Subsidy to encourage employers to hire mature workers

The Tax and Superannuation Laws Amendment (2014 Measures No 5) Bill 2014 was introduced in the House of Representatives on 4 September 2014. It proposes to amend the Income Tax Assessment Act 1997 (ITAA 1997) and the Taxation Administration Act 1953 (TAA 1953) to abolish the mature age worker tax offset from the 2014–2015 income year and later income years. A new expenditure program being delivered by the Department of Employment, Restart, will provide alternative support by way of subsidy of up to $10,000 to employers who hire mature age job seekers.

The new subsidy was announced in the 2014–2015 Federal Budget. Information on the Restart program is available at www.experiencepays.gov.au.

Offshore income tax “amnesty” nearing its end

The Tax Commissioner Chris Jordan earlier this year announced an initiative to allow eligible taxpayers to come forward and voluntarily disclose unreported foreign income and assets. In announcing the initiative, known as “Project DO IT: disclose offshore income today”, the Commissioner warned that it provides a last chance opportunity for those who haven’t declared their overseas assets and income to come back into the tax system before 19 December 2014, and to avoid steep penalties and the risk of criminal prosecution for tax avoidance.

Mr Jordan urged taxpayers with offshore assets to declare their interests ahead of a global crackdown on people using international tax havens. He emphasised that as governments around the world step up their data sharing and harness powerful technology to find tax cheats – and as the G20 continues to promote global tax transparency – the concept of the “tax haven” is dying and that it is just a matter of time before such tax cheats get caught.

Just recently, the ATO announced a data-matching program targeting offshore bank accounts. Under the program, the ATO will request and collect account details of bank customers from various financial institutions to identify Australian resident taxpayers with offshore bank accounts which may evidence undeclared income and/or gains for the years ended 30 June 2012 to 30 June 2015. The program is designed to help the ATO identify Australian resident taxpayers who may be outside the tax system, and increase transparency of the worldwide dealings of Australian resident taxpayers.

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. 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.

According to the ATO, it has received a “strong response” so far with many taxpayers coming forward to make a disclosure. Disclosures received include undeclared income from taxpayers who:

• have offshore pensions and property;
• want to repatriate funds from offshore bank accounts; and
• have offshore arrangements inherited from parents or other relatives.

The ATO has also revealed that most people getting in touch are reporting accounts in Switzerland, Israel, Lichtenstein, the Netherlands, South Africa and Hong Kong.

To receive the benefits of Project DO IT, the ATO says 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. 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. To do this, they must lodge an “expression of interest” to participate in the initiative.

Sources: ATO publication, Project DO IT: Disclose offshore income today, 21 July 2014, www.ato.gov.au/General/Correct-a-mistake-or-dispute-a-decision/In-detail/Project-DO-IT/Project-DO-IT; ATO media release, 30 June 2014, www.ato.gov.au/Media-centre/Media-releases/ATO-steps-up-data-mining-program-to-target-offshore-tax-evaders; Commonwealth Gazettes, Banking Transparency (2012-2015) (C2014G01381, 21 August 2014), www.comlaw.gov.au/Details/C2014G01381.

Other amendments

The Bill also proposes the following:

• amend the ITAA 1997 by repealing Subdiv 61-N to abolish the seafarer tax offset from the 2015–2016 income year and later income years. A company is entitled to the seafarer tax offset in an income year in respect of an Australian resident individual if certain conditions are met. This was announced in the 2014–2015 Federal Budget;
• amend the ITAA 1997 to reduce the rates of the tax offset available under the R&D tax incentive by 1.5 percentage points. The higher (refundable) rate of the tax offset (available to eligible entities with turnover of less than $20 million) will be reduced from 45% to 43.5% and the lower (non-refundable) rates of the tax offset (available to all other eligible entities) will be reduced from 40% to 38.5%. The Government says the reduction in the tax offset rates is consistent with its commitment to cut the company tax rate from 1 July 2015. This will apply to income years starting on or after 1 July 2014. The amendment was announced in the 2014–2015 Federal Budget;
• amend the ITAA 1997 to update the list of specifically listed deductible gift recipients. The changes would add Australian Schools Plus Ltd, East African Fund and The Minderoo Foundation Trust to the list.

Source: Tax and Superannuation Laws Amendment (2014 Measures No 5) Bill 2014, www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5329.

Doctor obtains tax relief for olive-growing activities

The Administrative Appeals Tribunal (AAT) has allowed a taxpayer relief from the non-commercial loss provisions for certain income years concerning his carrying on of an olive growing and olive oil production business on the basis that special circumstances applied.

Background

The taxpayer is a medical practitioner who, for the last 15 years or so, has also carried on an olive growing and olive oil production business. For the 2010 to 2014 income years inclusive, the AAT said the taxpayer applied to the Commissioner for relief from the non-commercial loss provisions (the provisions prevent the taxpayer from deducting his olive oil business losses from his other assessable income). In practical terms, unless he is granted relief, he has to wait until the olive oil business starts to generate profits before he can claim those losses.

Losses cannot be claimed in the year they are incurred unless the Commissioner exercises the discretion in s 35-55 of the ITAA 1997 that the non-commercial losses rules do not apply. That discretion can only be exercised where the taxpayer applies for a private ruling on the exercise of the Commissioner’s discretion. That means that the Commissioner’s decision not to exercise his discretion in the taxpayer’s favour is a private ruling. The AAT said the exercise of the discretion in s 35-55 was the only way the taxpayer could be relieved from the non-commercial loss provisions because his taxable income exceeded $250,000 in each of the relevant years.

The Commissioner refused the taxpayer’s application for relief. The taxpayer’s objection against the refusal was disallowed, and he applied to the AAT for review of the objection decision.

Decision

The essential issue before the AAT was whether the Commissioner’s decision not to allow the taxpayer immediate access to the losses he incurred in the relevant years was the correct or preferable decision.

The olive-growing scheme in question comprised over 200 pages of content. After reviewing the Commissioner’s private ruling, the AAT said it was not helpful that the schedule of financial information included by the Commissioner in the scheme outline did not accurately reflect the figures provided on the taxpayer’s behalf in the ruling application. The AAT observed that it seemed “the Commissioner’s officers took a regrettably inattentive approach to the formulation of the scheme. That has made the review task more difficult than it needs to be”. The AAT also noted that the Commissioner did not clearly “and with precision” identify the scheme in his private ruling. Against that background, the AAT considered it was difficult to accept the Commissioner’s complaints about the taxpayer’s approach to the case.

The AAT considered previous case law consideration of s 35-55 and then turned to a consideration of whether special circumstances applied in the taxpayer’s case to allow the Commissioner’s discretion to be exercised. The special circumstances included the following: infestations of the olive trees by the olive lace bug; prolonged drought; destruction of olive trees by a grass fire; extraordinary challenges facing the olive oil industry (glut of olives, low price etc); serious illness of the taxpayer’s wife (the AAT accepted she was “a highly qualified member of the team and an experienced oil maker and blender”). The AAT considered that all of the above, except the extraordinary challenges facing the olive oil industry, constituted special circumstances in the taxpayer’s case.

One of the Commissioner’s arguments was that, at the time of the ruling application, there was no assertion by the taxpayer that a tax profit would otherwise have been made but for the special circumstances, or the amount of the tax profit. The AAT rejected this saying it was a direct consequence of the fact that the Commissioner’s approved form asks no questions about tax profit. “It is disappointing that a taxpayer should be criticised on that basis”, the AAT said.

Having regard to the impact of the special circumstances on the taxpayer’s business activity in the excluded years, and to the financial outcomes that could have been expected had those special circumstances not occurred, the AAT said it was satisfied that it would be unreasonable to apply the rule in s 35-10(2) in each of the 2010, 2011, 2012 and 2013 income years, but not the 2014 year as it considered that any losses incurred in the 2014 year could not be attributed to the ongoing impact of special circumstances. The AAT therefore concluded that the discretion in s 35-55(1) should be exercised due to special circumstances.

AAT recommends Commissioner makes some changes

The AAT also made several recommendations to the Commissioner as a result of issues raised during the proceedings. These were that the Commissioner:

• considers the use of an alternative approved form for applications of this nature, to take them out of the private ruling regime;
• ensures, as far as possible, that any alternative approved form:

–        asks applicants to provide all the information the Commissioner considers necessary for a proper consideration of the application;

–        takes into account the legislative amendments enacted in 2009 (ie the income requirement which means that taxpayers with taxable income over $250,000 have to rely on the Commissioner’s discretion under s 35-55]).

• provides additional guidance to officers in the formulation of schemes for the purpose of private rulings.

Re Bentivoglio and FCT [2014] AATA 620, www.austlii.edu.au/au/cases/cth/AATA/2014/620.html.

Tax claims for R&D costs mostly allowed

In a lengthy and factually complex decision, the AAT has allowed most of a taxpayer’s claims for R&D expenditure at the 125% rate, but disallowed other claims in respect of overlapping expenditure.

Background

The taxpayer, referred to in the case as GHP 104 160 689 Pty Ltd, was a company previously known as Xstrata Holdings Pty Ltd prior to the merger of Xstrata and the Glencore Group. The AAT said the taxpayer has mining operations in a number of sites in Australia. Its R&D activities were directed to developing new knowledge and increasing the effectiveness of copper and lead-zinc concentrators at sites at Mt Isa, Ernest Henry and McArthur River and a copper smelter at Mt Isa.

Between 2003 and 2007, the taxpayer undertook R&D, conducted by way of plant trials, to test various possible improvements to its copper and lead concentrators and its copper smelter. Many of the plant trials ran over several months. A “plant trial” refers to R&D undertaken by way of testing one or more altered integers of a plant under ordinary operational conditions to assess the changed integers’ impacts on the operation of a plant as a whole.

The taxpayer sought to deduct a considerable part of its expenditure incurred during those plant trials at the premium rate of 125%. For each of the relevant tax years, the Commissioner disallowed many, but not all, items of expenditure claimed to be “research and development expenditure” and, as such, deductible at the premium rate. The taxpayer sought review of these decisions.

The Commissioner’s principal submission was that all of the taxpayer’s relevantly disputed expenditure was expenditure “incurred by the company in acquiring or producing materials or goods to be the subject of processing or transformation by the company in research and development activities” and was thus within the meaning that s 73B(1) gives to the term “feedstock expenditure” and was therefore not deductible at the premium rate. “Feedstock expenditure” is expressly excluded from the statutory definition of “research and development expenditure”. The Commissioner also argued that, due to an overlap of the taxpayer’s R&D activities at its Mt Isa copper concentrator and Mt Isa smelter, certain expenditure became “feedstock expenditure” and was not deductible at the 125% rate.

Decision

In the AAT’s view, the text of the relevant provisions, read as part of s 73B, allowed it to ascertain the meaning conveyed by the definition of “feedstock expenditure” without any requirement to resort to extrinsic materials.

The AAT said things “which are acquired to be the subject of some process in an activity cannot share a common identity with those acquired to subject them to that activity”. The exception only applies to expenditure on such goods or materials as are acquired or produced in order that they will be subjected to processing or transformation in the activity. The AAT considered the following example to illustrate the point.

“Assume an eligible company that manufactures food products submits its plans for R&D activities in order to test whether a different mechanism might enhance its production of ground coffee. To conduct that R&D it buys new parts for its industrial scale grinding machine and uses the same coffee beans it ordinarily grinds.

Assume that the new grinding mechanism suffers at least minimal wear while grinding the coffee beans in the course of these R&D activities. On the Commissioner’s case that is enough to effect the coffee grinder’s mechanism’s ‘transformation’.

The result, on the Commissioner case, is that the company’s expenditure not only on the coffee but also on the coffee grinding mechanism is ‘feedstock expenditure’ incurred by the company ‘in acquiring or producing materials or goods to be the subject of processing or transformation by the company in research and development activities’. That conclusion sounds decidedly odd.”

In the AAT’s view, the inter-relationship between the various definitions within the feedstock scheme provided a “statutory lens through which the meaning to be attributed to the definition of ‘feedstock expenditure’ can be viewed and ascertained”. In turn, the AAT said that provided “an additional foundation for rejecting the construction of the definition pressed upon the AAT by the Commissioner”.

The AAT considered that the legislation facilitated a distinction between deductibility for expenses incurred by a company in acquiring the goods and materials to be the subject of processing or transformation for which the premium rate is denied, and the enhanced deductibility which is available for expenditure otherwise in the R&D activities.

The AAT found that the entire relevant R&D undertaken by the taxpayer involved high levels of technical risk within the meaning of s 73B of the Income Tax Assessment Act 1936 (ITAA 1936). After analysis of the complex factual situation, and application of the law, especially in relation to the principles of statutory interpretation, the AAT was of the view the taxpayer was entitled to substantially succeed on the first principal issue, but it accepted the Commissioner’s argument on the overlap issue. The AAT therefore ordered that the Commissioner’s assessments be varied in accordance with its reasons.

Appeals update

The Commissioner has appealed to the Federal Court against the decision.

Re GHP 104 160 689 Pty Ltd and FCT [2014] AATA 515, www.austlii.edu.au/au/cases/cth/AATA/2014/515.html.

Compensation for providing domestic help taxable

The AAT has affirmed a decision of the Commissioner that a payment made to a taxpayer for compensation for domestic assistance was assessable as ordinary income under s 6-5 of the ITAA 1997.

Background

In February 1997, the taxpayer’s husband suffered a serious injury while white-water rafting during a team-building exercise organised by his employer. The husband was unable to work and the taxpayer gave up full-time work to become his carer. She continued to work part-time or on a temporary basis. In June 2012, the husband lodged a claim for compensation for domestic assistance under s 60AA of the Workers Compensation Act 1987 (NSW) in respect of the domestic assistance that the taxpayer had provided to her husband during the period 1 January 2002 to 12 April 2012.

In November 2012, the Workers Compensation Commission (WCC) awarded the taxpayer the sum of $179,116 (“the compensation payment”). The taxpayer received the compensation payment as a lump sum in the 2013 income year and lodged a private ruling application with respect to the payment. In July 2013, the Commissioner issued a private ruling stating the compensation payment was assessable income for the purposes of s 6-5 of the ITAA 1997. The taxpayer objected and the Commissioner disallowed the objection in full.

The taxpayer contended the lump sum was in the nature of capital and was not income according to ordinary concepts. It was also contended that the lump sum should be characterised as a receipt of capital by the taxpayer as the lump sum was not earned by her; was not expected by her; was not relied upon by her; did not have any element of periodicity, recurrence or regularity; was not payment for services rendered; was not in substitution for income; and was not for financial support.

The Commissioner contended the compensation payment had the character or was in the nature of ordinary income and was therefore assessable as ordinary income under s 6-5. The Commissioner argued the amount of the compensation payment was calculated by reference to the numbers of hours of gratuitous domestic assistance that the taxpayer provided to her husband during the period 1 January 2002 to 12 April 2012 as determined by the WCC. The Commissioner considered the payment was accordingly made for personal services rendered by the taxpayer. Further, the Commissioner argued that the compensation payment was neither calculated nor intended to reflect any loss or earning capacity on the part of the taxpayer and therefore there was no basis for arguing that the payment was a receipt of a capital nature.

The AAT said the sole issue for determination was whether the payment made to the taxpayer was assessable as ordinary income under s 6-5.

Decision

Having regard to the case law, the facts referred to in the ruling application and specifically the manner in which the WCC determined the amount to be paid in compensation, the AAT concluded the compensation payment was assessable as ordinary income under s 6-5.

After consideration of s 60AA of the Workers Compensation Act, the AAT was of the view that the purpose of the compensation, in the case of gratuitous domestic help, was to ensure that the care giver was directly provided with a sufficient payment to cover her lost income. It said this was achieved through the mechanism of making a payment directly to the care giver only in circumstances where she had lost income or foregone employment as a result of providing that assistance. The AAT was also of the view that the compensation payment was a reasonable substitute for a payment which the care giver might have received from the injured worker if the care giver had not chosen to provide those services gratuitously.

The AAT did not accept the contention that the compensation payment was made to compensate the taxpayer for a loss of earning capacity. It said the facts indicated the taxpayer did not suffer a loss of earning capacity. She did not suffer an injury that prevented her from being able to work. Rather, it said she elected to voluntarily resign from her full-time employment so as to provide domestic assistance to her husband. The AAT said on no basis could this be described as a loss of income earning capacity – rather, it was a loss of income. The AAT further noted there was no finding by the WCC that the taxpayer had suffered a loss of earning capacity.

While the payment as a lump sum could be suggestive of a capital payment, the AAT said that fact alone did not mandate a conclusion that it was of a capital nature. It said it will very much depend on all the relevant circumstances. Furthermore, the AAT said it was clear from the case law that a lump sum payment representing lost earnings is assessable income. Accordingly, the Commissioner’s decision was affirmed.

Re Riley and FCT [2014] AATA 664, www.austlii.edu.au/au/cases/cth/AATA/2014/664.html.

Perfecting a security interest over corporate property

The Federal Court has held that an SMSF trustee was merely an unsecured creditor in relation to a commercial loan to a company after finding that its security interest had not been registered in time on the Personal Property Securities Register (PPSR) to avoid the interest vesting in the company (in liquidation).

On 24 December 2013, the trustees of the SMSF (the applicants) agreed to lend $250,000 to Australian Gaming and Entertainment Ltd, a Perth-based public company (the company). The terms of the loan included a security agreement under which the company agreed to mortgage personal property in favour of the applicants. Some five months later, on 19 May 2014, the applicants registered their security interest on the Personal Property Securities Register (PPSR) pursuant to the Personal Property Securities Act 2009 (PPSA). The company was placed into voluntary administration on 26 May 2014 with a single asset, $860,000 in a bank account.

The Court held that the applicants’ security interest was not valid and enforceable against the company. It followed that the security interest vested in the company (in liquidation) pursuant to s 588FL of the Corporations Act 2001 with the result that the trustees of the SMSF were unsecured creditors in relation to the outstanding $348,713 debt. Because of the time at which the security interest was registered relative to the commencement of the voluntary administration of the company (ie within six months), the Court ruled that the security interest would vest in the company pursuant to s 588FL of the Corporations Act, unless the applicants could establish that the security interest was not perfected only by means of registration. However, the Court rejected the applicants’ submission that the method of perfection was not by registration alone. As such, the Court ruled that the security interest was not valid and enforceable against the company.

Registration of security interests – time limits

The decision in Pozzebon highlights that a failure to register a security interest on the PPSR within 20 business days of the creation of a security agreement over corporate property leaves the lender/mortgagor in the hands of the gods in terms of later perfecting the security.

While there is no statutory obligation to register a security interest on the PPSR, it is necessary to perfect a security interest within certain time limits in order to obtain priority. Unperfected security interests vest in the grantor upon insolvency. Registration of a security interest before the grantor becomes bankrupt or goes into liquidation or administration will protect the security interest from the vesting rule. However, security interests in corporate property must be registered on the PPSR within 20 business days of the creation of the security interest or not more than six months before the administration or winding up of the grantor company. Otherwise, the unperfected security interest will vest in the grantor company in liquidation. It follows that a failure to register within 20 business days means that the security interest must have been registered at least six months before the administration or winding up of the grantor company. Given that things tend to happen very quickly when companies start to go pear-shaped, leaving the registration of a security interest until the first signs of trouble would typically make it difficult to satisfy the six-month test in s 588FL(2)(b)(i) of the Corporations Act.

As priority for security interests perfected by registration starts from the time the security interests became available for searching on the PPSR, it is imperative to register security interests as soon as possible. Indeed, it is even possible to register prospective security interests before the grantor and the secured party enter into a security agreement.

SMSF commercial loans – caution required

The Pozzebon case also serves as a warning to SMSF trustees chasing a higher yield that commercial loan investments are intrinsically problematic for most trustees in terms of the skills required to assess and manage the additional risks from such loans. Of course, a loan to a “related party” of an SMSF would face additional compliance challenges (eg the in-house asset rules), not to mention the potential for conflicts of interest. While there is nothing specific in the Superannuation Industry (Supervision) Act 1993 (SIS Act) to prevent an SMSF trustee from making a loan investment to an unrelated party, the trustees would still need to comply with the general SIS investment rules, eg the sole purpose test, trustee duties, arm’s length dealing. The risks associated with a commercial loan would also need to be suitable as part of the fund’s written investment strategy.

Therefore, at a minimum, a trustee would need to establish a detailed risk management plan for the life of a commercial loan. Remember, if your client is going to turn their SMSF into a bank, they also need to assess loan applications and take security like a bank (ideally over real property). This would typically require specialist accounting and legal advice in terms of assessing a loan investment and perfecting their security interest under the PPSA to help gain a priority status in the event of a default by the borrower.

Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd [2014] FCA 1034; www.austlii.edu.au/au/cases/cth/FCA/2014/1034.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.