Tax & ATO News Australia

Exchange rate gains and losses

With the rise of (and falls in) digital currencies, such as Bitcoin, regulators, including the ATO, have announced they’ve turned on the spotlight.

 

Assuming the ATO treats Bitcoin, and other digital currencies, similarly as other foreign currency, the application of the Division 775 foreign exchange gains and losses rules in the Income Tax Assessment Act 1997 could mean substantial increases in income or available deductions resulting from the trade of highly volatile digital currencies.

 

In short, foreign exchange gains or losses resulting from change in value of a currency (“forex realisation gain” and “forex realisation loss”) are treated as assessable income or deductible.

 

A simple example of a forex realisation gain is where you dispose of a foreign currency for more than what you paid for it attributable to an increase in the value of the currency.

 

However, where the gain or loss resulting from the fluctuation in the currency value is not realised, there will be no forex realisation gain or forex realisation loss.

 

For example, on disposal of a foreign capital asset, on translation into Australian dollars, a capital gain or loss may arise. That capital gain or loss is worked out using the exchange rate at the time of acquisition for the purposes of calculating the cost base, and the exchange rate at the time of disposal for the purposes of calculating the capital proceeds. To work out the effect the exchange rate had on the capital gain or loss, use only the exchange rate at the time of disposal to work out the gain or loss.

 

The difference is the amount to be included as income or that is available as a deduction, unless it does not contribute to the realised gain or loss.

 

For example, if, on the disposal you make a capital gain attributable to the increase in value of the asset, but actually make a loss because the foreign currency has dropped in value, the ATO will not allow that net loss as a deduction.

 

There is also a rule that if 12 months have not passed since acquiring an asset and the disposal of it, including the due date for payment, a forex realisation gain or forex realisation loss will not be treated as assessable or deductible, but rather will be treated as a capital gain or loss. An election can be made out of this 12 month exception.

Posted in: Tax & ATO News Australia at 26 February 14

ATO communication improving? Fingers crossed.

I recently attended a meeting between a number of ATO officers and representatives from the legal profession around Australia.  The meeting was billed as a high level communication exercise, as the ATO is eager to improve relationships with lawyers generally.


Surprisingly, the meeting was very positive.  Representatives of the ATO, right up to the Assistant and Deputy Commissioner level appeared genuinely committed to a new process.  Hopefully this will translate into real changes on the ground.  From past experience, this has not happened.

 

One of the major focuses over the next twelve months for the ATO is debt disputes (that is, where debt matters end up in court for recovery action).  I raised as some length my experiences, some of which I have shared previously, of debt recovery matters where there is a real dispute that the tax debt is wrong and there are appeals on foot.  The ATO (at a high level) were adamant that the ATO did not take debt recovery action when there was a genuine appeal. 

 

I told them they were wrong and gave an example of a taxpayer who sold her house at the height of the GFC because of the pressure she was under from the ATO debt collection department.  She not only had lodged an appeal, but we eventually won with all assessments set aside.  This was cold comfort to her, as she had lost a fortune selling her house in a fire sale in a depressed market.

 

The ATO is keen to hear more examples of these sort of thing happening.  Hopefully they are genuine.  I hope to bombard them with examples.  I have several, but I am hoping that if anyone has a story of debt collection gone horrible wrong, that they could share it with me (anonymously) so that I can start to collate some feedback from the ATO.

 

You can reply below, or email my personal assistant confidentially at abermingham@smh.net.au

Posted in: Tax & ATO News Australia at 24 February 14

High Court Case helps determine questions of facts vs. questions of law in AAT hearings

The ATO has recently released a decision impact statement on a High Court tax case that SMH Tax Lawyers won last year, Commissioner of Taxation v Crown Insurance Limited.

 

The ATO concluded that this case has no precedential value and is confined to its facts (which begs the question as to why they wasted tax payers money and that of our client pursuing the matter through to the High Court and losing), but we respectfully disagree.
 
Quite aside from clarifying issues regarding the source of overseas income, this case was very important in helping to determine what matters are questions of facts (and therefore not able to be appealed to the Federal Court after an Administrative Appeals Tribunal decision) and what are questions of law (and therefore can be appealed).
 
This question is at the heart of very many appeals from the AAT.
 
It also emphasises how important it is to present the facts in a clear, concise and compelling matter in AAT hearings.  If you do not get the facts right in AAT hearings (which the vast majority of taxpayers do not), then your chances of losing are very high and your chances of successfully appealing are negligible.
 
At SMH Tax Lawyers one of our most critical specialist roles is helping our clients present the facts properly.  This is something we are uniquely placed to assist with as lawyers with specialist litigation and tax experience and the resources to work with our clients in forensically examining complicated facts which can cover many years, and often many countries.
 
With this assistance, our clients have achieved highly successful results in tax litigation matters against the ATO.
 

Posted in: Tax & ATO News Australia at 24 January 14

How the Qld Office of State Revenue's powers can affect business owners

Last week the Qld State Government announced a change at the top of the Office of State Revenue, which is responsible for collecting state taxes like stamp duty, land tax and payroll tax.  The new Commissioner, Ms Elizabeth Goli, was until recently a Senior Assistant Commissioner in the Australian Taxation Office’s indirect taxation section.

 

Perhaps what is most interesting is the wording of the State Government’s announcement, which appears to foreshadow an even more aggressive tax collection approach from the Office of State Revenue under the cover of paying down debt.
 
Given that the Qld Office of State Revenue has perhaps the most extensive collection powers of any authority in Australia (including the ATO), this should make Qld business owners very, very worried.  Many people are not aware that the Qld Office of State Revenue has these powers which include:
 
• The ability to issue assessments based on their belief of a particular state of affairs, and not on hard evidence – as with the ATO, the Office of State Revenue can accuse you of underpaying state taxes and you are guilty until you prove yourself innocent.
• The ability to use extensive collection powers, such as accessing your bank accounts and forcing your debtors to pay the government instead of you (garnishee powers).
• The ability to recover from a wide range of other companies which may be deemed to be grouped with your company under the extensive grouping powers in the payroll tax legislation.
• Requiring you to pay the alleged debt in full prior to commencing appeal proceedings in either the Qld Supreme Court or the Qld Civil and Administrative Tribunal (QCAT).
 
SMH Tax Lawyers has had extensive and recent experience against the Qld Office of State Revenue – particularly in the area of payroll tax and land tax disputes. The payroll tax laws are particularly complex and difficult for small and medium sized businesses to administer. If the new Commissioner heralds an increase in the activities of the Office of State Revenue, we anticipate that there will be a lot more litigation in the area of payroll tax.
 

Posted in: Tax & ATO News Australia at 14 January 14

ATO targets discretionary trust partnerships

On 22 November 2013 the ATO released Taxpayer Alert TA 2013/3 “Purported alienation of income through discretionary trust partners”. The ATO is targeting, in particular, accountancy, legal, and other professional practices that operate as partnerships of discretionary trusts. This ATO alert flags an attack by the ATO on basic business structures under the guise of tax avoidance.

 

The ATO are looking for income splitting schemes where income of individuals attributable to their professional services is alienated to a trust. Of course, there are a number of hurdles to jump before the law can effectively attribute income distributed by a partnered discretionary trust to just one individual.
 
Firstly, individuals in a professional practice do not generate personal services income, but rather the practice generates the income. Secondly, even where there are individuals generating personal services income, the partnership will be a personal services business where a number of individuals are generating personal services income from a number of unrelated clients. This effectively prevents the partnership’s income being attributed to individuals.
 
If all else fails, the ATO have raised the possibility of applying Part IVA. Presumably, the Part IVA argument would be that if not for the partnership being made up of discretionary trusts, then more income would be attributable to what would otherwise be individual partners who would individually be liable to pay more tax, and, as such, the structure is a tax avoidance scheme.
 
The example provided in the alert compares the tax paid by three individual partners who each derived $500,000 in income from the partnership to a scenario where three partnered discretionary trusts distribute to two beneficiaries amounts of $50,000, to four beneficiaries amounts of $80,000, to another $450,000, one trust receives $350,000 but has at least an equal amount in losses, and an unidentified amount is distributed to a non-lodging corporate beneficiary. The resulting tax collected in both scenarios is then compared showing that overall more tax can be collected where three individual partners pay tax on $500,000 compared to where seven beneficiaries pay tax on lesser amounts, one beneficiary doesn’t lodge, one trust has losses, and the net profit or loss of the other two trusts remains a mystery.
 
With reference to the ATO’s example, it is not, as suggested by the ATO, a given that less tax is collected in the latter scenario. And then to confidently say that the arrangement is a tax avoidance scheme would require showing that the arrangement makes no sense other than to split income through trusts that would otherwise clearly be attributable to an individual or individuals, thereby reducing individual tax, while the tax consequences to the trusts and other beneficiaries pale in significance.
 
In theory, the ATO could take the same approach to corporate structures under Part IVA.
 
The other issue for the ATO is the capital gains tax consequences of an individual partner assigning his or her interest to a trust. The ATO is concerned that little, if any, CGT will be collected if individual partners are eligible to claim CGT concessions on the assignment of their partnership interest.
 
The ATO advises that it will look at partnered discretionary trusts in the 2013/14 and later years.
 

Posted in: Tax & ATO News Australia at 26 November 13

Taxpayer to sue the ATO for damages

The ATO is under fire again for not adequately compensating taxpayers whose lives it has turned into turmoil by the overzealous pursuit of them by its officers.

 

Gary Kurzer is one such taxpayer who, after being subjected to a five year tax audit lost not only his wealth but his health and marriage too, is now suing the ATO for a substantial amount in damages.
 
My client, Ron Pattenden, another taxpayer who fought the ATO six times over 10 years and won each and every time, which ordeal at the hands of the ATO has seen his health deteriorate tremendously is also considering such action.
 
An interesting article about both these taxpayers and the call for taxpayers’ rights to be enshrined in law was recently written by Chris Seage for Crikey.
 

Posted in: Tax & ATO News Australia at 25 July 13

New ATO taskforce

In the wake of Crown Insurance Services recent win in the High Court, the ATO has announced a new taskforce to examine the activities of companies which have based themselves offshore.

 

This taskforce could also be investigating overseas companies such as Google and Apple although the ATO will not confirm that these companies are or will be under scrutiny.
 
To read more see Chris Seage’s Crikey article.
 

Posted in: Tax & ATO News Australia at 17 July 13

Bankruptcy notices can now be served via email

It is long established that bankruptcy notices can be served via post, however, the decision of The Council of New South Wales Bar Association v Archer has established that bankruptcy notices can now be served via email.

 

In this case, the Court considered the effectiveness of a bankruptcy notice served via email under regulation 16.01 of the Bankruptcy Regulations 1996 (Cth). Regulation 16.01(1)(e) permits a bankruptcy notice to be sent via “facsimile transmission or another mode of electronic transmission”.
 
Federal Magistrate Lloyd-Jones noted that few cases have considered service by “another method of electronic transmission”. Accordingly he had to determine the case by logical extension of the principles relating to other methods of service. He was satisfied that the bankruptcy notice was validly served by email pursuant to the regulation.
 
This decision highlights the prevalence of electronic communication in legal dealings, and the importance of remaining vigilant of all lines of communication with respect to the service of legal documents.
 

Posted in: Tax & ATO News Australia at 27 June 13

Crown Insurance Services Limited wins in High Court against ATO

A long running fight between one of my clients and the ATO has had its final battle in the High Court on 6 June 2013.

 

Crown Insurance Services Limited, an offshore insurance company, succeeded in the High Court on 6 June 2013 in an application brought by the ATO to appeal against a Full Federal Court decision regarding the source of Crown Insurance's income. The ATO had lost in the Full Federal Court following an appeal from its loss in the Administrative Appeals Tribunal. A significant amount of tax was at stake in a case which could have had major ramifications for overseas companies which have dealings with Australian companies.
 
The ATO's case was that because Crown Insurance dealt with related Australian companies, which made their income from Australia, Crown Insurance's income was indirectly derived from Australian sources.
 
In running their appeals, the ATO ignored several High Court and other authorities over many years.
 
The ATO also argued that there should be a change of law on the determination of appeals from lower courts and tribunals.  Appeals from the AAT must be on a question of law and the ATO argued for a significant extension in the jurisdiction of the Federal Court to hear appeals.  The ATO was attempting to overturn long standing decisions including Pozzolanic Enterprises Pty Ltd v Collector of Customs and Collector of Customs v Agfa Gevaert. The effect of such a change of law would be to complicate appeals from the AAT and potentially turn all such appeals into a virtual re-hearing of the original decision.  This would add greatly to the already considerable cost of litigation in Australia.
 
Our client is immensely relieved at the win, but frustrated that the ATO has taken such a long time and wasted so much money fighting appeals that seemed doomed to failure from the outset.
 

Posted in: Tax & ATO News Australia at 07 June 13

Get your affairs in order before you leave Australia

Are you thinking about leaving Australia to take up a new job? Do you realise that you might be taxed in Australia on the income which you earn overseas? Seeking professional advice from a tax lawyer is imperative as they can provide you with the advice which you need to get your affairs in order so that you do not get surprised by an alarming tax bill.

 

If you are an Australian resident, you are taxed on income that you earn overseas. For example, if you accept a job in Dubai, you will be taxed in Australia on the income which you earn there. On the other hand, if you are a non-resident, you are only taxed on income which is sourced in Australia.
 
The residency tests used by the ATO to determine your residency status for tax purposes are not the same as those used by other Australian agencies, such as the Department of Immigration.

The main test that the ATO uses is the “resides test”. Basically, the ATO will look at whether you reside in Australia according to the ordinary meaning of “reside”.

If you do not satisfy this test, then the ATO may also look at any of the following tests:

• Have you been in Australia for more than 183 days in any year? (183 day test);
• Is your domicile in Australia? If it is, have you established a permanent place of abode outside of Australia (Domicile test); and
• Are you a current Commonwealth government employee? (Superannuation test).

The most contentious of these tests is the domicile test. Two recent AAT decisions found in favour of the ATO because although the taxpayers did not reside in Australia, the taxpayers were considered Australian residents for tax purposes because they failed to establish permanent places of abode outside Australia. In both cases, the taxpayers accepted employment overseas - one as a marine engineer in Dubai, the other as an operations technician in southern Oman. As the taxpayers were required to travel as part of their employment, both taxpayers lived in shared accommodation, but only spent a limited amount of time there. On this basis, the AAT held that the taxpayers had failed to establish permanent places of abode outside Australia.  In one case, the AAT described the taxpayer as a “citizen of the world”.

These cases clearly demonstrate that you need to carefully organise your affairs before you leave Australia.
 

Posted in: Tax & ATO News Australia at 05 June 13

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Tax & ATO News Australia

Author: David Hughes

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