Tax & ATO News Australia

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Walsh and Commissioner of Taxation [2018] AATA 235

In the decision of Walsh v Commissioner of Taxation, the Administrative Appeals Tribunal examines an applicant for review by a taxpayer of a decision of the Commissioner not to revoke a Departure Prohibition Order issued. Deputy President Molloy ordered that the Departure Prohibition Order be revoked on the basis its continuation did not serve the intended purpose and intrusion imposed on the taxpayer outweighed the protection of revenue.

 

Following an audit of the taxpayer’s affairs conducted by the Australian Taxation Office, the Deputy Commissioner of Taxation (‘DCT’) issued amended assessments and notices of assessments of administrative penalties for the financial years ended 2003, 2004, 2005, 2007 and 2008, on the basis that:

 

  • a sham arrangement existed between an Australian resident company and a company registered in Vanuatu, and monies transferred were the taxpayer’s assessable income; and
  • amounts credited in the loan account of the Australian resident company were deemed dividends and thus assessable income.


On 30 November 2010, the taxpayer objected to the assessment and on 10 August 2012 the Commissioner affirmed its decision. Accordingly, the taxpayer sought review of the decision on 9 October 2012, which was subsequently withdrawn and dismissed.


On 20 August 2015, the Commissioner issued a Departure Prohibition Order (‘DPO’) on the basis the taxpayer had a tax liability of $1,692,445.73, and that he failed to make an arrangement to pay his tax liability and there was a risk to revenue.


Subsequently, the DCT initiated proceedings in the Queensland Supreme Court to recover the tax liability and obtained a default judgement against the taxpayer.


On 2 December 2015, the taxpayer applied for revocation of the DPO, but the information provided by the taxpayer was not to the satisfaction of the Commissioner of Taxation (‘Commissioner’) to allow the revocation.


On 4 January 2017, pursuant to debtor’s petition, trustees of the taxpayer’s bankrupt estate were appointed.
The taxpayer sought to have the Tribunal review the Commissioner’s decision not to revoke the DPO on the basis of three grounds.

 

The DPO was no longer lawful


It was contended by the taxpayer that pursuant to the Bankruptcy Act 1966 the taxpayer could not be subject to the DPO as a creditor cannot enforce any remedy against a bankrupt person in respect of a provable debt.


Conversely, the Commissioner contended the notion that no bankrupt who was at the time of the bankruptcy in debt to the Commissioner could ever be subject to a DPO had been rejected by the Federal Court in Edelsten v Federal Commissioner of Taxation.


Ultimately, the Tribunal was not satisfied that the DPO was rendered unlawful by virtue of the taxpayer’s bankruptcy.

 

Continuation of the DPO does not serve the purpose


The Tribunal observed that the central purpose of Part IVA of the Taxation Administration Act 1953 (‘TAA’) is the prevention of persons with tax liability leaving Australia, where in the Commissioner’s belief reasonably arrived at, the recovery would or might thereby be impaired.


It was observed that the DPO had been in place for two years, over that time no contributions to revenue were made and the taxpayer did not have assets to pay the tax debt. Additionally, even if the DPO was set aside, the trustees would still control possession of the taxpayer’s passport and his ability to depart Australia.


In all the circumstances, the Tribunal was not satisfied the departure of the taxpayer from Australia would make it less likely that his tax liability will be discharged in either whole or part, or that the Commissioner’s ability to recover the tax would be impaired. Accordingly, the Tribunal found that the purpose of the legislation would not be met by the continuation of the DPO.

 

Freedom of movement


The Tribunal referred to Poletti v Commissioner of Taxation, where the Full Federal Court commented that the ‘severe intrusion’ of a DPO upon an individual’s ‘liberty, privacy and freedom of movement’ must be balanced against the protection of the revenue.


As the taxpayer’s principal place of resident was in the United States of America with his wife and young daughter, the Tribunal accepted the DPO operated as a particularly severe intrusion on his freedom of movement.


The Commissioner in relying on Troughton v Deputy Commissioner of Taxation (‘Troughton’) submitted that the factors concerning the personal hardship on the taxpayer and his family do not justify the revocation, but a consideration relevant for a Departure Authorisation Certificate under s 14U TAA.


However, the Tribunal found the comments in Troughton were directed to the facts and circumstances of that case and not made with the intention of laying down any principle of general application.


The Tribunal noted that the discretion to under s 14T(2) TAA to revoke a DPO is wide in terms. Accordingly, the Tribunal found it unlikely that the legislative intention behind exercising that discretion would allow the decision maker to ignore the impact the continuation of the DPO would have on the taxpayer and his family.


On this basis, the Tribunal found that the taxpayer’s family circumstances would weigh heavily in favour and against the continuation of the DPO.

 

Co-authored with Ben Caratti
 

Posted in: Tax & ATO News Australia at 28 February 18

MedAid Pty Ltd and Commissioner of Taxation [2018] AATA 170

In the recent decision of MedAid and Commissioner of Taxation, the Administrative Appeals Tribunal examines a joinder application brought by an individual purporting to be a creditor and member of a taxpayer, being deregistered company.

MedAid Pty Ltd (‘MedAid’), the taxpayer, commenced two separate proceedings seeking review of objection decisions made by the Commissioner of Taxation (‘Commissioner’). MedAid was subsequently deregistered on 2 August 2015.
 

Accordingly, the Commissioner requested that the proceedings be dismissed, as the taxpayer ceased to exist. Deputy President McCabe was satisfied with the Commissioner’s request, but agreed to consider whether Mr Arnold, a purported representative of MedAid should be joined to the proceedings, on the basis his interests were affected by the decision under review within the meaning of s 30 the Administrative Appeals Tribunal Act 1975 (‘AAT Act’).
 

By operation of section 14ZZD of the Taxation Administration Act 1953, section 30(1A) AAT Act is modified to be read as:
 

If an application has been made by a person to the Tribunal for the review of a reviewable decision or an extension of time refusal decision:


(a) any other person whose interest are affected by the decision may apply, in writing, to the Tribunal to be made a party to the proceeding; and
(b) the Tribunal may, in its discretion, by order, if it is satisfied that the person making the application consents to the order, make that person a party to the proceeding.

 

The Commissioner contended that Mr Arnold’s application for joinder would fail because:


(1) his interests are not affected by the decision in the sense intended by the legislation;
(2) the applicant cannot obtain the consent from MedAid required by s30(1A)(b) AAT Act; and
(3) the Tribunal should not exercise the discretion in Mr Arnold’s favour.


Are the interest of a creditor and a member sufficient to be joined?
 

Mr Arnold sought to claim an economic interest, arising from his position as both a creditor and member of MedAid.
 

The Commissioner doubted whether the debts were real and submitted that the invoices provided by Mr Arnold were self-serving evidence that the Tribunal should disregard. McCabe DP found that even if the debts were accepted as real, the Tribunal was not satisfied the economic interest of a creditor was sufficiently distinguishable from the interests of other individuals for the purposes of section 30(1A)(a) AAT Act.
 

Further, McCabe DP found that the interest flowing from membership in a company in the present circumstances would rise to the level where an order could be made under section 30(1A).
 

Who consents to the joinder? Can a deregistered company consent?

McCabe DP found that reference to a ‘person’ in section 30(1A)(b) refers to the taxpayer and as the taxpayer no longer exists, as it is ‘legally dead’, it cannot give consent to the joinder.
 

Accordingly, the Tribunal dismissed the application made by Mr Arnold to be joined as a party to review proceedings.

Co-authored with Ben Caratti
 

Posted in: Tax & ATO News Australia at 27 February 18

WLQC and Commissioner of Taxation [2018] AATA 14

 In WLQC and Commissioner of Taxation Deputy President McCabe examines an application for review brought by a series of Applicants in relation to a number of assessments raised by the Commissioner for a nil amount follow the Commissioner’s refusal to recognise the Applicants as a consolidated group.
 

The Applicants sought to apply for review by the Administrative Appeals Tribunal (‘AAT’) of a series of objection decision made to uphold assessments of nil for the 2004, 2005 and subsequent financial years as the Commissioner refused to treat the Applicants as a consolidated group.
 

Deputy President McCabe examined whether the nil assessments issued in 2004, 2005 and subsequent years provided the Applicants with a right of review pursuant to Part IVC of the Taxation Administration Act 1953.

2004 nil assessments:

With respect to the nil assessments in the 2004 financial year, section 175A of the Income Tax Assessment Act 1936 (‘ITAA36’) at the relevant time provided that:


“A taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953”

 

Further, section 6 of the ITAA36 at the relevant time defined assessment as:


(a) the ascertainment of:
      i. the amount of taxable income

 

The Commissioner contended that the language of these provisions make it tolerably clear that references to specific amounts of taxable income and a determination of the amount the taxpayer was liable to pay were essential features of an assessment at that relevant time.
 

In support of this position the Commissioner relied upon Batagol v Commissioner of Taxation [1963] HCA 51, which concluded an assessment within the means of the ITAA36 must ascertain an actual amount of tax being due and payable.
 

Conversely, the Applicants relied upon the Full Federal Court’s finding in Commissioner of Taxation v Ryan (1998) 82 FCR 345 that a nil assessment can be made under the ITAA36. However, the decision was overturned by the High Court on appeal on another point.
 

Ultimately, Deputy President McCabe found he was inclined to accept he was bound by the authorities, thus accepted that the nil assessments issued for the 2004 financial year were not valid, and that there is no right of review with respect to those decisions under Part IVC.

 

2005 and subsequent nil assessments:

 

Deputy President McCabe considered the assessments issued with respect to the 2005 and subsequent financial years separately, as the Tax Laws Amendment (Improvements to Self-Assessment) Act (No. 2) 2005 amended sections 6 and 175A of the ITAA36. Following the amendments sub-section 175A(2) was included, which reads:

 

(2) A taxpayer cannot object under sub-section 175A(1) against an assessment ascertaining that
     (a) the taxpayer has no taxable income; or
     (b) the taxpayer has an amount of taxable income and no tax is payable

Unless the taxpayer is seeking an increase in the taxpayer’s liability

 

The Applicants were unable to confirm whether any particular Applicant with a nil assessment was seeking an increase in liability as it would require further analysis of other companies in the corporate group.
 

On this basis, Deputy President McCabe found that section 175A(2) of the ITAA36 could not be satisfied by the Applicants’ merely foreshadowing the possibility of an increase.


Jurisdiction:


With respect to jurisdiction the Applicants argued that the Tribunal should not focus on whether the assessments were invalid, it should concern itself instead with whether the assessments were excessive.
 

In rejecting this argument the Deputy President McCabe found that:
 

“if there is no assessment – and I am constrained to accept there is no assessment in the 2004 year of income where the taxpayers have received a nil assessment – or if the legislation specifically limits the right of review as it has done in s175A(2), the Tribunal has no jurisdiction to review what has been decided”.

 

Co-authored with Ben Caratti
 

Posted in: Tax & ATO News Australia at 29 January 18

NZBG and Commissioner of Taxation (Taxation) [2017] AATA 2784

 The applicant, who currently lives in New Zealand, sought a review of the Commissioner’s refusal to a request for the release of a tax debt. The applicant tendered some written materials and made submissions by telephone at the hearing. The issues in review were whether the tax debt of $92,671.44 and general interest charge of $338,184.38 ought be released, in whole or in part, under s 340-10 of Schedule 1 to the Tax Administration Act 1953 (Cth).

 

The tribunal found that the applicant discharged his onus of proof. The tribunal was not satisfied that the applicant disclosed all of his assets and liabilities, asserting he had no assets other than monies in the bank, for which he failed to put current evidence. The tribunal was neither satisfied that the applicant had no other income besides his New Zealand pension. Statements by New Zealand residents that the applicant filed in relation to the Commissioner’s assertions of other possible assets and income sources were unable to be tested because those persons did not attend the hearing. For those reasons, the tribunal affirmed the Commissioner’s decision.
 

Posted in: Tax & ATO News Australia at 25 January 18

Tyl and Commissioner of Taxation (Taxation) [2017] AATA 2850

The Administrative Appeals Tribunal affirmed the Commissioner’s objection decision in relation to the taxpayer, Mr Damien Tyl. Mr Tyl was working as a truck driver in the 2012 and 2013 financial years when he claimed deduction for travel expenses, work-related expenses and car expenses. He was audited for those expenses resulting in the disallowance of the car expenses and reduction of all other deductions to nil. Mr Tyl objected to the results of the audit. In the objection decision, the Commissioner partly allowed deductions for all of the expenses. The administrative penalty was also reduced but not entirely remitted. Mr Tyl sought a review.
 

The Tribunal emphasised that the onus of proof in establishing his allowable deductions and that he has satisfied any substantiation requirements, as well as establishing that the administrative penalty should not have been made, was on Mr Tyl. Further, Mr Tyl is required to substantiate the whole claim if any expenditure exceeds the reasonable daily allowance allowed by the Commissioner which was $87 per day in the 2012 financial year and $89.60 per day in the 2013 financial year.
 

As noted by the Tribunal member throughout the review, Mr Tyl and his tax agent, Mr Fumberger, failed to provide good, if any, evidence in relation to several material assertions. They failed to present payslips, receipts, adequate bank statements or good evidence of travel allowance. A letter from Mr Tyl’s employer indicated that $50 per overnight trip was recorded on each weekly payslip. This evidence was inconsistent with Mr Tyl’s claim of actual travel expenditure and with his assertion as to the number of nights he spent away for both years, and showed that he exceeded the reasonable daily allowance in both years. He was thus required to substantiate the whole claim for each year with written evidence, which he failed to do.
 

The Tribunal thus affirmed the objection decision and found that the Commissioner was justified in issuing the administrative penalty because Mr Tyl and Mr Fumberger showed a lack of reasonable care.
 

Posted in: Tax & ATO News Australia at 24 January 18

VPRX and Commissioner of Taxation (Taxation) [2017] AATA 2156

The Applicant sold a website to a US buyer and received payment in instalments throughout the 2010 financial year, and further payments in the 2012 financial year. As the Applicant did not lodge a tax return for either year, the Commissioner issued default assessments with a 75% shortfall penalty based on amounts documented by AUSTRAC. The tax payable and penalties were reduced after the Applicant objected to the decision, and one payment was treated as capital.

The Applicant submitted that all of the documentation relating to the sale had been lost except for some emails. For the 2010 financial year payments, he contended that it was difficult to secure a fixed price during the GFC so the amounts received were ‘revenue payments’, consideration from the buyer based on their calculated profit, and were not income. He claims he was entitled to deductions for expenses in earning his ordinary income. With regard to the 2012 financial year payments, he contended that the penalty was unjust in circumstances where he was unable to locate the sale agreement. Indeed, the applicant was inefficient in producing evidence and failed to do so on several occasions.

The tribunal accepted the emails as evidence of a sale agreement but in the absence of its details, particularly the basis on which payments were calculated, treated the payments as income rather than capital. Regarding the penalty, the tribunal found that the Applicant’s inability to produce documents was no justification for concession and that, although he was not grossly careless, there was no justification for reducing the penalty in the circumstances. The tribunal reiterated that the onus is on the Applicant to establish that the assessments are excessive, and concluded that the Applicant was unable to discharge this burden. There were no submissions on the matter of capital gains tax.


 

Posted in: Tax & ATO News Australia at 28 November 17

Deputy Commissioner of Taxation v Ma [2017] FCA 1317

In the recent decision of Deputy Commissioner of Taxation v Ma, the Federal Court has examined an application by the Deputy Commissioner seeking interlocutory relief by way of freezing order against three respondents.

The relief sought by the Deputy Commissioner, is followed by separate proceedings by the Deputy Commissioner to recover accrued tax liabilities owed by the respondents to the New Zealand Commissioner for Inland Revenue as provided by Article 27 of the Australia New Zealand Double Taxation Agreement.

Pursuant to s 263-30 of the Taxation Administration Act 1953, upon registration of a foreign revenue claim, the amounts owed to a foreign revenue authority become pecuniary liability to the Commonwealth of Australia. In the present case, the tax debt were correctly registered and the required notice was given to the respondents.

Mortimer J in granting the interim relief sought by the Deputy Commissioner discussed the necessary elements for the Court to exercise its discretion. Each element and the relevant findings were as follows:

1. The Applicant must have a reasonably arguable case, both on the law and facts.

Mortimer J was satisfied that the evidence clearly showed that the Deputy Commissioner had a reasonably arguable case as the debt owed to the New Zealand Commissioner of Inland Revenue was duly registered. Thus, the Deputy Commissioner was entitled to the debt. 

2. A danger that a prospective judgement will be wholly or partially unsatisfied because the assets of the prospective judgement debtor will be removed from Australia or disposed, dealt with or diminished in value.

Each debt registered against the three respondents were of significant value. Although there was no evidence of a positive intention on the part of any of the respondents to frustrate the judgement of the Court, Mortimer J was satisfied that from the evidence an inference can be drawn that there is a real risk or danger that the respondent might attempt.

In drawing such an inference, Mortimer J examined several categories of evidence that demonstrated a real risk of deliberate dissipation existed, which are discussed below:

  • (a) On the evidence, the first respondent conducted serious transactions as an authorised person to an account owned by a Chinese national. On these facts, Mortimer J found “the first respondent appears to be concealing his financial activities behind the façade of another person through the use of this bank account.”
  • (b) After the first and second respondent were notified of their tax debt they proceeded to put their Australian properties, either owned personally or through a corporation (under their control) on the market for sale.
  • (c) Following the Deputy Commissioner notifying the first and second respondent of the foreign revenue claim and subsequent garnishee notices, they transferred substantial funds from Australia to China.
  • (d) Other dishonest behaviour exhibited by the first and third respondents as directors of companies that have claimed and been paid large amounts of Goods and Services Tax credits, which they were not entitled to.

Accordingly, on the basis of the evidence discussed Mortimer J recognised that their behaviour gave rise to an inference that there is a real and not fanciful risk that each of the respondents may seek to dissipate or dispose assets should the orders not be made.

3. The balance of convenience favours granting of the freezing order

Mortimer J was satisfied the balance of convenience favours making the freezing order, accounting for the undertakings proffered by the Deputy Commissioner.

In granting the freezing order sought by the Deputy Commissioner, Mortimer J found that providing an exception for the respondents to deal with or dispose of assets in the ordinary court of business was not appropriate in the present context. In light of the risks demonstrated on the evidence, the respondents may use the exception improperly and inappropriately. 

Posted in: Tax & ATO News Australia at 22 November 17

Ham and Tax Practitioners Board (Taxation) [2017] AATA 1642

An appeal has been lodged by the applicant tax agent against the decision of Ham and Tax Practitioners Board, whereby the AAT affirmed the decision of the Tax Practitioners Board (TPB) to reject Mr Ham’s application for renewal of registration, on the basis he is not a ‘fit and proper person’ within the meaning of the Tax Agent Services Act 2009 (TAS Act). 

The TPB’s refusal to renew Mr Ham’s registration arose following the decision of Themis Holdings Pty Ltd v Canehire Pty Ltd & Anor [2014] QSC and the subsequent appeal. In summary, Philippides J found Mr Ham, as the sole director of Canhire Pty Ltd, knowingly breached his fiduciary duties and acted dishonestly in paying away proceeds of a sale, which lawfully belonged to beneficiaries of a trust.

Accordingly, on the basis of Mr Ham’s conduct following the Supreme Court decision, the TPD rejected Mr Ham’s application to renewal on the grounds he was not a ‘fit and proper person’.

Subsequently, Mr Ham sought to have the TPD’s decision reviewed by the AAT.

In determining whether Mr Ham satisfied the definition of a ‘fit and proper person’ for the purposes of the TAS Act, the Tribunal held that it was entitled to rely on the findings of the Philippides J in the Supreme Court judgement as evidence for its own findings.

The Tribunal in concluding it was entitled to rely on the findings of the Supreme Court referred to s33(1)(c) of the Administrative Appeals Tribunal Act 1975 (AAT Act), which provides ‘the Tribunal may inform itself on any matter in such a manner as it thinks it appropriate’.

Accordingly, in conjunction with the Tribunal’s objectives in section 2A of the AAT Act, and present case it concluded that:

  • the most expeditors and efficient means by which the Tribunal can inform itself is by reference to the Supreme Court findings;
  • it would be too costly and time consuming to effectively conduct a re-hearing; and
  • the potential unfairness to Mr Ham was reduced as he was represented in both proceedings and had the opportunity to lead further evidence.


With regard to the question of whether Mr Ham is a fit and proper person, the Tribunal considered Mr Ham’s conduct ‘inconsistent, not only with the qualities of strong moral principle, uprightness and honestly, but also with the atmosphere of mutual trust, that underpins a tax agent’s relationship with his or her clients, the ATO and the Tax Practitioners Board’.

The Tribunal further recognised that Mr Ham failed to take steps to redress his actions, despite having ample opportunity to do so.

Mr Ham sought to argue that he is a ‘fit and proper person’ as he has expressed insight and contrition. However, the Tribunal was not persuaded for the following reasons:

  • Mr Ham’s contrition was late, his letter to the Tax Practitioners Board contained no expression of contrition or remorse;
  • It was inconsistent for Mr Ham to state he “unreservedly” accepts the Supreme Court’s decision, yet he continues to maintain his own version of event;
  • It was inconsistent for Mr Ham to realise the unethical nature of his conduct yet contest it at future disciplinary proceedings; and
  • Mr Ham’s proposed systems to prevent future misconduct demonstrated an oversimplified of the conduct found by the Supreme Court

At the hearing, Mr Ham indicated he would be prepared to abide by two conditions should his registration be renewed:

  • furnish a written report to the TPB at the end of each month for 12 months identifying any transactions he or his associated entities entered into; and
  • undertaking a Professional Development Business Ethics Training Course.

The Tribunal in response to the restrictions proposed by Mr Ham, found that ‘the imposition of conditions is not intended to be an alternative avenue for an applicant who fails to satisfy the standard of fitness and proprietary’.

Posted in: Tax & ATO News Australia at 16 November 17

Shord v Commissioner of Taxation

 The case is reasonably unremarkable for any legal or factual analysis, but it does provide a good insight into the attitude of the ATO towards acting as a uncompromising litigant, which makes the most of every possible procedural point, as opposed to a model litigant as they are required.

Justice Logan from Qld made some fantastic comments (with respect);

 

The standard of fair play expected of the Crown and its officers in litigation is a standard in keeping both with the avoidance of behaviours that, in an extreme form, led to the civil war and with the later constitutional settlement. Once this heritage is understood, the requirement for its observance is, or should be, as Griffith CJ stated, “elementary”.

 

I note that Robert Gottleibsen also discussed this case and raised these comments in yesterday’s Australian.

 

Shord v Commissioner of Taxation [2017] FCAFC 167


Between 2006 and 2011, Mr Shord worked on various overseas assignments as a supervisor for foreign companies in the oil and gas industry. He did not lodge tax returns for that period, believing he was a non-resident. The Commissioner believed otherwise and issued amended assessments including all Mr Shord’s foreign income. The Commissioner disallowed Mr Shord’s objection.

The Tribunal found in favour of the Commissioner. The Tribunal found Mr Shord was a resident and, in particular, that his income was not exempt pursuant to s 23AG of the ITAA36. This provision exempts income of residents engaged in foreign services for a continuous period of not less than 91 days.

At the onset of the hearing, counsel for the Commissioner withdrew a contention that Mr Shord’s circumstances failed to meet the legislation’s definition of ‘foreign services’. The Tribunal nonetheless found that Mr Shord did not meet this definition. Fletcher v FCT is authority that a taxpayer is denied procedural fairness when a Tribunal makes a decision on the basis not argued by any party.

Procedural fairness was not raised on appeal to the Federal Court. Instead, the first two questions of law related to the proper application of s 23AG. These hinged on the third question which was whether the Tribunal had jurisdiction to decide whether Mr Shord was engaged in ‘foreign services’. The fourth question was whether Mr Shord was entitled to offsets for foreign taxes paid. The primary judge found against Mr Shord on the third and fourth question and did not therefore consider the first two.

On appeal to the Full Federal Court, procedural fairness was finally raised by Mr Shord as the first ground in an amended notice of appeal. The Commissioner initially objected to the amendment but eventually conceded the ground to Mr Shord. The Full Court thus remitted the matter to the Federal Court to decide the two questions about s 23AG. Unlike the majority, Justice Logan reprimanded the Commissioner, as a representative of the Commonwealth, for its failure to act as a model litigant and raise the crucial issue earlier.

The second ground related to Mr Shord’s entitlement to tax offsets. The Full Court found that Mr Shord did not produce any evidence as to what, when and how much foreign tax he paid, and that neither the Tribunal nor the Commissioner had an obligation to help him adduce evidence to the contrary.
 

Posted in: Tax & ATO News Australia at 01 November 17

Moignard And Commissioner Of Taxation:

This is an interesting decision of the AAT in relation to trust distributions. Much of the analysis it unsurprising, but the trust disclaimer argument would have been of great interest had it had a better run.  With the greatest of respect to Mr Moignard this case also shows the difficultly of representing yourself in tax cases, even before the case gets to the more formal jurisdiction of the Federal Court (eg, on objections with the ATO, or at the AAT). Raising matters at the last minute never find favour with the courts and tribunals, and getting early advice about the potential arguments is critical.


Quick Summary:

  • Commissioner issued an amended assessment for $243,959.84 and imposing a penalty of $187,043.45 for 2007-8 FY.
  • Taxpayer sought to introduce a ‘capital argument’, which the tribunal disallowed.
  • Commissioner advanced alternative argument that the taxpayer was presently entitled to one third of the $480,476, which was the net profit from the sale of a property held by the trust. On the basis that the default provision of the RST Deed provided where there has been no exercise of trustee discretion to pay, apply or set aside the Deed had the effect of making the taxpayer and his two children entitled to the net profits in equal shares.
  • Bean DP found that the default clause of the trust deed operated, the amounts assessed by the Commissioner were excessive being “$51,671.10 versus $195,814.20”.
  • Bean DP found the written resolution and the “certificate” did not support a valid distribution to another trust as they were produced well after financial year in question.
  • Bean DP found the taxpayer’s true entitlement did not come to his knowledge before making the disclaimer, thus it was not effective.
  • Bean DP agreed with the Commissioners Moignard application of 50% penalties for the taxpayer’s recklessness as he had the capacity and resources which should have enabled him to arrive at a better and more accurate understanding of what his true taxation liability was. 


Article Summary:

This is an interesting decision of the Administrative Appeals Tribunal (‘AAT’) in relation to trust distributions. Much of the analysis is unsurprising, but the trust disclaimer argument would have been of great interest had it had a better run.
 

On 18 October the AAT released its decision in relation to the rehearing of Moignard and Commissioner of Taxation, following an appeal to the Federal Court.
 

Upon the rehearing of the matter, the Commissioner sought to advance his alternative argument that the trustee did not exercise their discretion to pay, apply or set aside the trust income. On this basis, the default provisions of the trust deed would apply to deem trust income be distributed equally between the taxpayer and his two children.
 

In light of the Commissioner’s abandonment of his primary argument, the taxpayer sought to include a new argument, which Bean DP dismissed given it was raised at a very late stage of the proceedings.
 

The taxpayer sought to argue that it had made a valid distribution during the 2007-8 financial years, which was supported by a written resolution and certificate made in April 2011. Bean DP agreeing with the Commissioner concluded that the resolution was not made until well after the end of the relevant accounting period, and therefore could not amount a determination to distribute.
 

Additionally, the taxpayer contended that the taxpayer disclaimed the purported distribution of funds” from the sale of the property. However, the Tribunal rejected this argument, finding that the disclaimer did not relate to the actual share of the taxpayer’s trust income and was clearly not made on the basis of an understanding of the operation of the deed or the share of the trust income to which he was entitled.
 

Bean DP found that in order for a disclaimer to be effective, the disclaimer would have to indicate or be made on the basis of an understanding of what the taxpayer’s entitle actually was.
 

One of the final issues the Tribunal addressed was the appropriate penalties. The Commissioner sought to apply a 50% administrative penalty for Mr Moignard’s recklessness in complying with tax laws. The Tribunal taking into account Mr Moignard’s extensive qualifications and commercial experiences found that he “had capacity and resources which should have enabled him to arrive at a better and more accurate understanding of what his true taxation liability was.” Accordingly, the Tribunal agreed with the Commissioners application of a 50% administrative penalty.

In conclusion, Moignard and Commissioner of Taxation shows the importance of understanding the terms of a trust deed and ensuring the appropriate documents for distributions are recorded in the same accounting period.



 

Posted in: Tax & ATO News Australia at 25 October 17

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Author: David Hughes

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