Indirect Tax Bulletin - May 2017

What you need to know

2017/18 Federal Budget

The 2017/18 Federal Budget, announced on 9 May 2017, contained proposals for a number of significant tax reforms.  We await release of legislation, which will hopefully clarify questions about the details of how the measures will apply.

Purchasers of new residential properties to remit GST

From 1 July 2018, purchasers of new residential premises and subdivided land will be required to remit GST on the acquisition directly to the ATO.  The announcement does not provide details of how the measure is intended to operate from both a technical and practical perspective, but it appears that purchasers will be required to deduct GST for remittance to the ATO as part of the settlement process, similar to the procedures under the foreign resident CGT withholding regime.

Labelled as part of the Government's "tax integrity package", this measure has been introduced to ensure that a vendor's GST liability on sales of newly constructed residences and subdivided land is promptly remitted to the ATO.  However, we anticipate that there will be a number of crucial issues that the Government will be required to address as part of the implementation process.  For example, there will need to be clarity around:

• the type of transactions to which the measure will apply;
• whether the amount withheld will be at the normal GST rate of 10%, or the actual GST liability of the vendor (which can differ from 10% because of the application of the margin scheme);
• whether the GST liability transfers to the purchaser (which, in turn, may affect the stamp duty payable on acquisition); and
• if the GST liability is not 10%, who is responsible for making sure the GST is calculated correctly (which, due to the application of the margin scheme, settlement adjustments etc, can be a complex exercise).

Double taxation of digital currency removed

As recommended by the Senate Economics References Committee in 2015, the GST treatment of digital currency will be changed to align with money from 1 July 2017.  Digital currency is currently treated as intangible property for GST purposes which results in double taxation - where GST is paid once on the purchase of digital currency and again on the use of digital currency in purchasing goods and services which are subject to GST.  
By treating digital currency as money, the purchase of digital currency will no longer be subject to GST.  This is expected to encourage the development of digital currency in the Fintech sector

Charge on foreign owners of underutilised residential property

The Budget includes a proposal to introduce a charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months per year.  The charge will be levied annually and will be equivalent to the foreign investment application fee imposed at the time of acquisition of the property.

The measure will apply to foreign persons who make a foreign investment application for residential property from 7:30PM (AEST) on 9 May 2017.

 

Victorian State Taxation Acts Amendment Bill 2017

The State Taxation Acts Amendment Bill 2017 (Vic) is currently before the Legislative Assembly and makes amendments to Victorian legislation to enact measures proposed in the 2017/18 state budget, including:

Transfer duty

• Introducing an exemption for transfer duty for first home buyers for purchases up to $600,000, and a concession for purchases between $600,000 and $750,000.
• Confining the off-the-plan concession from transfer duty to buyers that qualify for the first home buyer or Principal Place of Residence (PPR) concessions.
• Removing the concession for duty on the transfer of property between spouses from 1 July 2017 (with the existing exemptions for PPR and breakdown of relationship to remain).

Land tax

• Introducing a Vacant Residential Property Tax (VRPT) of 1% of the capital improved value of property which is left unoccupied for six months or more in a calendar year from 1 January 2018.
• Land valuations will be conducted annually by the Valuer-General and will no longer be the responsibility of councils.

Payroll tax

• The annual tax free threshold increases from $575,000 to $625,000 in 2017/18 and $650,000 in 2018/19.
• Businesses with annual payroll tax liabilities of $40,000 or less (increased from $10,000) can opt to make annual rather than monthly payroll tax payments from 1 July 2017.
• The payroll tax rate is reduced to 3.65% for businesses with payrolls that comprise at least 85% regional employees from 1 July 2017.

Insurance duty

• Duty on policies insuring agricultural products against damage from flood, fire and other accidental provisions will be abolished from 1 July 2017.

 

Northern Territory Revenue and Other Legislation Amendment Bill 2017

The Revenue and Other Legislation Amendment Bill 2017 (NT) is currently before the Legislative Assembly and makes a number of amendments to Northern Territory tax legislation to enact measures proposed in the 2017/18 state budget, including an increase in the top rate of duty to 5.95% where the value of property is greater than $5 million, with a new rate of 5.75% to apply to properties valued at between $3 million and $5 million.

 

Lotus Projects Pty Ltd v Commissioner of State Revenue [2017] VSC 63

Summary

The primary issue for determination in Lotus Projects Pty Ltd v Commissioner of State Revenue [2017] VSC 63 was the meaning of "land vested in a person or body" for the purposes of the land tax exemption under section 71(1) of the Land Tax Act 2005 (Vic) (Act).

In dismissing the appeal, the Court found in favour of the Commissioner on both arguments raised by Lotus Projects Pty Ltd (Lotus):

• the exemption must be determined by reference to all of the "land vested" in Lotus, not only to part of that land that is leased; and
• the exemption does not expressly or impliedly allow for application by reference to "the essential and overall use" of the land.

Background

Lotus, a developer, was assessed for land tax for the 2014 to 2016 land tax years, in respect of land comprising a residential development known as Silverwoods Estate, in Yarrawonga.  Part of the land was leased to a third party, Black Bull Golf Club Pty Ltd (Black Bull) for use as a golf course and club house.  In each of the relevant land tax years, the land was the subject of a single certificate of title.  It was not in dispute that the rent payable by Black Bull under the lease was donated by Lotus to the St Vincent de Paul Society, Victoria. 

In its objection to the land tax assessments issued by the Commissioner, Lotus contended that the Commissioner should have determined that the land was exempt from land tax under section 71(1) of the Act.  Section 71(1) provides an exemption from land tax where "land vested in a person or body" is leased for sporting, recreational, cultural or similar outdoor activities (and is available to the public for use for one or more of these activities), and the proceeds from the leasing are applied exclusively by the person or body for charitable purposes.

Lotus submitted that the phrase "land vested in a person or body" should be properly construed as if it were a reference to "land leased to a person or body", and "land" for the purposes of the Act is not confined to land contained in a certificate of title – it can mean any identifiable part of the land described, either by its physical use or otherwise identifiable through, for example, a lease.  

Alternatively, Lotus argued that if section 71(1) of the Act requires all of the land to be leased for the required purpose, then the whole of the Land was so leased, having regard to "the essential and overall use made of the land".

Decision

The Court rejected Lotus' arguments, and gave the following reasons:  

1. The construction advanced by Lotus essentially ignores or gives no operation to the word "vested", and fails to address the broader context of the Act in which Parliament has given an express indication whenever it intends to refer to a "part of land" for the purposes of the imposition and assessment of land tax.

   The text and grammatical structure of section 71(1) of the Act strongly supports the construction that the exemption is to be determined by reference to all of the land vested in Lotus, as opposed to part of that land that was leased to Black Bull.

2. Section 71(1) does not expressly or by implication leave any scope for applying the requirements of the exemption by reference to "the essential and overall use" of the land. In any case, residential development was the principal purpose for which the land as a whole was being used at the relevant dates, and the golf course was incidental to the residential development, rather than the other way around.

 

Riverside Parklands Pty Ltd v Commissioner of State Revenue [2017] QCAT 104

Summary

In Riverside Parklands Pty Ltd v Commissioner of State Revenue [2017] QCAT 104, the Queensland Civil and Administrative Tribunal upheld the Commissioner's decision to disallow the taxpayer's objection to a land tax reassessment for the 2015-16 financial year.  The dispute related to whether a valuation of land from 2013 was a "Land Valuation Act value" of the land where the 2013 valuation related to the same physical block of land but to a different instrument of legal title.

Background

The taxpayer owned land which was originally identified with the title details of Lots 6 & 7 on SP241607 (the Land).  On 15 October 2013, the Land was re-surveyed in order to facilitate dedication of a new road and the title was split into Lot 6 on SP193947 and Lot 7 on SP241607.  On 5 July 2015, both titles were cancelled and re-issued as part of a subdivision of the two lots.  The taxpayer was subsequently issued with a land tax assessment for the 2015/16 financial year.

The Land Tax Act 2010 (Qld) (the Act) imposes land tax on the taxable value of land, with liability arising at midnight on 30 June immediately preceding the financial year.  Section 16 of the Act provides that the taxable value of land is the lesser of the Land Valuation Act value of the land for the financial year, or the "averaged value" of the land.  Section 18 of the Act provides for the averaged value of land to be calculated either as the average of the Land Valuation Act values for the current and two previous financial years, or where there are no Land Valuation Act values for the two previous financial years, on the basis of the current valuation multiplied by an "averaging factor".

The Commissioner contended that the averaged value of the Land should be calculated on the basis of the current valuation multiplied by an averaging factor because there was no Land Valuation Act value of the land for the 2014/15 financial year.  There was a valuation for the 2015/16 year (valued as at 30 June 2015) and for the 2014/15 year (valued as at 30 June 2014) but no valuation for the 2013/14 year because the "land" for the purposes of section 18 of the Act did not come into existence until 15 October 2013.  The taxpayer sought to use a valuation of the Land for the 2013/14 year on the basis that it was a valuation of the same physical land, even if it related to a different legal instrument of title.

Decision

The Tribunal upheld the Commissioner's decision to make an assessment on the basis that there was no Land Valuation Act value of the Land for the 2013/14 financial year.  The Tribunal held that the definition of "land" is not to be construed by its physical characteristics, but by its legal characteristics and title description under the Torrens system.

 

Planet Red Pty Ltd v Commissioner of ACT Revenue (Administrative Review) [2017] ACAT 18

Summary

In Planet Red Pty Ltd v Commissioner of ACT Revenue (Administrative Review) [2017] ACAT 18, the ACT Civil & Administrative Tribunal considered the nature of the burden and onus of proof on a taxpayer seeking a redetermination of a land valuation.  After considering the interaction of the ordinary onus of proof requirements in the Tribunal and the special rules in the Taxation Administration Act 1999 (Cth) (TAA), the Tribunal concluded that an onus lay on the taxpayer to establish that the valuations were too high, even within the parameters within which the valuation process can differ.

Background

The taxpayer was the Crown lessee of three parcels of land in Canberra and was liable to pay rates under the Rates Act 2004 (ACT) calculated on the basis of the "unimproved value" (UV) of each parcel of land.  By valuation notices dated 17 July 2015, the Commissioner for ACT Revenue (the Commissioner) redetermined the UV of each parcel of land.  The taxpayer was issued with rates assessment notices stating the rates payable for each parcel of land for the year ended 30 June 2016 and sought a review of these assessment notices on the basis that the valuations overstated the UV of each parcel of land.  
In the ordinary course of administrative review in the Tribunal, an applicant is not subject to any burden or onus of proof – the Tribunal's obligation is to hear the matter 'afresh' and to decide what it considers to be the correct decision.  However, section 101(3) of the TAA provides that "the burden of showing that an objection should be sustained lies with the taxpayer making the objection".  The taxpayer accepted that this meant that it carried an onus of persuading the Tribunal that the redeterminations should be varied.  However, a question arose as to how this onus is discharged in the context of an inherently subjective valuation.

Decision 

First, the Tribunal considered the relevant authorities and held that section 101(3) of the TAA modifies the general position in Tribunal proceedings by placing an onus on a taxpayer objecting to a reviewable tax decision to sustain their objection.

Second, the Tribunal considered how this requirement applied to a land valuation, in which context there is no "correct" decision when determining the UV of land.

This required the Tribunal to determine "whether, on the evidence, the applicant has established within margins reasonably open to the Commissioner that the valuations are too high".

Third, once the Tribunal is satisfied that the taxpayer has discharged this onus, the Tribunal can proceed to substitute different valuations.  The taxpayer is not required to establish on the balance of probabilities that its valuation is correct, but rather once the taxpayer discharges the onus of establishing that the Commissioner's valuation ought to be corrected, the Tribunal can conclude on the evidence what it considers to be an appropriate valuation.  
Ultimately, the Tribunal concluded that the onus was discharged in respect of two blocks, and substituted appropriate valuations for those two blocks.  In respect of the third block, the difference between the Tribunal's estimated UV and the Commissioner's valuation  was relatively small (less than 3%).  Therefore, considering the inherent subjectivity of the valuation process, the Tribunal held that the taxpayer failed to establish that the Commissioner's valuation was too high.

 

Danvest Pty Ltd & Anor v Commissioner of State Revenue [2017] VSC 125

Summary

In Danvest Pty Ltd & Anor v Commissioner of State Revenue [2017] VSC 125, the Supreme Court ruled that the transfer of partnership interests was not subject to duty under the Duties Act 2000 (Vic) (the Act), even where the partnership property included dutiable property.  The Court considered the nature of a partner's interest, finding that a partner's interest in partnership property is a personal equitable chose in action rather than a proprietary interest in the partnership property, and that the transfer of such personal interests is not subject to duty under the Act. 

Background

Danvest Pty Ltd (Danvest), Northpeak Pty Ltd (Northpeak) and Lopet Pty Ltd (Lopet) were each parties in a partnership (the Partnership).  Gold Age Australia Pty Ltd (Gold Age Australia) held property on trust on behalf of the Partnership as "Manager" under the Partnership Deed and this property included an estate in fee simple, ie freehold land (the Property).

By way of a Partnership Sale Agreement, Northpeak and Lopet sold their interests to Danvest and Bullhusq Pty Ltd (Bullhusq) (together the Appellants).  The Property was not transferred and Gold Age Australia continued to hold it on trust for the Partnership.

The Appellants sought a private ruling from the Commissioner to the effect that the transactions under the Partnership Sale Agreement were not dutiable.  The Commissioner responded with a private ruling expressing the view that the transactions were subject to duty either:

1. under section 7(1)(a) of the Act as a transfer of dutiable property; or
2. under section 7(1)(b)(vi) of the Act as a transaction that results in a change in beneficial ownership of dutiable property.

"Dutiable property" is relevantly defined in the Act to include an estate in fee simple (section 10(1)(a)) and an estate or interest in any dutiable property referred to in paragraph (a) (section 10(1)(ac)).  Whether the transaction was dutiable hung upon the characterisation of the partnership interests.  The transaction would only be dutiable if either the partnership interests are themselves dutiable property (as interests in the Property), or if the transfer of partnership interests resulted in a change in beneficial ownership of the Property.

The Commissioner contended that a partner has a "presently existing equitable sui generis proprietary interest in each and all of the assets of the partnership".  At trial, the Commissioner accepted that if a partner does not have a proprietary interest in the assets of the partnership, the transaction would not be dutiable.  In response, the Appellants contended that a partnership interest is a species of personal property that confers no equitable proprietary interest in the partnership assets.  

Decision

After an extensive review of case law on the topic, Croft J held that a partner's interest is a chose in action entitling the partner to a proportion of the surplus after the realisation of assets and the payment of debts and liabilities.  As such, it is a species of personal property and confers no equitable interest in the partnership assets.  According to Croft J, judicial references to this interest as a "beneficial interest" are apt to mislead because the term can have many meanings but when construed in the context of section 7(1)(b)(vi) of the Act refers to a presently vested proprietary interest.

Turning to the issue at hand, Croft J held that the first task was to determine the nature of the partners' interests under the terms of the Partnership Deed.  Under the terms of the Partnership Deed, no partner had a present entitlement to any of the partnership property until such time as the Manager declared a distribution, the partner sold their interest, or the Partnership was dissolved.  The second task was to construe the statutory definition to ascertain whether the rights of the taxpayers fell within that definition.  As the partners did not have a presently vested proprietary interest in the Property, the transaction was not dutiable under either section 7(1)(a) or section 7(1)(b)(vi).

The decision highlights the difference between the position in Victoria and in other jurisdictions, such as New South Wales, which have specific provisions in their duties legislation to cover the transfer of partnership interests.

The Commissioner of State Revenue has appealed the decision.

 

Tay v Chief Commissioner of State Revenue [2017] NSWSC 338 / Tay v Chief Commissioner of State Revenue (No. 2) [2017] NSWSC 504

Summary

In Tay v Chief Commissioner of State Revenue (No. 2) [2017] NSWSC 338, the Supreme Court of NSW has held that a transfer of shares the subject of a will was exempt from ad valorem marketable securities duty under section 63 of the Duties Act 1997 (NSW) (Duties Act) but the exemption from landholder duty in section 163A of the Duties Act did not apply.  The transfer was exempt under section 63 as an appropriation of the assets of the estate but the acquisition was not exempt from landholder duty under section 163A because the agreement to the transfer of the shares entered into by the beneficiaries resulted in the acquisition not being solely as the result of the distribution of the estate.

In a related decision in Tay v Chief Commissioner of State Revenue (No. 2) [2017] NSWSC 504, the taxpayer subsequently argued that whereas the judgement charged landholder duty on the entirety of the acquisition, the portion of the acquisition that was not affected by the variation ought to be exempt.  The Court refused to entertain the application on the basis that it should have been advanced in the first hearing.

Background

The taxpayer, Mr Chwan Yi Tay (CY Tay) was a beneficiary under the will of his father, Mr Tee Peng Tay (TP Tay), who was domiciled in Singapore and died on 30 November 2013.  TP Tay's will provided for 90% of his assets to be sold and distributed among four of his children in specified proportions.  The estate was valued in excess of SGD1.7 billion and consisted of a variety of assets, including a 59.98% interest in Memocorp Australia Pty Ltd (Memocorp), an Australian company with substantial real estate holdings.

After obtaining legal advice, the executors of the will determined to value and distribute the assets of the estate instead of selling them and distributing the proceeds.  By way of a Deed of Family Agreement (DoFA), the beneficiaries agreed to accept valuations of the assets and to receive the assets in proportion to their entitlements under the will.  As a result, CY Tay acquired his father's 59.98% interest in Memocorp in partial satisfaction of his entitlement under the will. 

Significantly, the DoFA also provided that CY Tay would acquire all of the other existing shareholders' shares in Memocorp at their net tangible value.

The Commissioner assessed CY Tay as liable to pay:

1. marketable securities duty under section 33(1) of the Duties Act; and
2. landholder duty under Chapter 4 of the Duties Act.

However, CY Tay claimed exemption from marketable securities duty under section 63(1)(a)(ii) and (iii) and from landholder duty under section 163A(d) of the Duties Act.

Section 63 relevantly provides:

"(1) Duty of $50 is chargeable in respect of:

(a) a transfer of dutiable property by the legal personal representative of a deceased person to a beneficiary, being:

(ii) a transfer of property the subject of a trust for sale contained in the will of the deceased person, or

(iii) an appropriation of the property of the deceased person (as referred to in section 46 of the Trustee Act 1925) in or towards satisfaction of the beneficiary's entitlement under the trusts contained in the will of the deceased person or arising on intestacy"

CY Tay contended that while the appropriation was not made under section 46 of the Trustee Act 1925 (NSW) (Trustee Act) (because it was made under Singaporean law), it was made under the general law of Singapore, which in relation to the rules of equity applicable to such appropriations is the same as Australian law.  In the alternative, CY Tay contended that section 63(1)(a)(ii) applied to the transfer as a transfer of the shares being property the subject of a trust for sale in TP Tay's will. 

In response, the Chief Commissioner contended that the appropriation was not made under section 46 of the Trustee Act because it was made under Singaporean law, and that the transfer was not made in satisfaction of CY Tay's entitlement under a trust contained in the will because it was made under the DoFA rather than the will.  Similarly, the Memocorp shares could not be said to be property the subject of a trust for sale contained in TP Tay's will because the DoFA ended the sale process.

Section 163A(d) relevantly provides:

"An acquisition by a person of an interest in a landholder is an exempt acquisition:

(d) if the interest was acquired solely as the result of the distribution of the estate of a deceased person, whether effected in the ordinary course of execution of a will or codicil or administration of an intestate estate or as the result of the order of a court …"

The dispute in relation to section 163A(d) related to whether CY Tay acquired the shares "solely" as the result of the distribution of TP Tay's estate in the ordinary course of execution of the will.  The Chief Commissioner contended that the transfer was not authorised by the will and was made pursuant to the DoFA, not the will.  

Decision

1. Marketable securities duty

The Court held that, at least insofar as it affected CY Tay's interest, the DoFA did not operate to vary the trust under the will or to resettle the property subject to the trust under the will, but rather operated as a consent by the beneficiaries to the trustee appropriating specific assets towards CY Tay's entitlements under the will.  

Further, section 63(1)(a)(iii) was held to apply not only to appropriations specifically under section 46 of the Trustee Act, but also to an appropriation at general law or under a power expressly conferred by the trust instrument such as that referred to in section 46.  It being settled law that where a will contains a trust for sale, the trustee, with consent of the beneficiary, can appropriate a specific asset in whole or partial satisfaction of the beneficiary's entitlement, it follows that section 63(1)(a)(iii) applied to make the transfer subject to nominal duty of $50 rather than ad valorem marketable securities duty.  In the alternative, section 63(1(a)(ii) would have applied.

2. Landholder duty

For the purposes of section 163A(d) of the Duties Act, the appropriation could be characterised as a distribution to CY Tay.  However, in order to be eligible for exemption under section 163A(d), an interest must be acquired solely as the result of the distribution of the estate.  The use of "solely" means that it is not enough under section 163A(d) that the direct or immediate cause of the acquisition was the distribution of the estate.  

CY Tay's acquisition of the Memocorp shares was not solely as the result of the distribution of the estate of TP Tay because an additional operative cause of the acquisition was the DoFA.  The DoFA formed part of an entire transaction by reason of which CY Tay acquired the shares in Memocorp and the transfer was therefore not eligible for exemption under section 163A(d).

 

Frontlink Pty Ltd v Commissioner of State Revenue [2017] VSC 121

Summary

In Frontlink Pty Ltd v Commissioner of State Revenue [2017] VSC 121, the Supreme Court has considered the extent and nature of VCAT's jurisdiction under the Taxation Administration Act 1997 (Vic) (TAA) in circumstances where the taxpayer sought referral to VCAT to object to an assessment but subsequently decided to accept the assessment in the Tribunal hearing. 

The Court ruled in favour of the Commissioner, finding that the Tribunal had jurisdiction to vary the assessment and that the taxpayer had the onus of proving its case, even where that case was that the former assessment should be affirmed.

Background

In 2009 Frontlink Pty Ltd (Frontlink) alleged that the Land was exempt from land tax for the 2009 land tax year on the basis that it was primary production land under Division 2 of Part 4 of the Land Tax Act 2006 (Vic). On this basis, Frontlink requested the referral of a 2009 land tax assessment to the Tribunal (the 2009 Land Tax Matter).

On 5 February 2010, the Commissioner assessed the Land as 100% taxable for the 2010 land tax year.  Frontlink objected, claiming that the Land was eligible for the primary production exemption and on 18 May 2012, the Commissioner partially allowed the objection, granting a 73% exemption.  On 12 June 2012, Frontlink requested that the matter be referred to VCAT under section 106 of the TAA and on 3 March 2014, a reassessment was issued assessing the Land as 73% exempt.

However, on 30 September 2014, VCAT handed down its decision in relation to the 2009 Land Tax Matter, in which it found that the land was not being used for primary production and was not eligible for any exemption.  The Commissioner advised Frontlink of its revised position that no exemption applied for the 2010 land tax year.  Frontlink did not reply.  On 1 October 2015, the Commissioner referred the matter to VCAT.

At the Tribunal hearing, Frontlink led no evidence regarding the primary production use of the Land, seeking only to maintain the reassessment which provided a 73% exemption.  To this effect, Frontlink argued that the Tribunal had no power to vary the assessment in the absence of evidence that it was wrong, and that it would be unfair to allow the Commissioner to contend for a result inconsistent with its own assessment.  The Tribunal held that where the taxpayer has led no evidence of primary production use, it was appropriate to vary the assessment to disallow any exemption.  Further, the Tribunal held that there was no unfairness because Frontlink was on notice that the Commissioner would contend that the land was not used for primary production purposes, and Frontlink chose not to lead evidence of primary production use.

Frontlink appealed to the Supreme Court with four key arguments:

1. Section 106(1)(a) of the TAA provides that "if … a taxpayer is dissatisfied with the Commissioner's determination of the taxpayer's objection … the taxpayer, in writing, may request the Commissioner to refer the matter to the Tribunal."  Therefore, a precondition to the Tribunal's jurisdiction is that the taxpayer be "dissatisfied" with the Commissioner's determination.
2. Section 111(2) of the TAA provides that "[i]f the taxpayer does not appear before the Tribunal, the Tribunal must confirm the assessment or decision".   Because they did not object to the Commissioner's determination, Frontlink's counsel did not "appear" at the VCAT hearing, and therefore the Tribunal ought to have confirmed the assessment.
3. It was more efficient, cheaper and quicker for the Commissioner to reassess the Land, such that referring the matter to the Tribunal in order to vary the assessment was an inappropriate use of the Tribunal process.
4. Section 110 of the TAA provides that "[o]n a review or an appeal, the taxpayer has the onus of proving the taxpayer's case".  As Frontlink supported the Commissioner's determination, it had no "case" on review and should bear no onus of proof.

Decision

The Court dismissed the appeal on all four grounds of appeal, ruling that:

1. Dissatisfaction is a precondition only for the initial request for referral.  Section 106 was satisfied because when Frontlink submitted its written request for referral, it objected to the determination, even if it no longer objected at the time of the hearing.
2. Frontlink's counsel did "appear" before the Tribunal even if he did not contest the Commissioner's determination.  "Appear" in this context means to physically attend court and represent the client, which Frontlink's counsel did.  Further, Frontlink's counsel made detailed submissions as to why the Tribunal ought not vary the assessment.
3. Even if it would have been more efficient for the Commissioner to issue a reassessment of the land, and noting that any improved efficiency was mere speculation, this would not be an error of law.
4. Frontlink did have a "case", even if that case changed from objecting to the reassessment to supporting the reassessment.  In any event, section 111 of the TAA charges the Tribunal with reviewing "a matter referred to it" and permits the Tribunal to "confirm, reduce, increase or vary the assessment or decision", suggesting that it is not the objection decision that the Tribunal is concerned with, but rather the original assessment.  Accordingly, the Tribunal was correct in making the ruling that no exemption applied on the basis of an absence of evidence that the land was used primarily for primary production.

 

The Norwestern Trust v Commissioner of Taxation [2017] AATA 361

Summary

In The Norwestern Trust v Commissioner of Taxation [2017] AATA 361, the Administrative Appeals Tribunal (the Tribunal) found that the Norwestern Trust's (the Applicant) failure to lodge business activity statements (BAS) in respect of five tax periods, during which taxable supplies were made, warranted the Commissioner's finding of fraud and evasion.  The Tribunal also considered the Applicant's circumstances and declined to remit any of the 75%  administrative penalty imposed in addition to the Applicant's tax liability.  

Background

The Applicant was registered for GST in 2001 (as an aside, while a trust is an "entity" under the GST law, it is not an entity capable of bringing a proceeding, meaning the case name should probably refer to the trustees of the Applicant).  In 2002, the trustees of the Applicant purchased two parcels of land, on which the Applicant managed the construction of 10 townhouses.  Seven of those townhouses were sold across five different tax periods, occurring from late 2004 to 2008 (the Relevant Periods), for approximately $800,000 each. 

From its GST registration to the tax period ending March 2003, the Applicant lodged five BAS within the statutory deadlines, each recording nil taxable supplies.  The Applicant did not lodge another BAS until the tax period ending June 2009, despite the Commissioner sending 13 reminder lodgement reminder letters and three letters specifically in relation to BASs for the Relevant Periods, including a final notice. 

In 2010, the Commissioner lodged the BAS for the Relevant Periods by default and audited the Applicant.  As a result of the audit, the Commissioner:

• found that a number of townhouses were sold during the Relevant Periods;
• found that those sales were taxable supplies which the Applicant had failed to report;
• made a finding of fraud and evasion; and
• issued assessments to the Applicant for approximately $929,000, comprising the Applicant's tax-related liability for the Relevant Periods as well as an administrative penalty amounting to 75% of that liability, for failure to provide a document. 

The Applicant failed to produce any documentation to assist the Commissioner during the audit.  After the Commissioner denied the Applicant's objection, the Applicant sought review of that decision by the Tribunal.

Prior to the Tribunal hearing the Applicant produced information which caused the Commissioner to resile from his earlier position that the margin scheme did not apply to the sales.  The result of this was that the amounts sought from the Applicant were reduced to a total of approximately $651,000.  

Decision

The Tribunal firstly considered whether the finding of fraud and evasion was correct.  The Applicant bore the onus of disproving that finding, which it failed to discharge.  In ruling that the finding was correct, the Tribunal referred to case law which established that while mere withholding of information was insufficient to make out evasion, an intention to withhold information so as to reduce or conceal a tax liability will justify such a finding.  

In a letter to the ATO, the Applicant had admitted it used funds to pay bank loans instead of paying GST.  In the same letter, the Applicant asserted that it did not intentionally avoid its GST obligations and that it could not afford to have its BAS completed by an accountant.  The Tribunal pointed out that the Applicant's BAS lodgements prior to March 2003 indicated that Applicant was aware of the obligation to lodge BAS, and that the letter indicated the Applicant had made a decision to not discharge its GST obligations.  These circumstances established the requisite intention and dispelled any suggestion that the Applicant had instead failed to lodge its BAS for the Relevant Periods due to an oversight or the expense of an accountant.

The Tribunal then had to consider whether the administrative penalty was correctly imposed and, if so, whether it should be remitted to the Applicant.  Put broadly, section 284-75(3) of the Taxation Administration Act (the TAA) provides that a taxpayer is liable to an administrative penalty where it fails to provide a document necessary to determine a tax-related liability to the Commissioner on time, and the Commissioner determines the liability without the assistance of that document.  The Tribunal applied this language to the circumstances and found that the failure to lodge a BAS meant the penalty was correctly imposed. 

Under section 298-20(1) of the TAA the Commissioner may remit all or part of a penalty.  In the absence of legislative guidance, that discretion is to be exercised (here by the Tribunal) having regard to the circumstances of the taxpayer, meaning the Applicant bore the onus of showing factors which justify remission.  The Tribunal found that in the circumstances no remission was appropriate.  It referred to, among other things, the Applicant's failure to lead any sworn evidence on the sale of the townhouses or its failure to lodge BAS, dilatory behaviour at every stage of the process and implausible excuses for failing to lodge BAS.  The Tribunal also noted that in circumstances where the Applicant had deliberately prioritised its business imperatives over its tax obligations, particularly compelling circumstances would be required to justify remission.  The Applicant also failed to lead any evidence which demonstrated that declining to remit the penalty would cause it financial hardship. 

The Tribunal's decision in this case makes clear that failures to lodge BAS which would have recorded taxable supplies can provide a basis for fraud and evasion where the requisite intention can be established.  It also suggests that the imposition of administrative penalties under section 284-75(3) will proceed by a straightforward application of the language of that section and that the best way to "attack" a penalty is to lead sufficient evidence justifying remission.  It also indicates that it is more difficult to have a penalty remitted where it is clear a taxpayer has prioritised its business activities over its GST obligations.