[Interaction of Division 855 and capital gains distributed by discretionary trusts]

Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation  [2020] FCA 559

The recent decision of Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation  [2020] FCA 559 should put all discretionary trusts with non-resident beneficiaries on alert.

The Peter Greensill Family Trust (PGFT) received capital gains in respect of the sale of shares in an Australian company, which were not taxable Australian property.  In three consecutive financial years, the trustee of the PGFT determined the capital gains were to be distributed to Mr Greensill, a resident of the UK for tax purposes.

Pursuant to section 855-10 of the ITAA97, a foreign resident is entitled to disregard a capital gain or loss from a CGT Event if the CGT event occurs in respect of a CGT asset that is not taxable Australian property.

It has long been thought that an Australian trust (being a 'flow through' entity for tax purposes) would not be subject to tax on capital gains made from the sale of assets other than taxable Australian property distributed to a non-resident – as would be the outcome where a foreign resident owned the property directly and later disposed of it.

However, Federal Court has held that, on a technical reading of the legislation, the gain made by the beneficiary was not made 'from' a CGT event, but from a distribution of an amount to the beneficiary which represented the capital gain made by the trust.  Section 855-10 was therefore found not to apply, as the capital gain from the the CGT event was made by the trustee, and the trustee was neither a foreign resident or trustee of a foreign trust.

As the capital gain was received by the PGFT (as opposed to having been made directly by Mr Greensill) section 98 of the Income Tax Assessment Act 1936 applied to require the trustee of the PGFT to pay tax, rather than the ultimate beneficiary (meaning that the capital gain was ultimately subject to tax in Australia).

Key takeout:  A notice of appeal has been filed – so watch this space! Arguably, the decision of the Federal Court is contrary to the policy that the tax policy that the tax outcomes for a beneficiary of a discretionary trust (a 'flow through' entity for tax purposes) should be referable to the result that would arise  if the beneficiary had derived the income (or owned the asset) directly.  Further, one would be mistaken for thinking that the policy objective of Division 855 was also clear – foreign residents should only be required to pay tax in Australia in relation to capital gains made on the disposal of taxable Australian property.

However, the decision is in line with the view adopted in recent Taxation Determinations 2019/D6 and D7.  Until such time as the appeal is heard, taxpayers investing in Australia should carefully consider the structure of their investment.

[Residency]

MacKinnon and Commissioner of Taxation [2020] AATA 1647

In one of the first decisions of the Administrative Appeals Tribunal following the suite of recent Australian tax residence decisions of the Federal Court including Harding, Stockton, Pike and  Addy which have run over the past 18 months, Senior Member Hespe has found that the Applicant, a citizen of the United Kingdom, was not a resident of Australia for tax purposes.

Ms MacKinnon, originally of Scotland, travelled to Australia for 12 months on a working holiday visa.

The Commissioner sought to establish that the Applicant was not a resident of Australia for tax purposes and was consequently not eligible for the tax-free threshold on the basis that she was not ordinarily resident in Australia and, despite having spent more than 183 days in Australia, maintained a usual place of abode outside of Australia.

Applying the decisions of the Federal Court in Harding and Stockton, Senior Member Hespe ultimately agreed that Ms MacKinnon was not an Australian tax resident.  In reaching this conclusion, the Senior Member focused on the transient nature of her presence in Australia, noting, for example, that the work she engaged in was not in her chosen profession and Ms MacKinnon continued to receive financial support from her parents in Scotland.

Key takeout: Following the decisions in Harding, Stockton, Pike and  Addy, there is increased latitude available to Members of the Administrative Appeals Tribunal to reach their own conclusions having regard to the delicate balance of the facts in any particular case.  Having regard to Stockton, in particular, which reminded the profession that each decision must be considered separately having regard to all relevant facts and with limited recourse to analogies with previous decisions, residency continues to be a difficult area for both advisors and taxpayers.

[Administrative review of decision to issue DPN]

Brown v Commissioner of Taxation [2020] FCA 817

In a rather unusual outcome, Mr Brown has successfully sought review of a decision of the Commissioner of Taxation under the Administrative Decisions (Judicial Review) Act  1977 (Cth) in relation to director penalty notices (DPNs) issued by the Commissioner.  The decision under review was that a defence to the DPN had not been established under section 269-35(2) of Schedule 1 to the Taxation Administration Act 1953 (Cth).  The decision of the Federal Court determined that the decision maker, in making their decision, did not make reference to the factors in subsection 269-35(3), which inform the meaning of the 'reasonable steps' that the recipient of a DPN is required to take to make out the defence.

His Honour Justice Kerr of the Federal Court found that the delegate had made a 'reviewable error in the relevant decision involving either an error of law... or a failure to take a relevant consideration into account in the exercise of the decision maker's power...' (at [62]) when the delegate failed to reference the considerations in subsection 269-35(3) and address their application to the facts.  In reaching this decision, Justice Kerr referenced the finding of the High Court of Australia in Minister for Immigration and Multicultural Affairs v Yusuf that 'where a decision maker has a duty to give reasons a reviewing court is entitled to infer "that any matter not mentioned... was not considered... to be material"'  (at [59]).  Justice Kerr also found that it would not be futile to require the Commissioner to review the decision, despite the matter being before the Supreme Court of Queensland.

Key takeout: Although Justice Kerr noted that the finding of Yusuf should not be elevated to a rule of law, this matter demonstrates that it will often be beneficial to both request written reasons from the Commissioner (in cases when they are not automatically provided) and to carefully review the decision in light of the required considerations.  Whilst for many taxpayers it is often not feasible to seek judicial review of deficient reasons, this case highlights the importance of requesting further reasons so that the case against the taxpayer is clear, and can proceed with the relevant form of review with the benefit of this knowledge.

[Successful application against Tax Practitioner's Board decision]

HFFV v Tax Practitioner's Board (Taxation)  [2020] AATA 1712

In this recent decision, the decision of the Tax Practitioners Board (TPB) to terminate the registration of a company for failure to comply with its taxation obligations, including outstanding lodgments, PAYG and GST debts, and Superannuation Guarantee debts was overturned by the Tribunal.

In acknowledging the relevance of context in construing the actions of the tax agent (and its sole director), Deputy President O'Loughlin QC and Senior Member O'Connell critically found that:

  • Termination should not be treated as a default sanction for breach of the Code of Conduct, in particular for breach of taxation obligations, where the current regime provides a range of sanctions so that an appropriate response can be made in light of the nature and extent of non-compliance in question.  This may be so even though the case involves dishonest conduct (at [51]).
  • The absence of any complaint regarding client services will inform the appropriate sanction however, 'in some cases the nature and extent of non-compliance with personal tax obligations may warrant termination even though clients have not suffered loss...' (at [51(b)])

Key takeout: Following this decision, it is clear that the Tribunal does not consider that the termination of a tax agent's registration can be regarded as a default sanction, even in cases involving dishonesty.  In this regard, the Tribunal also urged caution in dealing with pre-2009 cases which resulted in termination because it was the only sanction available under that regime.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.