Latest income tax developments April 2022

Labor's Economic Plan and Budget Strategy

• On 27 April 2022, Labor announced its Tax Policy.  The first component of Labor's Tax Policy is to address multinational tax avoidance issues and involves  supporting the OECD'S Two Pillar Solution for a global 15% minimum tax and ensuring large multinationals' profits are taxed where the products or services are sold.  Limited details on how these ruled would be implemented into Australian tax law have been provided.
• Additionally, Labor's tax policy includes thin capitalisation and Intellectual Property (IP) tax haven proposals.  From 1 July 2023, Labor proposes to: 
  • remove the safe harbour debt amount, and substitute it with a limitation on debt deductions where they exceed 30% of taxable earnings before interest, taxes, depreciation and amortisation, which it considers is in line with the OECD's BEPS Action Item 4.  The arm's length debt amount and the worldwide gearing debt amount (where relevant) would remain as alternatives. 
    
    A number of details are not provided, such as whether adjustments would be made during periods of non-earning such as construction, whether the denial under the 30% rule is permanent or denied deductions can be carried forward (as is the case in other jurisdictions), as well as whether certain projects (such as public infrastructure projects) may be excluded, as the OECD indicates is optional in their report on Action Item 4.  In addition, the material released by the Labor Party focusses on related party debt arrangements, but the policy (as announced) is not limited to related party debt arrangements; it remains to be seen whether this is intended; and
  • limit the ability of multinationals to deduct royalties where they are paid to entities that are resident in a so-called tax haven with which Australia has concluded a double tax agreement (such that a reduced rate of royalty withholding tax may apply).

• In a Media Release, Labor clarified that the royalty measure would only apply to large global multinationals which are significant global entities. It also confirmed that the only transactions that would be affected by the IP tax haven proposal are those that fail the "sufficient foreign tax test" aspect of diverted profits tax in section 177L of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) or involve "a harmful tax preferential regime".  Deductions for affected transactions will be denied unless it can be substantiated that the royalty payments are not for the dominant purpose of tax avoidance. 
• Labor further proposes to improve tax and ownership transparency by requiring the public reporting of country-by-country reports, developing a public registry of ultimate beneficial ownership, requiring mandatory reporting of tax haven exposure to shareholders, and requiring government tenderers to disclose their country of tax domicile. 
• Other proposed (and previously announced) tax policies include delivering the legislated Stage 3 tax cuts to Australians earning over $45,000 (to commence in 2024-25) and introducing an Electric Car Discount, which will involve exempting all electric cars below the luxury car tax threshold from import tariffs and fringe benefits tax where the cars are provided by employers. 

ATO News

ATO issues decision impact statement clarifying the common law test of employment 

• The ATO has issued a decision impact statement on Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1.  The case concerned a labour hire company (which engages workers to supply labour to clients) engaging the services of Mr McCourt and entering into a written agreement with him.
• The majority of the High Court concluded that Mr McCourt was an employee.  The Commissioner's interpretation of the majority reasoning is that the multifactorial test applied by the courts below was unnecessary and inappropriate in this case. Rather, the Court's role is to characterise the relationship by examining its totality, and having regard to the rights and obligations contained in the written agreement.  The majority noted that post-contractual conduct may be examined in certain circumstances, including where the contract is not in writing or the terms of a written contract are being challenged as invalid.
• Although the Commissioner was not involved in the case, the Commissioner considers that the decision provides clarity on the common law test of employment.  For example, the case highlights the importance of examining the terms of the written contract and whether the putative employer holds any authority to exercise control over the work done by the worker.  Ultimately, the Commissioner considers that the decision does not disturb the "well-established practice of examining the totality of the relationship" and reflects the Commissioner's understanding and application of the "business integration test".
• The decision and impact statement provide useful guidance for individuals and companies on when a relationship will be characterised as a contract of service rather than a contract for services. Further, tax-specific guidance will be provided by the Commissioner upon reviewing a list of impacted advice and guidance. 

ATO issues supplementary guidance on third party data tax controls 

• The ATO has issued a Supplementary Guide for large superannuation funds, managed funds and insurance companies on third-party data tax controls.  The Guide complements, and should be read with, the Tax Risk Management and Governance Review Guide published by the ATO in 2015.  Importantly, the Guide outlines the ATO's expectations for entities that rely on outsourced service providers to capture, collate and present tax data that feeds into its tax and reporting obligations.
• The Guide explains how the "Justified Trust" methodology is applied by the ATO to review the existence, and design and operational effectiveness of third party data income tax controls.   
• The ATO has included practical guidance on how an entity can self-review its data tax controls.  The Guide outlines the ATO's expectations in terms of the "five fundamental controls relevant for the third-party data tax controls framework", being:  roles and responsibilities are clearly understood, control frameworks are documented, any significant transactions are identified, the board is appropriately informed, and the entity engages in periodic internal control testing by an independent reviewer. 

ATO finalises two taxation determinations on employee share schemes 

• The ATO has issued TD 2022/8 on the deductibility of expenses to establish and administer employee share schemes.  We discussed the Draft Taxation Determination, TD 2022/D2, in our January and February in Australian Tax Bulletin.  There are no material changes in the final Determination. 
• The ATO has also issued TD 2022/4, which sets out the principles for working out whether an Employee Share Scheme's (ESS) disposal restrictions are "genuine disposal restrictions" for the purposes of Division 83A of the ITAA 1997, and, if so, when employees are no longer "genuinely restricted" by the scheme from disposing of their ESS interests.  This allows for the ESS deferred taxing point to be determined. We discussed the Draft Taxation Determination, TD 2021/D5, in our  November 2021 Bulletin.  There are no material changes in the final Determination. 

Guidance issued on the meaning of "connected with" when determining aggregated turn over 

• The ATO has issued three Taxation Determinations setting out the Commissioner's views on when an entity is "connected with" another entity for the purpose of determining aggregated turnover under Subdivision 328-C of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).  The draft versions of the three Determinations were discussed in our November 2021 Bulletin.  
• First, TD 2022/5 provides guidance on the application of the "connected with" concept to corporate limited partnerships.  The final Determination confirms that an entity that directly controls a corporate limited partnership under either the "general control test" or "voting control test" will be "connected with" that corporate limited partnership, as the corporate limited partnership is treated as a company for income tax purposes. 
• Second, TD 2022/6 provides guidance on the application of the public entity exception to the "indirect control test", within the meaning of section 328-125(7).  The final Determination confirms that the mere presence of an interposed public entity does not result in a control chain being broken as the first entity can still control the third entity indirectly. 
• Third, TD 2022/7 provides guidance on the application of the "connected with" concept to partnerships, foreign hybrids and non-entity joint ventures.  The Commissioner confirms that the partnership, rather than the individual partners, is the relevant entity when determining whether a partnership directly controls another entity.  Additionally, and consistent with the deeming provisions contained in tax law, a foreign hybrid company or foreign hybrid limited partnership is treated as though it were a partnership and non-entity joint ventures are not considered entities in their own right for the purposes of Subdivision 328-C.  
• Ultimately, this guidance is useful as "aggregated turnover" is relevant to a number of tax provisions, including (for example) the mandatory application of the TOFA regime, as well as concessions including the temporary loss carry back, temporary full expensing, application of the ESS "start-up" concession and some small business concessions.

Other

OECD consulting on new tax transparency framework for crypto-assets 

• The OECD has released a public consultation document seeking input on a new global tax transparency framework – the Crypto-Asset Reporting Framework (CARF). The CARF was developed in response to a request from the G20 to develop a "framework for the automatic exchange of information on crypto-assets". The Common Reporting Standards (CRS) will also be amended as the current scope of assets and obliged entities it covers is insufficient in the context of transactions involving crypto-assets. 
• The new framework is intended to combat what is perceived to be poor visibility that tax administrators have on the crypto-asset market. Specifically, the market is characterised by a shift away from traditional financial intermediaries, and it gives taxpayers the ability to hold crypto-assets in wallets unaffiliated with any service provider. Consequently, the OECD considers that there is a risk that crypto-assets may be used to evade tax obligations. 
• The consultation paper covers the CARF's first "building block", which is the development of rules and commentary on information collection from resident crypto-asset intermediaries, and its incorporation into domestic law. Specifically, it proposes the scope of crypto-assets to be covered, the intermediaries subject to data collection and reporting requirements, transactions subject to reporting requirements (and the information to be reported in respect of such transactions) and due diligence procedures to identify crypto-asset users and the relevant tax jurisdictions for reporting. 

Declaration to treat COVID-19 state business grants as non-assessable non-exempt income

• The Income Tax Assessment (Eligible State and Territory COVID-19 Economic Recovery Grant Programs) Amendment Declaration (No 3) 2022 declares various grant programs as "eligible programs", such that grants paid under them will be non-assessable non-exempt income (for grant payments received in the 2021-22 income years).  
• For the purposes of section 59-97 of the ITAA 1997, the following grant programs are eligible programs: NSW Accommodation Support Grant; Commercial Landlord Hardship Grant (NSW); NSW Performing Arts Relaunch Package; NSW Festival Relaunch Package; 2022 Small Business Support Program (NSW); 2021 COVID-19 Business Support Grants (Queensland); COVID-19 Business Support Grant — July 2021 (SA); COVID-19 Additional Business Support Grant (SA); COVID-19 Tourism and Hospitality Support Grant (SA); COVID-19 Business Hardship Grant (SA); and COVID-19 Business Support Grant (ACT).

Cases

Commissioner of Taxation v Carter [2022] HCA 10

• The High Court has unanimously allowed the Commissioner's appeal against a Full Federal Court decision. At issue was subsection 97(1) of the ITAA 1936 and, specifically, the issue of whether a beneficiary's present entitlement is to be determined: 
  • immediately prior to the end of a year of income by reference to the legal relationships then in existence; or 
  • following events after the year of income, where those events affected or altered those legal relationships with retrospective effect. 
• In this case, the combined operation of clauses in the trust deed was such that if the trustee failed to make a determination, "immediately prior to the end of the last day" of the income year, the five primary beneficiaries (the respondents) would be entitled to a one fifth share each of the trust income. In the 2014 income year, the trustee did not make a determination and one-fifth of the income of the Trust was held on trust for each of the respondents. The Commissioner issued amended assessments to the respondents, which included their share of the trust's net income (determined by reference to their share of the trust's income) as assessable income. The respondents later sought to disclaim any and all right, title and interest conferred by the trust deed to any income. 
• Under the general law, an effective disclaimer operates with retrospective effect, such that the beneficiary is taken never to have been entitled to the trust income. At issue in this case was whether the retrospective operation of a disclaimer was effective for the purposes of subsection 97(1) of the ITAA 1936.
• The Full Federal Court found that the respondents' disclaimers were effective and there was nothing in subsection 97(1) of the ITAA 1936 to indicate that a beneficiary's liability was determined "once and for all" at the end of the income year. However, this decision was overturned by the High Court. The outcome turned the construction of subsection 97(1).
  • The High Court considered that, as the phrase "presently entitled to a share of the income of the trust estate" is expressed in the present tense, it is directed to the position existing immediately before the end of the income year for the purpose of identifying the beneficiaries who are to include their share of the trust's net income.
  • The High Court stated that it was important that subsection 97(1) is directed towards identifying the beneficiaries immediately prior to the end of the income year.  Additionally, the legislative provisions relating to the status (or otherwise) of a beneficiary as a resident and not being under any legal disability during the relevant income year were considered consistent with this interpretation, as they are ascertained during and at the end of the income year, and cannot be altered by subsequent facts and matters. 
• Therefore, the High Court held that any taxation liability of a beneficiary is to be determined by ascertaining the proportion of the income of the trust estate to which the beneficiary is presently entitled just before midnight at the end of the income year and then by applying that proportion to the net income of the trust.  Although unnecessary to address the effectiveness of the disclaimers, the High Court held that they were ineffective in retrospectively defeating the operation of a vested and present entitlement. The decision illustrates that the impact under the tax laws of events being deemed to occur or not occur retrospectively at law depends on the construction of the relevant statutory provisions, consistent with the decision of the NSW Court of Appeal in Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd  [2017] NSWCA 184.
• Ultimately, the High Court noted that the construction it adopted "means that a beneficiary might be presently entitled at the end of an income year but be unaware of it", and that "unfairness" arises because Division 6 (and, in particular, subsection 97(1)) is drafted to tax a beneficiary by reference to present entitlement and not receipt. In response, the Government has foreshadowed potential legislative change. Specifically, it will consider whether the decision raises any inequitable outcomes that may not have been intended.  

Aurizon Holdings Limited v Federal Commissioner of Taxation [2022] FCA 368

• The Federal Court has found that an amount credited to a "Capital Distribution" account by the State of Queensland (the State) was an amount of "share capital".
• In 2010, the State credited over $4.388 billion to a "Capital Distribution" account to reflect a contribution to Aurizon (then QR National Ltd) made by the State (the Contribution).  The Contribution was made in the context of the ASX listing and public floatation of the State's coal and freight network, and sell down of the state's interest in that network through a share offer (the IPO), and was not made in exchange for the issuance of shares. The Queensland Treasurer issued a legislative direction to facilitate the IPO. When the direction was issued, Aurizon's contributed equity comprised 100 fully paid shares held by two Ministers of the State. 
• The Commissioner argued that the Contribution was not share capital as it was expressly made for "nil" consideration in the legislative direction and it was not made in exchange for the issue of any shares.  Thawley J held that while the term share capital almost invariably refers to the capital contributed to a company in exchange for shares, it is not an exhaustive definition. The Contribution was made by the State as a sole shareholder, intending it to form part of Aurizon's share capital, and it was treated by Aurizon as forming part of its share capital.  Therefore, the Contribution was appropriately characterised as share capital and the Capital Distribution account as a "share capital account" (section 975-300(1) of the ITAA 1997).
• The following three considerations were relevant to Thawley J's conclusion:
  • First, the absence of any intention that the Contribution should not be share capital when the original plan was altered. Rather, the alteration "was simply to ensure that the correct number of shares existed at the time the Offer Document was issued rather than after that time".
  • Second, the Offer Document suggested that the Contribution was intended to be share capital. It stated that the "contributed equity" would increase by $4.007 billion from $2.067 billion to $6.074 billion. The $2.067 billion was referred to as "contributed equity" and was share capital. The amount of $4.007 billion was also referred to as "contributed equity". Therefore, with nothing to suggest that these two amounts were of a different character, the ordinary reader of the Offer Document would have assumed the total share capital after restructure would be $6.074 billion.
  • Third, none of the documents in evidence suggested "any good or proper reason for intending that the Contribution be something other than share capital". Specifically, it was unlikely that it was intended for the Contribution not to comprise share capital so as to avoid the limitations on the return of capital. 
• Dealing with the "nil" consideration issue, Thawley J held that, when assessed objectively in the context of the whole document and background to the direction, the Contribution was intended to be an equity contribution by the sole shareholders (the Ministers). Further, the Contribution was not intended to be a gift.

Singapore Telecom Australia Investments Pty Ltd appeals Federal Court transfer pricing decision

• On 18 April 2022, Singapore Telecom Australia Investments Pty Ltd (STAI) filed a notice of appeal against the Federal Court's decision to deny interest deductions of $894 million.  We discussed the key issues and outcome in the Federal Court decision in our January and February in Australian Tax Bulletin. 
• Since our Bulletin was published, a judgment on the form of final orders and costs was delivered: Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation (No 2) [2022] FCA 260.  Here, STAI argued that a carried forward loss of over $259 million be taken into account when applying section 136AD(3) of the ITAA 1936 or section 815-15(1) of the ITAA 1997 for the year ending 31 March 2011.  If successful, STAI's taxable income for that year would have been reduced by that loss. 
• Ultimately, Moshinsky J noted that section 815-15(1) proceeds on the basis that the amount of profits are to be ascertained by reference to a particular year of income.  Therefore, STAI's contention was rejected as it would be inconsistent with the language of the provision and broader statutory scheme. 

Watching Brief - Tax Guidance for 2022

Taxpayers should be aware of the following expected tax guidance to be published by the Commissioner this year:

• The Privatisation and Infrastructure – Australian Federal Tax Framework. This was previously expected in early 2022, but the ATO has now indicated this is expected in mid-2022. As discussed in our January and February in Australian Tax update, Taxpayers operating in the Infrastructure and Real Estate sectors in particular should be ready to consider any updates to the ATO's views from the draft Framework published back in 2017.
• Taxation Ruling: Income tax: composite items and identifying the depreciating asset for the purposes of working out capital allowances. A draft Taxation Ruling (TR 2017/D1), discussed in our January and February in Australian Tax update, is now expected to be finalised in July 2022.
• Taxation Ruling: Income tax: personal services income and personal services businesses. A draft Taxation Ruling (TR 2021/D2) is expected to be finalised in June 2022. The final Ruling will provide a consolidation of TR 2001/7 (Income tax: the meaning of personal services income) and TR 2001/8 (Income tax: what is a personal services business).
• Taxation Ruling: Income tax: expenses associated with holding vacant land. A draft Taxation Ruling (TR 2021/D5) is expected to be finalised in July 2022, and provide the Commissioner's view in relation to the application of section 26-102 of the ITAA 1997.
• Decision impact statement on Clough Limited v Commissioner of Taxation [2021] FCAFC 197. The decision impact statement published on 10 March 2022 was discussed in our March in Australian Tax update. The period for comments on the decision impact statement closed on 8 April 2022. The expected completion of the final version is to be advised, but will ultimately outline the ATO's response to the decision concerning the deductibility under section 8-1 of the ITAA 1997 of certain amounts paid to directors and employees of a company to cancel their options as a condition precedent to a Scheme of Arrangement to take over the company.