Date posted: 15/04/2024

Tax cases, appeals updates and DISs

Tax cases, appeals updates and decision impact statements (DISs) that feature in the CA ANZ Tax News AU.

Items released the week ended 12 April 2024 

Decision impact statement 2021/8256, 2021/8257 and 2021/8258 - BPFN and Commissioner of Taxation – outlines the ATO’s response to this decision about the application of the non-arm’s length income provision in subsection 295-550(5) of the Income Tax Assessment Act 1997 to distributions made to the Applicant, a beneficiary, self-managed superannuation fund.

Decision impact statement 2020/0826 - GQHC and Commissioner of Taxation - outlines the ATO's response to this case, which was concerned with whether:

  • the Commissioner has the power to assess or make decisions as to whether an R&D entity's registered activities are eligible 'R&D activities' as defined in Division 355 of the Income Tax Assessment Act 1997 in circumstances where no findings about an R&D entity's registration that bind the Commissioner were made (Finding) by Innovation and Science Australia (the Board) (the jurisdictional issue)
  • the Applicant's registered activities in the relevant year were research and development (R&D) activities, and if so, were the activities in fact conducted in the relevant income year (the eligibility issue), and
  • expenditure incurred by the Applicant in acquiring or producing both 'day old' chickens and poultry feed were feedstock input expenditure which requires a feedstock adjustment (the feedstock adjustment issue).
 

Tax Cases 2024

Mylan Australia Holding Pty Ltd v Commissioner of Taxation (No 2) [2024] FCA 253

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Konebada Pty Ltd ATF the William Lewski Family Trust v Commissioner of Taxation [2024] FCAFC 42

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Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28 – no dominant purpose to obtain tax benefit

The Full Federal Court has allowed the taxpayer’s appeal, holding the taxpayer did not have the dominant purpose to obtain a tax benefit in entering the schemes. 

At appeal, the Commissioner sought to argue that the fact that the trustee of MHT (a hybrid trust having ordinary units and special units) did not exercise a discretion to distribute income to the special unitholders was sufficient to attract the operation of Part IVA.

The Full Federal Court said “[a]t the end of the day, the appellant as trustee of MHT made a distribution of distributable income in accordance with the terms of the MHT trust constitution and the terms on which the units in MHT had been issued. The making of that distribution resulted in MFGT being able to make a distribution to its unitholders which resulted in a real benefit to those unitholders. It was not disputed that a tax benefit had been obtained by the appellant. If distributions had been made differently more Australian tax would have been payable. But the identification of a tax benefit does not answer the question posited by s 177D. Nothing in the surrounding context objectively supports a conclusion that any party to any of the schemes either entered into or carried out any of the schemes for a dominant purpose of enabling the appellant to obtain a tax benefit.”

The Commissioner’s case rested upon a comparison between the way in which the finance business was structured in 2007 prior to restructure and the way in which income flows occurred in the relevant years, which was after the restructure. It assumed, in effect, that there was no objective reason for the change in income flows other than a desire to secure a tax advantage. 

His Honours pointed out that a case of that kind failed to engage with the unchallenged finding (at first instance) that the restructure in 2007 was not a scheme to which Part IVA applied and the evidence as to the changed commercial circumstances, including the business need for further sources of capital. Those changes had consequences for the role of LF (the special unitholder), including as to its sources of income. The appellant was entitled to point to these matters as part of the context in which the objective reasons for the distributions of income from MHT were to be evaluated.

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AusNet Services Limited v Commissioner of Taxation [2024] FCA 90 – reorganising rollover applies

The Federal Court has found that Division 615 of the Income Tax Assessment Act 1997 (ITAA97) applied in relation to the restructure of three stapled groups. The restructure involved the unstapling of the three stapled groups (Distribution tax consolidated group, Transmission tax consolidated group and Finance tax consolidated group) and the three groups being owned through an interposed shelf company (the taxpayer). Division 615 of the ITAA97 provides for rollover relief for transactions under certain schemes pursuant to which a holder ceases to own shares in a company or units in a unit trust and in exchange, the holder becomes the owner of new shares in another company.

At issue was the construction of the rollover provisions in Div 615 of the ITAA 97. The taxpayer contended that Div 615 did not apply to the scheme of arrangement by which it came to be the holder of the shares in Distribution head entity, with the consequence that it could not have made a valid rollover election under that Division and therefore was entitled to an increase in the cost bases of the assets of the former Distribution tax consolidated group. The Commissioner contended that the taxpayer had made a valid rollover election for Div 615 to apply with the consequence that the taxpayer was not entitled to an increase in those cost bases.

By the time of the hearing, the parties agreed that there were two questions to be addressed:

(1) Was there a scheme for reorganising the affairs of Distribution for the purposes of s 615-5(1)(c)? I.e. the shareholders disposed of all their shares to Distribution in exchange for shares in the taxpayer and “nothing else”.
(2) Were the ratios in s 615-20(2) equal? 

The taxpayer submitted that the requirements of s 615-5 were not satisfied because Distribution shareholders did not receive only shares in the taxpayer but also something else in the form of a “boost” in the value of their existing shares in the taxpayer (acquired as a consequence of the Transmission and Finance schemes).

The taxpayer’s case rested on the proposition that Div 615 did not apply if there was any value that was brought in that was not attributable to the exchange. In this case, the taxpayer had tried to argue that value arose by reason of the sequential acquisition of Transmission tax consolidated group, Finance tax consolidated group and then Distribution tax consolidated group. 

The Court rejected the taxpayer’s argument. The Distribution scheme could not be examined in isolation given the Distribution scheme was undertaken as part of broader scheme involving the schemes relating to Transmission and Finance and that prior to the restructure, the entities had been stapled together, operated and owned as a single economic unit.

The taxpayer has filed a notice to appeal the decision of the Federal Court.

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2022/3436 - Bowerman and Commissioner of Taxation

This Decision impact statement outlines the ATO's response to Bowerman and Commissioner of Taxation [2023] AATA 3547 about the deductibility under section 8-1 of a loss incurred by an individual on the sale of her home which she acquired with the purpose of making a profit in a commercial manner. The Tribunal observed that both the facts and the result of this case were ‘unusual’. This decision does not represent a departure from established principles and cases of this type will always turn on their particular facts.

Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29 – transfer pricing  

The Full Federal Court has dismissed the taxpayer’s appeal, holding that the taxpayer claimed a transfer pricing benefit based on the interest terms on a 10-year loan note between the taxpayer and another related foreign company, both wholly-owned subsidiaries of Singapore Telecommunications Limited.  

At appeal, the taxpayer alleged the primary judge made 7 key errors in its reasoning. Addressing each of the errors, the judges found that a fundamental flaw in the taxpayer’s submissions was the way the comparison with the hypothetical was to be undertaken. The taxpayer submitted that the arm’s length initial interest rate of the 10-year loan note and the total amount of the interest payment made over the 10-year period was to be compared to an arm’s length interest rate and the total interest payments over a 10-year period between two independent parties. The taxpayer’s comparison failed to take into account the timing differences of the interest payments and did not make an income year by income year comparison for the relevant tax years.

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Electric vehicle tax case realigns Federal/State taxation powers

In a landmark decision, the High Court (4:3 majority) has handed down its judgment in Vanderstock v Victoria [2023] HCA 30. The case concerned whether the Zero and Low Emission Vehicle Distance-based Charge Act 2021 (Vic) ("ZLEV Act") was a duty of excise within the meaning of s 90 of the Constitution. The High Court held that it was a duty of excise and therefore invalid as it was unconstitutional, being within the Commonwealth’s exclusive taxing power.

According to the Court’s own summary:

"The Court reopened and overruled its decision in Dickenson's Arcade Pty Ltd v Tasmania (1974) 130 CLR 177, which held by majority that a tax on the consumption of goods does not constitute a duty of excise. The Court held that an excise within the meaning of s 90 is an inland tax on goods. The question of whether a tax is to be characterised as a tax on goods turns on whether, first, the tax bears a close relation to the production or manufacture, sale, distribution, or consumption of goods, and, second, whether the tax is of such a nature as to affect the goods as the subjects of manufacture or production or as articles of commerce. The ZLEV charge is a tax on goods because there is a close relation between the tax and the use of ZLEVs, and the tax affects ZLEVs as articles of commerce, including because of its tendency to affect demand for ZLEVs."

Edelman J (dissenting) expressed the major significance of the decision in this way at [700]:  “...the reasons of the majority today realign our federation by significantly expanding the range of prohibited State taxes. This occurs by a new "practical"1535 and "evaluat[ive]"1536 test of whether the tax is a "tax on goods" without significant regard to whether the tax has a real and substantial effect and without the two constraints that have existed since Federation, namely that an excise must be: (i) a tax with a reasonably anticipated economic effect on the supply-side, and (ii) a tax whose effect is direct. Matters that once were "obvious enough"1537 are now either rejected or in serious doubt1538.” To illustrate the uncertainty this creates, his Honour then lists a range of taxes with a connection to goods that may now be a duty of excise, even certain types of land tax, payroll tax and licence charges.

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Bendel and FCT [2023] AATA 3074 

This case considers whether an unpaid present entitlement to income (or capital) of a trust estate is a loan for the purpose of s 109D(3) of the 1936 Assessment Act.  Referring to case law and using statutory interpretation the Tribunal found that a loan within the meaning of s 109D(3) does not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) are created but not satisfied and remain unpaid. 

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Simplot Australia Pty Limited v FCT [2023] FCA 1115

A single Federal Court judge held that certain frozen food products such as fried rice with vegetables and omelet, pasta with vegetables and sauce and quinoa with brown rice were not GST free as they were marketed as a meal and the products had the attributes of a prepared meal in quantity, composition and presentation.   

The final paragraph of the judgement states that “The legislative scheme with its arbitrary exemptions is not productive of cohesive outcomes. It has left the Court in the unsatisfactory position of having to determine whether to assign novel food products to a category drafted on the premise of unarticulated preconceptions and notions of a “prepared meal”. It may be doubted whether this is a satisfactory basis on which taxation liabilities ought to be determined.” 

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Hedges v Commissioner of Taxation [2023] FCAFC 105

The Full Federal Court has dismissed the taxpayer’s appeal, holding that the taxpayer was entitled to receive the capital proceeds for the disposal of interest in the goodwill of a partnership pursuant to the Partnership Deed and thus was assessable on the discount capital gain without set-off for the taxpayer’s debt due on the capital account.

The Court found that the source of the taxpayer’s right to be paid an amount of retirement money was not the Deed of Partner’s Retirement dated 30 September 2008, but the Partnership Deed dated 25 September 2006. The purpose of clause 3.7 of the Deed of Partner’s Retirement was not to confer a right on the taxpayer to be paid or to impose an obligation on the remaining partners to pay the monetary entitlement but to vary the payment terms and manner of calculation of the quantum which originated from the Partnership Deed.

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Hannover Life Re of Australasia Ltd v Commissioner of Taxation [2023] FCA 680

The Federal Court held that:

  • acquisitions being commissions paid to licensed distributors of life insurance policies were not to any extent creditable acquisitions and therefore no input tax credits were available. The applicant’s appeal failed in this regard
  • the overhead acquisitions were creditable acquisitions to the extent that they relate to the applicant’s GST-free supplies, including to/from Hannover Rück, and that, subject to one adjustment, the applicant’s proposed methodology of apportionment was fair and reasonable in the circumstances of the applicant’s enterprise. The required adjustment was to account for the applicant’s input taxed investment supplies. The applicant’s appeal succeeded in this regard.

The applicant had submitted that the relationship between the distributors’ services and the GST-free supplies of reinsurance of the distributor’s policies with Hannover Rück (overseas reinsurer) was not too remote. In this regard, the Court accepted the propositions from Rio Tinto’s case:

1. The incidentality, or even necessity, of an acquisition to the making of a taxable (or GST-free) supply does not answer the statutory inquiry under s 11-15(2)(a) of the A New Tax System (Goods and Services Act 1999

2. Section 11-15(2)(a) excludes any entitlement to input tax credit on an acquisition to the extent that the acquisition relates to the making of an input taxed supply, and the real and substantial connection between the acquisition and the making of the input taxed supply is not reduced by a relationship between the acquisition and the making of a taxable or GST-free supply that is “by and through” the making of the input taxed supply.

The Court found the relationship of the distributors’ services to the GST-free acquisition supply of the Hannover Rück reinsurance was wholly by and through the otherwise input taxed supply of the domestic insurance policies. Therefore, notwithstanding that the distributors’ services were acquired in the carrying on of the applicant’s enterprise within the meaning of s 11-15(1), they were “blocked” from having a creditable purpose by s 11-15(2)(a).

Regarding the overhead expenses, Stewart J accepted they were not attributable to any particular supply made by the applicant. The acquisition of the overheads was therefore partly creditable, and the amount of the input tax credit on the acquisition must be calculated under the formula in s 11-30(3).

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BBlood Full Federal Court appeal – application of s100A 

In B&F Investments Pty Ltd as trustee for the Illuka Park Trust v Commissioner of Taxation [2023] FCAFC 89, the Full Federal Court dismissed the trustee’s appeal on s100A of the ITAA 1936 (reimbursement agreement provisions) but has allowed the beneficiary company’s appeal against the Commissioner. The Court affirmed the primary judge’s decision that s100A(8) (tax reduction purpose) applied to the arrangements. The issue on appeal concerning s100A was confined to s100A(8). 

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Bechtel Australia Pty Ltd v Commissioner of Taxation [2023] FCA 676 

Dismissing Bechtel's appeal, the Federal Court held that the travel expenses, had they been incurred by the employees, would not have been deductible. The expenses would, if incurred by the employees, be pre-requisites to the gaining or producing of assessable income, not incurred in the course of gaining or producing assessable income. Therefore, the taxable value of the travel expenses were not reduced to nil for Fringe Benefits Tax (FBT) purposes. 

The appeal concerned travel expenses incurred by Bechtel in respect of air travel for field non-manual employees (FNM) FIFO employees, who worked on projects on Curtis Island, who could not be accommodated on the mainland Australia in or near Gladstone, Queensland. In respect of the FNM FIFO employees, Bechtel incurred travel expenses to take them: 

(a)    from the high-capacity airport nearest to such an employee’s point of origin location (referred to within Bechtel as the “point of origin airport”) to Gladstone airport to undertake work during the employee’s roster period; and 

(b)    from Gladstone airport back to the point of origin airport at the conclusion of each roster period. 

These travel expenses were included in deemed assessments of Bechtel to FBT under the Fringe Benefits Tax Assessment Act 1986 (FBTAA) for each of the FBT years ended 31 March 2012 to 31 March 2019 (inclusive) as being the taxable value of the residual fringe benefits. Bechtel accepted that these travel expenses were, in terms of the FBTAA, residual fringe benefits but objected to the assessments on the basis that the taxable value thereof should be reduced to nil, because those expenses satisfied the “otherwise deductible” test under s 52(1) of the FBTAA. On this point, the Commissioner disallowed Bechtel’s objection. 

Logan J distinguished the current case from the circumstances in John Holland Group Pty Ltd v Commissioner of Taxation (2015) 232 FCR 59. When the employees in John Holland flew from Pert Airport to the airport closest to their remote work site in Western Australia, they had commenced their rostered hours of duty. Their travel was in the course of their employment unlike the current case where their roster period commenced on Curtis Island. 

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Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3

The Full Federal Court dismissed the Commissioner’s appeal in relation to s100A of the Income Tax Assessment Act 1936 (1936 Act) and partially allowed the appeal in relation to the application of Part IVA of the 1936 Act to distributions made by Guardian AIT Pty Ltd (Guardian) as trustee for the Australian Investment Trust (AIT) to AIT Corporate Service Pty Ltd (AITCS), a corporate beneficiary.

A detailed summary of the decision is available

Hedges v Commissioner of Taxation [2022] FCA 1389 

The Federal Court (Cheeseman J) has upheld the Tribunal’s decision that a capital gain arising from the disposal of goodwill by the partner in a law firm partnership, could not be offset by amounts owed to the partnership. Under the Partnership Deed, the taxpayer became entitled to a payment for the disposal of goodwill. However, the partnership was entitled to be paid, by way of set-off, any amounts that the taxpayer owed to it.  Whilst the amounts owed by the taxpayer exceeded the goodwill amount, it was held that the capital gain crystallised before the operation of the set-off in clause 26 of the Partnership Deed. 

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Appears in Tax News AU: Edition 44

Commissioner of Taxation v Carter [2022] HCA 10 – later beneficiaries’ disclaimers ineffective for tax purposes

The High Court has allowed the Commissioner’s appeal from the decision of the Full Federal Court in Carter v Commissioner of Taxation [2020] FCAFC 150. At issue was whether a beneficiary’s present entitlement under section 97(1) of the Income Tax Assessment Act 1936 – the present legal right to demand and receive payment of a share of the income of a trust estate – was to be determined immediately prior to the end of a year of income by reference to the legal relationships then in existence, or could events after the end of the year of income, which may affect or alter those legal relationships (e.g. a beneficiary’s disclaimer of entitlement), be considered.

The High Court held that section 97(1) is directed to the position existing immediately before the end of the income year for the purpose of identifying the beneficiaries who are to be assessed with the income of the trust. Therefore, the respondents’ subsequent beneficiary disclaimers to their present entitlements in a later year were not effective to retrospectively expunge the rights of the Commissioner against the respondents. The High Court has published a summary. 

Read Commissioner of Taxation v Carter 

Appears in Tax News AU: Edition 12

Komlotex – Legal Professional Privilege protected communications 

The NSW Supreme Court (Rees J) has held that various communications between AMP and its lawyers Clayton Utz (CU) in relation to ASIC's "fees for no services" investigation were protected by legal professional privilege (LPP). 

As part of a class action brought against AMP, the NSW Supreme Court was asked to determine claims for LPP in respect of 27 sample documents, which broadly fell into 4 categories: 

  1. CU's Advice
  2. Confidential communications between AMP and its in-house lawyers, or between the in-house and external lawyers, for the dominant purpose of the lawyers providing legal advice to AMP in a board paper when the CU Advice and the CU Report were presented to the board
  3. Confidential communications regarding work undertaken subsequent to the CU Report, and 
  4. Confidential communications in respect of Project White. 

The NSW Supreme Court held that the sample documents were privileged as they were brought into existence for the dominant purpose of providing legal advice to AMP or, in the case of the Project White documents, for providing legal services in relation to existing, pending or anticipated proceedings.  

The Court also held that, although AMP had waived privilege over the CU Report when it provided it to the Royal Commission, it had not waived privilege over the CU Advice and confidential communications relating to the CU Report.  

Read case: Komlotex Pty Ltd v AMP Ltd [2022] NSWSC 1525  

Commissioner of Taxation & Anor [2022] HCA 34 – wife not holding 50% of her property on trust for husband

The High Court has unanimously allowed an appeal from the Full Federal Court, holding the presumption of resulting trust will not arise where there is evidence from which it may be inferred that the parties' objective intention is inconsistent with the person providing the purchase money obtaining an interest in the property.

A presumption of resulting trust can arise:

  • when a person purchases property in the name of another or in their joint names, but the other person did not contribute any purchase money
  • when the purchase money is contributed by two people jointly, but the property is registered in the name of only one person.

The Commissioner was a creditor of Mr Bosanac and sought a declaration from the Court that Ms Bosanac held half of her interest in her residential property on trust for Mr Bosanac, relying upon the presumption of resulting trust. The Commissioner argued that the presumption of advancement of a wife by her husband, which operates to preclude a resulting trust from arising, is no longer part of the law of Australia in relation to the matrimonial home.

The "presumption" of advancement allows an inference to be drawn from the fact of certain relationships, such as husband and wife, that the presumption of resulting trust will not arise.

The proper inference to be drawn from the objective facts was that the parties objectively intended Ms Bosanac to be the sole beneficial owner of the property, and that Mr Bosanac was merely facilitating Ms Bosanac's acquisition of the property.

Read Bosanac v Commissioner of Taxation & Anor [2022] HCA 34 

BBlood Enterprises Pty Ltd v FCT – s100A reimbursement agreement

In BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112, the Federal Court concluded:

(1) The assessment issued to the trustee, which taxed the trustee on the basis of s100A of the Income Tax Assessment Act 1936 (ITAA 1936), was an original assessment. It was not excessive on the contended basis that it was an amended assessment issued outside of the limited amendment period.

(2) Section 100A applied to deem BBlood Enterprises Pty Ltd not to be presently entitled to the trust income. The agreement comprising of several steps, including a share buyback, was not an agreement entered into the course of ordinary family or commercial dealing. The Court found the agreement to be unusual and its complexity was not shown to be necessary to achieve a specific outcome sought to be achieved by a dealing aptly described as "an ordinary family or commercial dealing". 

(3) The trustee was taxable to the extent to which the Commissioner contended.

(4) If s100A of the ITAA 1936 did not apply, s207–150 of the Income Tax Assessment Act 1997 did apply, because the deemed dividend was part of a "dividend stripping operation" as defined by s 207–155.

Read BBlood Enterprises Pty Ltd v Commissioner of Taxation

Minerva Financial Group Pty Ltd v Commissioner of Taxation [2022] FCA 1092

The Federal Court has concluded that, in respect of three Part IVA schemes that were alleged by the Commissioner:

  • the applicant did not enter into or carry out the first scheme for the dominant purpose of enabling it to obtain a tax benefit in connection with that scheme within the meaning of s 177D of the Income Tax Assessment Act 1936 (“ITAA 1936”)
  • the applicant entered into or carried out the second and third schemes for the dominant purpose of enabling it to obtain a tax benefit in connection with those schemes within the meaning of s 177D of the ITAA 1936.

The three schemes in question were as follows:

(1) The first scheme comprised the establishment of corporate and trust “silos”, and the nomination of Minerva Holding Trust (MHT) as the residual income unitholder of the securitisation trusts established from 2009, and directing income from the securitisation trusts through MHT. The Court agreed with the applicant that there was a commercial explanation for the scheme - the applicant believed it was the optimal way to go to market under an IPO.

(2) The second scheme comprised the transfer of ownership of Minerva Financial Group Trust (MFGT) from the applicant to the ultimate parent company, Jupiter Holdings BV, in December 2007, and the failure of the applicant, as trustee of MHT, to distribute more than only nominal amounts of MHT’s distributable income to the corporate silo, instead distributing the majority of income to the trust silo. The Court found only the second part of the scheme as indicative of the dominant purpose of obtaining a tax benefit as it could not be explained commercially why the applicant chose to distribute only nominal amounts to the corporate silo.

(3) The third scheme was similar to the second scheme, except that it did not involve the transfer of ownership of MFGT from the applicant to Jupiter. Therefore, the same reasoning as the second scheme applied.

Read Minerva Financial Group Pty Ltd v Commissioner of Taxation

Appears in Tax News AU: Edition 35

Landcom v FCT State supply of land: each lot was a single supply under the contract

In Landcom v Commissioner of Taxation [2022] FCA 510, the Federal Court held that:

  • The Federal Court had jurisdiction to entertain an appeal by Landcom, a State-owned corporation despite the dispute between Landcom and the Commissioner as to the correct GST amount calculated for the sale of land (consisted of bundled Lots) under the margin scheme (Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)) was a purely notional amount (s114 of the Constitution prohibits the Commonwealth imposing “any tax on property of any kind belonging to a State).
  • The questions in the private ruling application should have been answered by the Commissioner as follows:
    • Question 3 – For the purposes of working out whether the circumstances specified in the second column of item 4 of the table in subsection 75–10(3) of the GST Act apply, will the sale of the freehold interests in the Lots comprising Property B2 pursuant to Contract B2 be a single supply No.
    • Question 4 – For the purposes of working out whether the circumstances specified in the second column of item 4 of the table in subsection 75–10(3) of the GST Act apply, will the sale of the freehold interest in each Lot comprising Property B2 pursuant to Contract B2 be a single supply Yes.

Read Landcom v FCT

Tax News AU: Edition 16

Court finds no reimbursement agreement under s100A

In Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619, the Federal Court held that:

  • section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) did not apply to deem the clean skin corporate beneficiary of Guardian AIT Pty Ltd ATF Australian Investment Trust (AIT) not to be presently entitled to the relevant trust income and therefore the trustee was not liable to income tax under section 99A(4A) of the ITAA 1936
  • Part IVA of the ITAA 1936 did not apply to the individual, Mr Springer, who controlled AIT and the clean skin corporate beneficiary.

There were two separate appeals heard together by the Federal Court with the case concerning the application of section 100A to AIT being the lead case. The arrangements that triggered the Commissioner’s amended assessments was the fact that the trustee of AIT made an unpaid present entitlement (UPE) to its newly established corporate beneficiary and the UPE amount was subsequently offset by AIT paying the tax owed by the corporate beneficiary on the UPE and a subsequent dividend declared by the corporate beneficiary to AIT (this happened over two income years).

In short, Logan J found that section 100A did not apply because there was no “reimbursement agreement”. His Honour found that the “understandings” that the Commissioner posited as the reimbursement agreements did not exist at all based on the contemporaneous evidence provided. Logan J was of the view that to accept a broad meaning of “agreement” in s100A(13), it must be possible to conclude that something answering the description of “reimbursement agreement” in s 100A(7) pre-existed the present entitlement. In addition, Logan J found that the “agreement” entered into was in the course of ordinary family or commercial dealing as no element of the understanding as made in the relevant income year in any way entailed the future payment of a dividend by the corporate beneficiary to AIT.

Read Guardian AIT Pty LTD ATF Australian Investment Trust v Commissioner of Taxation

Appears in Tax News AU: Edition 1