in relation to certain property developments.

Background

The first taxpayer (a company) and the second taxpayer (a partnership of two individuals) claimed to have made acquisitions in relation to a property development. The first taxpayer also claimed to have made acquisitions in relation to another property development. Both taxpayers were registered for GST. However, the Commissioner issued to both taxpayers amended assessments denying ITCs claimed for those purported acquisitions – in the first taxpayer’s case, for the tax periods April 2010 to June 2011, and in the second taxpayer’s case, for the tax periods April 2009 to December 2010. The Commissioner’s position was that neither taxpayer carried on an enterprise at all, so neither of them could be entitled to any ITCs. The Commissioner also imposed an administrative penalty at the rate of 50% on the shortfall amount.

The AAT dealt mainly with the arrangements concerning the first property development as the AAT was of the view that the arrangements did not differ materially from the second development. The AAT noted that there had been some work done on the property; however, the parties disputed what that work consisted of, how much of it was done, who it was done for, and whether it had been paid for.

The AAT heard from the taxpayers that they were “principal contractors to the project”. The project was presumed by the AAT to be the development of the property for eventual subdivision. However, the AAT noted that exactly what the “principal contractors” did in respect of the property remained the subject of “quite profound mystery”. The AAT said that the same observation applied in respect of what the “principal contractors” were supposed to have acquired from various entities, described by the taxpayers as the “subcontractors”, who were said to have undertaken some of development activities.

The AAT understood the case put by the taxpayers as follows: the owner of the property engaged the principal contractors to get certain work done on the property; the principal contractors in turn engaged subcontractors to do the physical work; the subcontractors did the work and charged the work to the principal contractors; and the principal contractors bundled up the charges with a 20% mark-up and on-charged the owner of the property.

The AAT noted that the total amount invoiced to the first taxpayer by the subcontractors (in relation to both property developments) was over $250,000. The total amount invoiced to the second taxpayer was over $820,000. However, the AAT said the invoices themselves were “short on detail”. The AAT also noted that the Commissioner had notified the taxpayers of his doubts concerning the work undertaken on the property after he was informed by the relevant council authority that approval to subdivide the property had been refused.

Decision

The AAT said that each taxpayer’s claim for ITCs failed “at the most basic level”. It said: “It is trite to observe that an entity is not a ‘project manager’ simply because someone says it is. It is equally trite to observe that, to carry on an enterprise, an entity must do something.” The AAT was unable to identify the “activity” that the taxpayers were doing in respect of the properties. The AAT was also not satisfied that either of the taxpayers, in relation to the relevant property developments, carried on any activities “in the form of a business”. A key issue identified by the AAT was the difficulty the taxpayers had in articulating the arrangement between themselves, the land owners and the subcontractors.

The AAT was of the view that the “true arrangement” was that work was done for, and the supplies were made to, the owners of the properties, and that at most, the taxpayers agreed to pay for some of the supplies. The AAT found, on the balance of probabilities, that there were “supplies” by the subcontractors; however, it was of the view that any supplies made by the subcontractors were not made to the taxpayers. Accordingly, it held that the claims for ITCs were not sustainable.

Although it was not required to, the AAT also rejected the taxpayers’ argument that “promissory notes” issued by them to the subcontractors for work done constituted consideration at the time of the supplies. The AAT also affirmed the penalty of 50% of the shortfall amount. The AAT said that the arrangement involved multiple entities, many of them not at arm’s length, and that given the type of arrangement involved and its size, independent advice should have been obtained. Among other things, the AAT noted that the “accountants were too close to the arrangement to give it the proper degree of consideration and dispassionate analysis”. The AAT held that the penalty should not be remitted in the circumstances.

Re Dotrac Pty Ltd and FCT [2014] AATA 336, www.austlii.edu.au/au/cases/cth/AATA/2014/336.html.

Individual working overseas not a tax resident

The AAT has allowed a taxpayer’s objection to amended assessments issued to him for the 2009 and 2010 income years after finding that the taxpayer was not a “resident” of Australia as that term is defined in s 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Background

The Commissioner had issued amended assessments to the taxpayer increasing his assessable income for the 2009 and 2010 income years by $200,540 and $305,516 respectively. The increases were the result of the Commissioner’s inclusion of income derived by the taxpayer from his employment in Saudi Arabia during each of the income years in question. The taxpayer had prepared and lodged his income tax returns for those years on the basis that he was a foreign resident. It was common ground that the taxpayer was domiciled in Australia for each of the income years in question.

In making various findings of fact, the AAT largely accepted the taxpayer’s evidence. The taxpayer was a building and construction project manager and in August 2007 he signed an employment contract with a company (a Saudi Arabian subsidiary of a company group) to work on a project located in Saudi Arabia. When he first travelled to Saudi Arabia in September 2007, the taxpayer had an expectation that the project would last three years. It was also the taxpayer’s expectation that upon completion of the project, he would move on to another project located in Saudi Arabia. While in Saudi Arabia, the taxpayer lived in an apartment situated in a secure residential compound, which was provided by his employer and for which he had exclusivity of occupancy. The taxpayer was single at the time and did not share the apartment with anyone. The taxpayer spent recreational time in Bahrain and holidays in Thailand and Australia, with the greater time spent in Thailand.

The AAT accepted the taxpayer’s reasons for not selling or renting his house located on the Gold Coast while he was employed in Saudi Arabia. The taxpayer had left belongings in the house and had it secured before he left Australia. The AAT accepted that the taxpayer initially decided to retain the house because he was uncertain as to what he would encounter when he took up his employment in Saudi Arabia, but that his reasons later changed when he found that he enjoyed the employment. Among other things, the AAT inferred that the taxpayer could well afford to make such choices given that he was well paid and did not need additional income from renting out the property. The AAT also considered the cost that would have been incurred in obtaining alternative storage for his collection of pistols and rifles as telling against his renting out of the house.

The AAT noted that on occasions when the taxpayer did return to the house during holidays, he never spent more than a few days at a time at the house. The taxpayer returned to Australia in May 2010 at the conclusion of the project and from then on he lived at the house. However, when he did return to Australia in May 2010, he had expected further employment in Saudi Arabia. The AAT noted some discrepancies in the taxpayer’s evidence regarding his holidays but accepted that this was the result of exact details being lost through the passage of time.

On incoming and outgoing passenger cards, the taxpayer had selected “Resident returning to Australia” and “Australian resident departing temporarily”. The taxpayer explained that he thought that, as an Australian citizen, these were the options that ought to be selected. The AAT said: “The options presented by the incoming and outgoing passenger cards, if one is versed in the law with respect to residency, do embrace the situation of a citizen who is a resident of Australia returning after a temporary absence or departing temporarily. Equally though, they do not separately and expressly address the situation of a person who holds citizenship but is leaving Australia to live and work abroad indefinitely or returning temporarily but not intending to give up living and working abroad indefinitely”.

The taxpayer maintained an Australian bank account into which his salary was paid in Australian dollars. The taxpayer did not open a bank account in Saudi Arabia for the purpose of receiving his salary as this would have entailed his being paid in Saudi riyal. There were also local Saudi exchange controls that meant it could have taken months to get the money out of the country if held in a local bank account. The taxpayer also organised for accumulated mail to be couriered to him. The taxpayer did not inform the Australian Electoral Commissioner that he was living in Saudi Arabia.

In lodging the relevant income tax returns, which were prepared with the assistance of a tax agent, the taxpayer had declared that he was an Australian resident with the Gold Coast house as his home address. The taxpayer’s belief was that he was only obliged to lodge an income tax return for his Australian-sourced income. The AAT was of the view that the taxpayer’s affirmative response in respect of residency and the specification of the Gold Coast house as his home address were the result of “inadvertence, probably shared with the tax agent, not a considered manifestation of his intention as to residency”.

Decision

The AAT rejected the Commissioner’s submission that the definition of “resident” in s 6(1) of the ITAA 1936 “should be accorded a wide meaning because it is used in revenue legislation for the purposes of the imposition of tax”. The AAT said the word “resides”, as used in s 6 of the ITAA 1936, bears its ordinary meaning, which is “to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place”. It added that adopting and applying what was said about statutory construction in Alcan (NT) Alumina Pty Ltd v Comr of Territory Revenue (2009) 73 ATR 256 (in which it was stated that the task of statutory construction must begin with a consideration of the text itself) “should put any contrary notion firmly and finally to rest”.

The AAT said the taxpayer’s presence in Saudi Arabia “was hardly casual or passing. So far as intention is relevant, [the taxpayer] had, at the time when he first left Australia for the Kingdom, a reservation as to whether he would make Saudi Arabia his home for the duration of the [project] and beyond”. The AAT accepted that the taxpayer had then at some point intended to make Saudi Arabia his home for the duration of the project and beyond into the indefinite future (although the AAT noted that it would be difficult, if not impossible, to assign the precise day on which the taxpayer formed such an intention).

The AAT was of the view that by the commencement of the 2009 income year, the Gold Coast house was no longer the taxpayer’s usual place of abode, but rather a convenient place to briefly visit in transit while on holidays and a place to store part of his capital. It said the principal purpose of his visits to Australia was not to resume residency in the Gold Coast house, but rather to catch up with his children and ex-spouse in Canberra. It added that those visits did not make him a resident in Canberra.

The AAT concluded that the taxpayer resided in Saudi Arabia in the 2009 and 2010 income years. It was also satisfied that the taxpayer’s permanent place of abode was in Saudi Arabia for the years in question. The AAT noted that circumstances concerning expected follow-on employment had changed after the project ended and that at the end of June 2010 (or so), the taxpayer’s intention changed and he again made Australia his settled place of abode.

Accordingly, the AAT held that the taxpayer had discharged the burden of proof that the amended assessments were excessive.

Re Dempsey and FCT [2014] AATA 335, www.austlii.edu.au/au/cases/cth/AATA/2014/335.html.

ATO debt collection approach under review

On 26 May 2014 the Inspector-General of Taxation, Ali Noroozi, announced the terms of reference for his review of the ATO’s approach to debt collection.

“Despite the ATO’s debt assistance programs, its approach to collecting taxes has been a persistent source of taxpayer complaint”, Mr Noroozi said. He noted that the ATO’s approach to collecting debts accounted for 23% of all ATO-related complaints received by the Commonwealth Ombudsman in 2012–2013. Furthermore, Mr Noroozi said some stakeholders believe that the ATO has recently taken a firmer approach to debt collection despite continuing economic pressures, while others are of the view that the ATO allows debts to accumulate for too long before taking action.

The Inspector-General has noted stakeholders’ concerns regarding the efficiency and consistency of the ATO’s debt recovery and assistance activities, including reliance on the Business Viability Assessment Tool (BVAT) to inform such activities. Specifically, stakeholders have expressed concern that certain debt recovery activities are disproportionate and have broader impact. Examples of such activities include insolvency proceedings commenced against viable taxpayers, garnishee notices that exhaust bank accounts and concurrent debt recovery action that impedes challenges to the underlying assessments.

The review will, among other things, focus on the ATO’s strategies for managing tax debts, the structure and design of the ATO’s debt recovery and assistance initiatives, appropriateness and consistency of assistance that the ATO offers taxpayers, and the ATO’s use of third party debt collectors. The review will also focus on the proportionality, consistency and effectiveness of the ATO’s debt recovery activities, including its use of garnishee notices, director penalty notices, departure prohibition orders and insolvency actions.

Public consultation closes on 18 July 2014.

Source: Inspector-General of Taxation, Review into the ATO’s approach to debt collection, terms of reference and submission guidelines, www.igt.gov.au/content/work_program/TOR-ATO-debt-collection.asp.

New ATO approach to identifying SMSF risks

The ATO has announced that it will apply a new risk-based approach to its treatment of auditor contravention reports (ACRs) for self managed superannuation funds (SMSFs) based on the overall risk posed by each SMSF.

In edition 30 of the ATO’s SMSF News (released on 29 May 2014), the Commissioner says he will consider multiple indicators and use new risk models to determine the appropriate action to take in relation to each SMSF. The key indicators include non-compliance (with regulatory and income tax matters), information from the SMSF annual return, ACRs and other data including trustee and member records.

Under this new approach, the ATO will respond to all ACRs received with an audit, phone call or letter. This will take place shortly after lodgment in order to provide more certainty to trustees, tax agents and SMSF auditors. The ATO says this approach also recognises the increased SMSF auditor professionalism stemming from the new ASIC registration regime, with many cases therefore warranting less intrusive action.

The ATO’s new risk categories for SMSFs include the following:

• High-risk SMSFs – These will be selected for comprehensive audits that will scrutinise all regulatory and income tax risks displayed by the fund, with a particular focus on repeat offenders. This program will also involve an increasing number of ATO field visits to engage high-risk SMSFs and their tax agents. New ATO administrative penalties for breaches by SMSF trustees (up to $10,200 per breach) will be applied when the Commissioner confirms that a breach is eligible for such a penalty.
• Medium-risk SMSFs – The ATO will take less intrusive action in relation to SMSFs that are assessed as medium risk. That ATO says that because trustees are responsible for their fund’s activities, the ATO will engage directly with trustees to discuss reported contraventions, remind trustees of their obligations and encourage compliance in future. This action will usually occur within six to eight weeks of lodgment of the ACR. In the majority of cases, if the trustees can assure the Commissioner that they understand their obligations, the issue(s) reported in the ACR will be closed and no penalties will be applied. Through this treatment, the ATO aims to intervene before more serious comprehensive audits are required.
• Lower-risk SMSFs – These will be issued with tailored correspondence reminding the trustees of their obligations and encouraging compliance in future. The issue(s) reported in the ACR will be closed with the issuing of this letter, which will usually occur within six to eight weeks of lodgment of the ACR.

SMSF trustee penalties

The ATO notes that while the new SMSF trustee penalties will become available from 1 July 2014, contraventions (such as loans to members or relatives) that already exist on 1 July 2014 will come under the new penalty regime.

 

Source: ATO SMSF News – edition 30, released on 29 May 2014, www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/SMSF-News/SMSF-News—edition-30/?page=10.

New integrity rule targeting dividend washing

The Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014 was introduced into the House of Representatives on 29 May 2014.

The Bill will amend the Income Tax Assessment Act 1997 by introducing an integrity rule to limit the ability of taxpayers to obtain a tax benefit from “dividend washing” (or “distribution washing”). Broadly, distribution washing is a scheme that allows a taxpayer to obtain multiple franking credits in respect of a single economic interest by selling the interest after an entitlement to a franked distribution has accrued and then immediately purchasing an equivalent interest with a further entitlement to a corresponding franked distribution.

Broadly, the amendments in the Bill provide that franked distributions that a taxpayer receives due to distribution washing will not entitle the taxpayer to a tax offset. In addition, the taxpayer will not be required to include the amount of the franking credit in their assessable income. For these purposes, a distribution will be considered to be received as a result of distribution washing where the taxpayer has also received a corresponding distribution in respect of a “substantially identical interest” that the taxpayer sold before acquiring the new interest. Part IVA of the ITAA 1936 will also continue to be applicable where the amendments in the Bill do not negate the benefit.

The Bill also makes various technical corrections to the imputation rules in order to clarify a number of cross-references that relate to offsets.

Date of effect: The distribution washing amendments are proposed to apply with effect from 1 July 2013 (ie the date set out in the original policy announcement of 14 May 2013). The technical amendments to the references to offsets are proposed to generally apply with effect from 1 July 2002 (ie the date when the “misdescribed” cross-references were introduced).

Other important amendments

The Bill also contains the following amendments:

• Protection in respect of announced but un-enacted tax amendments – The Bill proposes to insert s 170B into the ITAA 1936 to provide protection to taxpayers in relation to various tax measures announced by previous governments and that the present government has decided not to implement. The primary means by which protection is provided to a taxpayer who meets the conditions for protection is by preventing the Commissioner from amending assessments in relation to protected positions in a way that would produce a less favourable result for the taxpayer: proposed s 170B(1). The protection provided is limited to the particulars of an assessment that reflect the taxpayer’s anticipation of the impact of an announcement that is listed for the purposes of the provision. All other particulars of the assessment are subject to the usual rules governing amendment of assessments.

Date of effect: Availability of protection will be based on statements made by or on behalf of a taxpayer that relate to the period when an identified announcement was “on foot”. An announcement is considered to have been “on foot” from the day on which it was originally announced by a previous government until 14 December 2013, which is the day the current government announced that the measure would not proceed.

• Medicare levy low-income family thresholds 2013–2014 – The Bill proposes to increase the Medicare levy low-income threshold for families for 2013–2014, as well as the dependent child component of the threshold, as announced in the 2014–2015 Budget. The Bill proposes to amend ss 8(5) to 8(7) of the Medicare Levy Act 1986 to increase the family threshold for the 2013–2014 year to $34,367 (from the current $33,693). It also proposes to increase the dependent child-student component of the family income threshold for the 2013–2014 income year to $3,156 (from the current $3,094).

Date of effect: Applies to the 2013–2014 and later income years.

Source: Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=r5260.

Administrator of deceased estate breached duty

The Supreme Court of Queensland has ruled that an administrator of a deceased estate breached her fiduciary duty by applying for her deceased son’s superannuation benefits to be paid to her personally, and not seeking a death benefit as the legal personal representative of the estate.

Background

In November 2013, the Court granted the applicant Letters of Administration over her son’s estate after he died, aged 40, intestate and without a spouse or children. The net assets of his estate were $80,000 (primarily the proceeds of a life insurance policy), in contrast to his superannuation benefits in three superannuation funds, which totalled $453,749.

As the administrator of the estate, the applicant was aware of her obligations to administer her son’s estate in accordance with the rules of intestacy such that it would be distributed in equal shares between the deceased’s two parents (the applicant and her former husband). However, she applied to the three superannuation funds for any death benefits to be paid to her personally. The applicant did not apply to the superannuation funds for a death benefit to be paid to her as the legal personal representative (LPR) of the deceased’s estate. Each of the superannuation funds determined to pay 100% of the death benefits to the applicant (tax-free) on the basis that she and the deceased were living in an “interdependency relationship”.

The deceased’s father (the respondent) submitted that the applicant had breached her duty under s 52 of the Succession Act 1981 (Qld) to get in the estate of the deceased. The respondent also claimed that the applicant had allowed a conflict of interest to occur by seeking a superannuation death benefit for herself personally, without also doing so on behalf of the estate.

Decision

The Court held that the administrator of the estate had breached her fiduciary duty and s 52(1)(a) of the Succession Act by applying for the death benefits to be paid to her personally, rather than to her as the LPR of the estate. In so finding, the Court ordered the applicant to account to the estate by transferring the $453,749 in superannuation death benefits to the estate (where it would be shared equally with her former spouse under the rules of intestacy).

The Court found that there was a clear conflict of duty and interest, which the applicant had resolved in favour of her own interest. The Court said that an administrator of an intestate estate has a duty to apply for payment of superannuation funds to the estate. While an administrator of an estate has no proprietary right to an interest in a superannuation fund, the Court said an administrator has standing to compel the trustees of the fund to exercise their discretion to pay out the funds pursuant to reg 6.22 of the Superannuation Industry (Supervision) Regulations 1994. The Court said this discretion is one that the deceased member’s personal representative must be under a duty to call on the trustee to exercise.

The Court noted that a person who has fiduciary duties is generally not allowed to enter into engagements in which the fiduciary has or may have a personal interest conflicting with the interests of those whom the fiduciary is bound to protect. An exception to this rule applies where a testator or settlor, with knowledge of the facts, imposes a duty on a trustee that is inconsistent with a pre-existing interest or duty that he or she has in another capacity: Mordecai v Mordecai (1988) 12 NSWLR 58. However, the Court ruled that the exception does not extend to allowing a trustee, by the trustee’s own act, to voluntarily put himself or herself into a new position of conflict.

The Court also observed that the application for Letters of Administration had not sufficiently disclosed that the applicant intended to apply to the superannuation funds for the death benefits to be paid to her personally. In this respect, the Court distinguished the duties of an administrator of an intestate estate (appointed by the Court) from an executor of a deceased estate appointed under a will (where the testator has exercised a testamentary choice and accepted a potential conflict of interest).

McIntosh v McIntosh [2014] QSC 99, www.austlii.edu.au/au/cases/qld/QSC/2014/99.html.

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.