Latest income tax developments - July and August 2021

ATO Updates

Decision Impact Statement on Eichmann v Commissioner of Taxation [2020] FCAFC 155

• This Decision Impact Statement outlines the ATO's response to the Eichmann case.
• In Eichmann v Commissioner of Taxation [2020] FCAFC 155, the taxpayer and his spouse ran a building business through their family trust, of which they were beneficiaries. The taxpayer and his spouse also owned a property adjacent to their main residence which was used for storage of work tools, equipment and vehicles used in the business. The taxpayer collected tools and other items from the property daily, sometimes multiple times a day. When the property was sold, the Commissioner ruled in a private ruling that the taxpayer was not entitled to the small business CGT concessions in respect of the sale because it was not an ‘active asset’ under section 152-40(1)(a) of the ITAA 1997.
• The Full Federal Court considered the active asset test under the legislation and the specific circumstances of the taxpayer as detailed in the private ruling. The Full Federal Court held that in order for an asset to be an active asset, it is not necessary that it be used in the day to day operations or normal course of carrying on of a business, nor does it require a direct functional relevance between the asset and the carrying on of a business. The Full Federal Court considered that the asset was an active asset (and overturned the decision at first instance in the Federal Court). In addition, the Full Federal Court considered that, even on the approach of Justice Derrington in the Federal Court, and based on the Commissioner's facts as described in the ruling, the asset was an active asset.
• The Decision Impact Statement sets out the ATO's view on the active asset test and the importance of the defined facts in a private ruling. The ATO considers that the active asset test is an "intrinsically fact-dependent" analysis. The Eichmann decision is also said to highlight the importance of the point that a challenge to a private ruling proceeds within the confines of the scheme specified in the ruling. In ruling on whether the active asset test is met in a particular case, the Commissioner will take care to ensure the description of the scheme is, so as far as possible, sufficiently detailed as to reveal all the facts relevant to the statutory enquiry.
• Small business entities looking to access the CGT small business concessions should take note of the approach to the active asset test. This test is also relevant in the context of the CGT earnout rules and the CGT participation exemption under Subdivision 768-G of the ITAA 1997. Similarly, applicants for rulings should pay particular regard to the facts comprising the relevant scheme to ensure they are appropriately detailed and complete.

Draft Law Administration Practice Statement PS LA 2021/D1 - Remission of additional superannuation guarantee charge

• The ATO has released draft Law Administration Practice Statement which proposes guidelines around the remission of additional super guarantee charges imposed under Part 7 of the Superannuation Guarantee (Administration) Act 1992. The Part 7 penalty applies when an employer fails to lodge a super guarantee statement by the lodgement due date.
• The Practice Statement also sets out when it is appropriate for penalty relief to be applied.
• Employers should carefully consider these guidelines and note that it emphasises that non-compliance with employer obligations is taken seriously by the ATO.

Draft Taxation Ruling TR 2021/D5 - Income tax: expenses associated with holding vacant land

• The ATO has released a draft ruling on deductions for losses or outgoing relating to holding vacant land under section 26-102 of the ITAA 1997.
• Section 26-102(1) operates to deny deductions for losses or outgoings relating to holding land on which there is no substantial and permanent structure in use or available for use. The draft ruling sets out the Commissioner's view on when that section applies to a land holding, including the tests to consider, with many illustrative examples.
• The draft ruling also explains the Commissioner's view on the exclusions to section 26-102(1).
• Additionally, the draft ruling clarifies the interaction of s 26-102 with the deduction of interest after a business activity has ceased, and the position for land held under separate multiple titles. The ATO's views on this are set out in TR 2004/4 and an addendum to that Tax Ruling has also been issued.
• Comments are invited on the draft ruling until 17 September 2021.

Practical Compliance Guideline PCG 2018/9 - Central management and control test of residency: identifying where a company's central management and control is located

• This guidance on corporate tax residency has been updated to extend the time that foreign incorporated companies have to revise their governance arrangements in applying the corporate residency test of "central management and control" for the purposes of determining Australian tax residency status.
• A transitional period was originally due to end on 30 June 2021, but due to the effects of COVID-19, and in light of some technical amendments announced by the Government, this has now been extended until 31 December 2021 for taxpayers with a 31 December year end and 30 June 2022 for taxpayers with a 30 June year end.
• Companies affected by these transitional provisions who have been taking active and timely steps to change their governance arrangements can take advantage of this extended timeline.

Taxation Ruling TR 2021/4 - Income tax and fringe benefits tax: employees: accommodation and food and drink expenses travel allowances, and living-away-from-home allowances

• This Ruling explains when an employee can deduct accommodation and food and drink expenses under section 8-1 of the ITAA 1997 when they are travelling on work, the FBT implications, and the criteria for determining whether an allowance is a travel allowance or a living-away-from-home (LAFHA) benefit.
• The Ruling is to be read in conjunction with PCG 2021/3 (discussed below), TR 2020/1 and TR 2021/1.
• The Ruling applies both before and after its date of issue.
• There is also a Compendium TR 2021/4EC which provides responses to comments received on the draft Taxation Ruling TR 2021/D1.

Practical Compliance Guideline PCG 2021/3 - Determining if allowances or benefits provided to an employee relate to travelling on work or living at a location - ATO compliance approach

• This PCG outlines the ATO's compliance approach to determining if employees in certain circumstances are travelling on work or living at a location away from their normal residence.
• In particular, the PCG provides practical guidance on whether:
  • an allowance paid by an employer to an employee is paid for travelling on work (this will be a travel allowance that is assessable to an employee and will not incur FBT), or living at a location which may be a living away from home allowance fringe benefit; and
  • amounts reimbursed or paid by an employer would have been deductible to the employee had they purchased the goods or services.

• This PCG applies to all employers who provide the relevant benefits to their employees, except FIFO and DIDO employees.

New Investment Engagement Service

• The ATO's New Investment Engagement Service for businesses planning significant new investments in Australia started on 1 July 2021. This engagement service was announced in the 2021-22 Federal Budget.
• The purpose of the service is to provide tailored guidance to businesses prior to the execution of significant commercial transactions. Investors can choose to receive informative guidance on existing ATO services and programs, guidance in respect of compliance, expedited rulings or advance pricing agreements and help in the FIRB process. The guidance will be provided in the form of a report setting out the ATO's views.
• All foreign businesses that come through the Global Business and Talent Attraction Taskforce and other Australian and foreign businesses making new investments into Australia in the vicinity of $250 million or more have access to this service.
• Ashurst is hosting an interactive online discussion regarding the New Investment Engagement Service, led by Chris Ferguson, ATO Assistant Commissioner, and Vivian Chang, Ashurst Tax Partner and Head of Tax, on Tuesday 14 September at 1 PM. If you are interested in attending, please register here .

Legislative Updates

Treasury Laws Amendment (Measures for Consultation) Bill 2021

• The exposure draft of this Bill introduces a third-party reporting regime for the sharing economy.
• The regime requires operators of electronic platforms within the sharing economy to report identification and payment information regarding participating sellers to the ATO for data matching purposes.
• The regime is intended to apply to transactions relating to supply of ride-sourcing and short-term accommodation from 1 July 2022, and other sharing economy services from 1 July 2023.

Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Employee Share Schemes

• The exposure draft of this Bill sets out changes announced in the 2021-22 Budget to regulatory and tax arrangements for employee share schemes.
• The key reform to the tax rules is the removal of the cessation of employment taxing point for tax-deferred employee share schemes for all companies.

Treasury Laws Amendment (2021 Measures No. 5) Bill 2021

• This Bill contains reforms to the Australian Screen Production Incentive and various miscellaneous and technical tax amendments.
• In particular, it increases the producer offset rebate rate to 30 per cent for eligible screen content for television and other eligible formats (with the offset remaining at 40% for feature films with a theatrical release).
• The Bill also increases these qualifying Australian production expenditure thresholds from $500,000 to $1 million:
  
  • Producer offset for feature films; and
  • PDV offset for films.

• The miscellaneous and technical tax amendments relate to, amongst other things:
  
  • country by country reporting;
  • loss carry back choice; and
  • finance leases (particularly, arising out of changes to the lease accounting standard, and impacts with the consolidation regime).

•  The Bill was referred to the Senate Environment and Communications Legislation Committee for report by 20 August 2021.

• A second reading in the Senate has been moved.

Treasury Laws Amendment (2021 Measures No 6) Bill 2021

• This Bill contains several amendments to:
  • make refunds of large-scale generation shortfall charges non-assessable non-exempt income;
  • effect changes to the actuarial certificate requirements for certain super funds; and
  • improve superannuation information sharing for family law proceedings.

Case Law Updates

Advanced Holdings Pty Limited as Trustee for the Demian Trust v Commissioner of Taxation [2021] FCAFC 135

• The case involved a suite of properties (the Lewisham Properties) held by a unit trust within a property development group. During the GFC, the trustee of the unit trust entered into a $20m facility agreement with Abacus (Abacus Facility) to finance debts relating to the Lewisham Properties.
• The trustee also entered into a Payment Deed with Abacus, under which it was to apply the proceeds of sale (or any other income) from the Lewisham Properties to the repayment of its debt under the Abacus Facility, as well as the debts of the other entities in the group owed to Abacus. Abacus was also granted a call option to acquire a 50% JV interest in the development of the Lewisham Properties, which it exercised.
• The Lewisham Properties were sold in August 2012, and the net proceeds of $48 million were paid to Abacus in repayment of the debt owing under the Abacus Facility, payment of an option cancellation fee, and discharge of debts owed to Abacus by other group entities.
• The appeal to the Full Federal Court related to the income tax consequences of the profits generated by the sale of the Lewisham Properties.
• The Full Federal Court dismissed all grounds of the taxpayer's appeals and also upheld the first instance decision on penalties. The findings included the following:
  • under the JV agreement, Abacus held a 50% contractual interest in the JV and not a 50% beneficial interest in the Lewisham Properties;
  • the amount applied by Abacus in discharge of debts owed by other group entities was not deductible by the trustee. The amount was not on revenue account and was wholly separate from the trustee's acquisition of trading stock and did not have a demonstrated nexus with its income earning activities; and
  • the purported removal of Demian Holdings as trustee of the Demian Trust and replacement by Allied Holdings in 2003 and again in 2006 was ineffective, due to the language of the deeds.

Appeal news - Greensill and N & M Martin Holdings 

• The taxpayers from the Full Federal Court decision of Peter Greensill Family Co Pty Ltd (Trustee) v FCT; N & M Martin Holdings Pty Ltd v FCT [2021] FCAFC99 have applied for special leave to appeal to the High Court.
• The appeals relate to two matters concerning the CGT liability of non-resident beneficiaries which were heard together in the Full Federal Court.

Hot Topics

Treasury Review of venture capital tax concessions

• Treasury will conduct a review of the Early Stage Venture Capital Limited Partnership program now that the tax concessions introduced in these reforms have been in place for five years.
• The review will assess whether the tax concessions operate as intended, to provide genuine support to early-stage Australian start ups.
• Treasury and Industry Innovation and Science Australia will undertake the review and engage in stakeholder consultation over the coming months. The final report is expected to be delivered to the Treasurer towards the end of the year.

Board review of the dual-agency administration model for the Research and Development Tax Incentive

• The R&DTI program is a self-assessment program that provides tax offsets for eligible company R&D expenditure that is currently jointly administered by the ATO, Industry Innovation and Science Australia (IISA) and the Department of Industry, Science, Energy and Resources.
• The Board of Taxation is reviewing and evaluating the R&DTI dual agency administration model (the ATO is responsible for admin and processing of tax offset claims, IISA is responsible for registering companies' R&D activities).
• The intention is to reduce duplication, simplify processes and otherwise reduce compliance costs.
• Written submissions can be made until 15 September 2021.

ATO discussion paper – Tax implications of Inter-bank Offered Rate reform

• As a consequence of traditional interest rate benchmarks (such as the London Inter-bank Offered Rate (LIBOR)) being transitioned out of use (as a result of impending non-publication), it is expected that most financial arrangements that provide for LIBOR-based payments will need to be modified to accommodate this transition. The ATO is seeking input on the associated tax implications arising from LIBOR reform.
• Parties to financial instruments that include references to relevant rates should consider the taxation implications of amending those documents, including (for example) whether the amendment may have the effect of terminating existing arrangements and resulting in new arrangements, or whether any other tax implications may arise.

House of Representatives Standing Committee on Tax and Revenue Report - Employee Share Schemes

• The Committee has released a report into the effectiveness of the current Employee Share Scheme regime.
• The report finds that the current regime is "complicated and restrictive", involving obligations which "provide no consumer or employee benefit", "are costly" and "onerous".
• The report makes 18 recommendations, which include, more significantly:
  • employee shares to be treated as being held on capital account, with employees liable for taxation only after selling their shares (CGT regime) – cessation of employment not to be a taxing point; and
  • changes to the definition of 'start-up' for the purposes of the concessions introduced in 2015, which the Committee found too restrictive.
• The government has six months to respond to the report.
• If the recommendation for employee shares to be treated as being held on capital account and taxed under the CGT regime is accepted, this will have significant implications for how companies should think about packaging remuneration.

Watching Brief

Taxation Ruling 2019/D6, relating to whether certain labour and other costs associated with building and construction of capital assets are capital in nature, was expected to be finalised in July 2021 and should be finalised soon.

A final Taxation Determination on how the aggregation rules apply where a connected entity or affiliate has a different accounting period to the entity calculating its aggregated turnover is expected to be completed in August 2021. We discussed Draft TD 20201/D1 in our last instalment of "This Month in Australian Tax".

Taxation Ruling 2017/D1, relating to composite items and identifying depreciating assets for capital allowance purposes, is expected to be finalised in August 2021.

The Privatisation and Infrastructure – Australian Federal Tax Framework, which sets out the ATO's views on a range of taxation issues including with respect to Division 6C, cross-staple arrangements, financing, and other issues that are relevant to infrastructure assets, is now expected to be finalised in Late 2021. It was previously expected to be completed in Mid 2021.

Draft Taxation Determination on when an employee is considered to be genuinely restricted from disposing of their beneficial interest in a right or share acquired under an employee share scheme is expected to be released in October 2021.