Tax & ATO News Australia

ATO affirms Bornstein decision

In an earlier blog I discussed the ATO’s reluctance to exercise its discretion to disregard excess superannuation contributions. You may recall that the Administrative Appeals Tribunal has found in favour of the ATO in all cases except two: Bornstein and Longcake. The ATO has now released a Decision Impact Statement in support of the AAT’s decision in Bornstein.

 

Bornstein concerned a taxpayer who was a sole director, shareholder and employee of a small company. At the end of each financial year Mr Bornstein, as ‘employer’, would make a superannuation contribution into his own superannuation fund. While overseas between 21 June and 8 July 2007, Mr Bornstein emailed his accountant to ask whether a superannuation contribution needed to be made prior to 30 June. Mr Bornstein received no response from his accountant, and decided to check the ATO website to see when the contribution could be made.
 
Mr Bornstein found on the website that an employer has up until 28 July to make a compulsory contribution for the previous quarter in accordance with the Superannuation Guarantee Administration Act 1992 (Cth). However, the site did not identify the consequences of such late payment on the employee under the excess contributions regime. Mr Bornstein was not aware of this parallel regime.
 
In reliance on the belief that a payment on 10 July 2007 would relate to the 2007 income year, Mr Bornstein proceeded to make a contribution. In June 2008 Mr Bornstein made a further contribution to his superannuation fund after confirming with his accountant that this was correct.  The ATO later assessed him for excess contributions tax because of the June 2008 payment.
 
Based on the circumstances, Mr Bornstein applied to the Commissioner to exercise his discretion to disregard the resulting excess contributions. However, the Commissioner did not exercise his discretion to do so.
 
On appeal of the decision, the Tribunal held that the Commissioner’s decision should be set aside and that discretion should be exercised in favour of Mr Bornstein. Senior Member McCabe held that special circumstances existed because there was a “‘perfect storm’ of events, miscommunications and misunderstandings”.
 
The Decision Impact Statement released by the ATO affirms this decision, and states that the decision is consistent with its stated view in PS LA 2008/1. In particular, paragraph 37 of PS LA 2008/1 provides that “each individual case will present a unique set of circumstances that need to be considered and weighed up in forming an opinion. It may not be helpful to focus too closely on each particular circumstance and ask whether it is special. Of itself, one particular matter is unlikely to be special for there would be many other individuals in a similar situation. The question is whether, when the relevant circumstances of the individual and the making of the relevant contribution are looked at in their entirety, they may be fairly described as unusual, uncommon or exceptional so as to warrant the exercise of the discretion”
 
It is not surprising that the ATO has affirmed this decision, as the decision establishes a very high threshold for exercising the discretion. 
 

Posted in: Tax & ATO News Australia at 20 March 13

New Commissioner of Taxation flags changes to the appeal process

Chris Jordan has only been in the top job at the ATO since 1 January 2013 and he has already identified that the current tax appeal process is not independent and needs to be fixed.
 
Tax appeals are currently heard in first instance by ATO officers and this process must be exhausted before an independent body (such as the Administrative Appeals Tribunal or the Federal Court) can hear a tax appeal.  This can take months (even years) and cost the taxpayer enormous amounts of money. There has been significant criticism of this process as it is not independent. There are examples of ATO officers who hear the tax appeal simply rubber stamping the work of the auditor. Worse, there have been allegations that the ATO has benchmarks for this process that require ATO officers to knock back 80% of appeals, rather than judge them on their merits.
 
The current system is clearly broken and needs to be fixed. The new Commissioner has taken a step in the right direction by moving towards an independent division, although it appears that this division will still be within the ATO.  It will be interesting to see whether this new appeals division really will be independent.
 
Small business taxpayers, many of whom I have acted for against the ATO, will rightly point out that this is all very interesting from an administrative law perspective, but how will things change for those taxpayers who have been subjected to the delays, cost and institutional biases of the current system?  Now that the new Commissioner has acknowledged that the current tax appeal process is broken, will there be meaningful compensation paid to those taxpayers whose lives have been financially devastated by it?
 
I am calling on the new Commissioner to relook at all such taxpayers and make it a key priority of his tenure. The only way that confidence in Australia’s tax system can be restored is by ensuring accountability for ATO officers and that means that the ATO must pay adequate compensation to those taxpayers who have unfairly suffered at the hands of the ATO.
 

Posted in: Tax & ATO News Australia at 13 March 13

ATO has a broad power to access documents and obtain information

The ATO has a broad power under s264 (1)(a) of the Income Tax Assessment Act 1936(Cth) to request any person to furnish the ATO with information that the ATO may require.

 

In December 2010, the ATO issued ANZ Bank with two s264 notices requesting that ANZ provide details of more than 1,300 Vanuatu accounts held by Australia from its digital database called “Global Digital Warehouse”.
 
On 9 March 2012, the Federal Court of Australia handed down a decision in favour of the ATO that the two notices were valid. The Federal Court rejected ANZ’s submission that production of the information to the ATO would be oppressive, breach confidentiality and violate secrecy provisions enacted in Vanuatu.
 
ANZ then instituted an appeal in the Full Federal Court of Australia. On 12 September 2012, the Full Federal Court of Australia dismissed ANZ’s appeal and held that s264 authorises the ATO to issue a notice to ANZ requiring it to furnish information that is stored in Australia. The Full Court agreed with the Federal Court that the production of the information would not be oppressive, would not breach confidentiality nor breach the non-statutory obligations of confidence under the law of Vanatu.
 
While the appeal was dismissed, ANZ had a small victory in that the Full Court held that one of the notices was invalid due to uncertainty. However, due to the broad powers given to the ATO under s264, it is anticipated that the ATO will simply reissue the notice to obtain the information anyway.
 
This case demonstrates that s264 confers very broad investigative powers on the ATO. As such, this could implicate many other Australian businesses.
 
A notice under s264 should not be treated lightly. If you receive a notice, you are legally obliged to respond to the notice otherwise you may face serious consequences.  I would recommend anyone who receives such a notice to seek professional taxation advice immediately.
 

Posted in: Tax & ATO News Australia at 04 March 13

SPAA SMSF National Conference 2013

Day one of the conference is now done and I am well and truly into the swing of day two.  You can see the some of the highlights of day one here including  a round up of the speakers for the day.

Posted in: Tax & ATO News Australia at 14 February 13

ATO's tough stance on excess contributions

Closely monitoring your superannuation contributions is critical because the ATO makes no exceptions if you exceed the superannuation contributions caps. A contributions cap sets a limit on the amount of contributions you can make in any financial year. In the 2012-2013 financial year, the limit is $25,000 for concessional (before tax) contributions and $150,000 for non-concessional (after tax) contributions. If you exceed these caps, your excess contributions are likely to be subject to the penalty tax.

 

The ATO has the discretion to disregard excess contributions if special circumstances exist, yet this discretion is not exercised lightly. A number of taxpayers have therefore challenged the ATO’s decision in the Administrative Appeals Tribunal (AAT). Unfortunately, the Tribunal has often sided with the ATO and these taxpayers have been forced to pay the penalty tax. In fact the Tribunal has only found in favour of the taxpayer in two cases. In both cases, the Tribunal held that special circumstances existed because there was a “perfect storm” of events, miscommunications and misunderstandings. With the spike in excess contributions tax (ECT) assessments again expected for the 2012-13 financial year, monitoring your superannuation contributions is critical.
 

Posted in: Tax & ATO News Australia at 21 January 13

ATO calls for more power!

The ATO has extensive investigative powers including, entering premises, demanding the provision of information in writing or by interview, demanding the provision of documents and issuing an offshore information exchange demand for documents, yet the ATO still wants more power. The ATO has called for the wire tapping laws to be changed so that it can access real time communications such as live phone calls. Under current law, only criminal law-enforcement agencies like the State Police and the Australian Federal Police can access prospective or real time data.  The ATO can only apply for warrants to gain access to “stored communications” such as emails, voice mails and SMS messages.

 

In its submission to the Parliamentary Joint Committee on Intelligence, the ATO stated that, "allowing the ATO's criminal investigators access to real-time telecommunications data will enable the ATO to become far more responsive to attempts to defraud the commonwealth through credit and refund fraud”.  In addition to this, the ATO submitted that communication data should be stored for up to two years which is consistent with the European Union Data Retention Directive.
 
It will be interesting to see how this one plays out, particularly because it raises issues about privacy.
 

Posted in: Tax & ATO News Australia at 17 December 12

New transfer pricing rules broaden the ATO’S power

Transfer pricing rules address arrangements under which profits are shifted out of Australia. On 8 September 2012, the first tranche of the new transfer pricing rules received Royal Assent. The new transfer pricing rules (Division 815) replace the former transfer pricing rules found in Division 13 of the ITAA 36.

 

There was a lot of uncertainty surrounding the interpretation of the former transfer pricing rules. By enacting the amendments, the Australian government has agreed with the ATO’S interpretation of the operation of Australia's transfer pricing rules, rather than the interpretation of the Full Federal Court in Federal Commissioner of Taxation v SNF. In SNF, the Court held that the correct way under Division 13 to consider a transfer pricing adjustment on a transaction between two related entities was to examine the arm’s length price for the actual transaction based on the available evidence. The ATO disputed the availability of the comparable transaction method relied on by SNF. Instead the ATO priced the transaction by applying the transactional net margin method discussed in the OECD guidelines. The Court also held that the OECD guidelines could not be used as an aid in interpreting and applying Division 13.
 
The new transfer pricing rules applies to dealings which are subject to an Associated Enterprises or Business Profits Article of a relevant Double Tax Agreement. That is, the new transfer pricing rules only applies where there is a relevant tax treaty. The new transfer pricing rules allows the ATO to make a determination to increase the taxable income or reduce the capital losses of an Australian taxpayer or a non-resident with a permanent establishment in Australia where the taxpayer receives a transfer pricing benefit.  A “transfer pricing benefit” will arise where the taxpayer’s actual profits are less than that which would have been accrued if the parties had been dealing on an arm’s length basis. The new rules are required to be interpreted to best achieve consistency with the OECD guidelines.
 
There are many concerns surrounding the new transfer pricing rules. One of the biggest being that the new transfer pricing rules broadens the ATO’s power to make a transfer pricing adjustment and further creates a power for the ATO to choose alternative pricing mechanisms. This in turn creates uncertainty for the taxpayer. Another major concern is the retrospective application of the new transfer pricing rules as the rules are to be applied retrospectively from 1 July 2004.
 

Posted in: Tax & ATO News Australia at 10 December 12

Proposal to allow trans-Tasman superannuation transfers finally underway

More than three years ago the Australian and New Zealand Governments agreed to develop legislation to facilitate the trans-Tasman transfer of retirement savings for a person emigrating permanently from one country to the other country.

 

New Zealand quickly implemented the trans-Tasman agreement by enacting legislation. However, the implementation of the trans-Tasman agreement has been impeded by the slow progress of the Australian Government as Australia is yet to enact the legislation.
 
Despite this setback, Australia has finally made a step towards implementing the trans-Tasman agreement. Recently, Superannuation Minister, Bill Shorten, released the draft legislation to facilitate the trans-Tasman superannuation transfers between Australian APRA regulated superannuation funds and New Zealand KiwiSaver funds.
 
Mr Shorten said that, “The scheme is intended to enhance labour mobility between Australia and New Zealand”.
 
“The new scheme will help Australians and New Zealanders make the most of their retirement savings, as they will be able to take their retirement savings with them across the Tasman when they move,” he said.
 
The proposal is relatively restricted in its current draft form, yet the changes will give many Australians and New Zealanders the freedom to take their retirement savings with them.
 
The proposed legislation is expected to be introduced into Federal Parliament shortly and if all goes well, the Government hopes it will take effect from 1 July 2013.
 

Posted in: Tax & ATO News Australia at 28 November 12

ATO jumps queue

The Full Federal Court of Australia recently handed down a decision that condoned the ATO’s actions of jumping the queue in a property settlement to recover a tax debt of $75,508.64. Without having any specific rights to the property, the ATO was able to take priority over a second registered mortgagee.

 

The case concerned a taxpayer who entered into a $1.675 million contract for the sale of a property which had two registered mortgages over it: the first in favour of NAB and the second in favour of Instyle. While the sale price was insufficient to satisfy the taxpayer’s debts to the two mortgagees, the parties agreed that the transaction-specific costs and the NAB’s first mortgage would be paid, with the balance to be paid to Instyle even though this was insufficient to discharge the debt.
 
Before settlement occurred, the ATO issued a notice under s260-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) – a notice compelling a third party to pay an amount owing to a taxpayer directly to the ATO - to the purchaser demanding payment of $75,508.64 to the ATO immediately upon the purchase amount becoming payable to the taxpayer.
 
The notice initially frustrated settlement because it meant that Instyle would not receive the full balance of the proceeds as originally agreed. After extensive discussions, the Commissioner agreed to allow the full balance of the sale proceeds to be paid to Instyle on the condition that the $75,508.64 in dispute be paid into a trust account pending resolution of the matter. As a result Instyle provided a release of the second mortgage over the property at the time of settlement.
 
In a 2:1 decision, the Court held that the sale proceeds were payable to the taxpayer, and therefore payable to the Commissioner as soon as the taxpayer offered unencumbered title to the purchaser, and that Instyle had therefore compromised its position when it released its mortgage over the property. On this basis, the Court ordered that the $75,508.64 be paid to the ATO.
 
While it appears that Instyle took all reasonable precautions to secure receipt of the proceeds of sale, they proved insufficient. This case emphasises the need for mortgagees to carefully consider their rights prior to providing any release of a mortgage where an applicable s260-5 notice has been issued. It will also be interesting to observe how this judgement impacts other security holders in light of the recently introduced PPSR.
 
You can read the full decision here.
 

Posted in: Tax & ATO News Australia at 21 November 12

A great result for Crown Insurance Services Limited

On Friday 2 November 2012, the Full Federal Court delivered a judgment in favour of our client, Crown Insurance Services Limited and found for our client in a 2:1 decision.

 

In a rather technical decision, the Full Federal Court found that the ATO’s appeal was incompetent – that is, that the ATO should not have attempted to appeal the factual findings of the Administrative Appeals Tribunal which found, as a matter of fact, that the source of our client’s income was not in Australia.
 
Lander and Foster JJ dismissed the Commissioner's appeal, deciding the appeal was incompetent as the Commissioner did not raise a question of law for s44(1) purposes.  Their Honours analysed the authorities on this issue in great detail but did not address the substantive question once they concluded the appeal should be dismissed for want of jurisdiction.
 
Jessup J decided there was a question of law, as the facts found by the Tribunal must necessarily lead to the conclusion that Crown Insurance indirectly derived its income from Australian sources.  His Honour placed great weight on the adverb "indirectly" to distinguish this case from the authorities
 
This is a great result for this client who has been fighting with the ATO for over ten years.
 

Posted in: Tax & ATO News Australia at 05 November 12

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Tax & ATO News Australia

Author: David Hughes

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