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Dunne, Taylor, Batten and Krapivensky Recent cases

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This paper provides a summary of tax judgments from the Federal Court, Full Federal Court and the High Court from January 2015 to the end of December 2015. The table is current to January 2016.

Cases of very particular relevance to the Financial Services and superannuation industry are in bold font, but many other cases are of general relevance. For example, the Full Federal Court's decision in the Desalination Technology Pty Ltd case considers when expenditure is 'incurred', the High Court decision in the AusNet Transmission Group Pty Ltd considers whether a contingent liability referred to in a contract for acquisition of a business will be capital in nature and non-deductible, and the litigation culminating in the Donoghue decision before the Full Federal Court considers the nature of rights to claim legal professional privilege and how to protect privileged material, as well as the law on when assessments will be invalid for conscious maladministration.

For conference attendees accessing this paper electronically, embedded links to each of the cases are also provided in the case name, and, where applicable, Australian Taxation Office (ATO) Decision Impact Statements are also provided in embedded links.

Cases that have been appealed as at January 2016 are identified.

The following are excluded from the table:

• Cases which are of a procedural nature – for example interlocutory applications for discovery, or relating to service or the filing of evidence or applications for leave to appeal;

• Collections or debt related cases that are not relevant or simple in nature – for example cases where the taxpayer or another person applies to set aside a statutory demand or to set aside an order to wind up a company;

• State tax cases; • Administrative Appeals Tribunal cases; and • Decisions on High Court special leave applications.

The presentation and PowerPoint slides will focus on a small number of key income tax cases. The presentation will also provide a statistical analysis of win/loss ratio for the taxpayer and Commissioner, and will review the statistics of each judge in the Federal and Full Federal Courts. Cases of interest from other jurisdictions will also be raised in the presentation.


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Date Case Name Citation Judge Outcome: Taxpayer or

Commissioner

Summary If known as at the date of this paper: (i) whether appealed (ii) the appeal outcome and (iii) whether a Decision Impact

Statement has been issued by the ATO

27/01/15 Kocharyan v Commissioner for Taxation

[2015] FCA 13

Jessup Commissioner This was an appeal by the taxpayer against a decision of the Administrative Appeal Tribunal. The taxpayer appealed on the basis that:

The Administrative Appeals Tribunal erred in holding that the taxpayer's 2007 tax return was valid on the basis that he had not authorised a return filed on his behalf by his tax agent and erred in holding that the amended assessments had been served upon him because they were sent to a PO Box and not his preferred address.

The Administrative Appeals Tribunal erred in holding that the amended assessments had been issued within the statutory time bar, as a two year time bar applied. The taxpayer's argument was that it was not reasonable to conclude that a scheme had been carried out for the sole or dominant purpose of the taxpayer obtaining a scheme benefit, so a four year time bar period did not apply.

Judgment: The appeal was dismissed. The taxpayer's grounds were either not questions of law, or were argued on a flawed basis.

Taxpayer has unsuccessfully appealed to the Full Federal Court – see decision summary below.

04/02/15 Commissioner of Taxation v Arnold (No 2)

[2015] FCA 34

Edmonds Commissioner The Commissioner sought declaratory relief and orders imposing promoter penalties against Mr Arnold and two associated companies. The scheme at issue involved pharmaceuticals being purchased by participants from an Australian entity and gifted to charities operating in Africa. Liability for payment of 92.5% of the purchase price was deferred for 50 years at very low interest. The purchase price of the pharmaceuticals was considerably higher than their market value at the time. Participants in the scheme claimed tax deductions for donations to the charities. A similar scheme had been previously entered into and promoted by Mr Arnold in Canada – with the Canadian authorities investigating and taking action.

Judgment: Judgment was issued for the Commissioner with $1m penalty being applied to Mr Arnold, and $500,000 between the two corporates. It was concluded that each of Mr Arnold and the two corporates was a 'promoter' and the scheme was a 'tax exploitation scheme' as defined in section 290-50 of Schedule 1 to the Taxation Administration Act 1953 (Cth). In particular, the Court held it was reasonable to conclude that all participants entered into or carried out the scheme in question for the dominant purpose of getting a 'scheme benefit' from the scheme and it was not reasonably arguable that the scheme benefit was available at law.

FEDERAL COURT 2015 TAX CASES

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06/02/15 LHRC v Deputy Commissioner of Taxation (No 3).

[2015] FCA 52

Perry Commissioner The taxpayers sought judicial review of a decision by the Commissioner to serve a notice on the taxpayers under section 264 of the Income Tax Assessment Act 1936 (Cth) requiring them to attend an interview in relation to their taxation affairs and provide evidence on oath as part of a Project Wickenby investigation.

The taxpayers' concern was that Crime Commission examinations had previously taken place in the context of the abrogation of the privilege against self-incrimination, balanced with prohibitions on particular material being used in criminal prosecutions and by the ATO. The taxpayers' view was that those prohibitions would be infringed if ATO officials present at the Crime Commission examination were entitled to use their knowledge of material presented there in a section 264 interview, and those officials should be barred from the section 264 examination. There were also allegations of improper purpose.

Judgment: After a review of the relevant statutory provisions and the powers of both the Crime Commission and the ATO, the Court dismissed the taxpayers' applications. Particular holdings of relevance to section 264 included the following:

Section 264 notices can be issued after assessments had been issued and during an objection process.

Section 264 notices do not need to be issued within 60 days of the lodgment of an objection.

The privilege of self-incrimination is abrogated under section 264.

The taxpayer unsuccessfully appealed to the Full Federal Court – see decision summary below.

09/02/15 Financial Synergy Holdings Pty Ltd v Commissioner of Taxation

[2015] FCA 53

Pagone Commissioner As part of a group restructure, on 29 June 2007 a number of units in the Orford Family Trust (established prior to 20 September 1985) were transferred to Financial Synergy Holdings Pty Ltd in exchange for Financial Synergy Holdings Pty Ltd issuing shares in itself. The taxpayer elected a rollover under Division 122 of the Income Tax Assessment Act 1997 (Cth), which disregarded the disposal of the units and the units retained pre-CGT status (this was not in dispute). Subsequently, a consolidated group was formed on 1 July 2007 with Financial Synergy Holdings Pty Ltd as the head entity of the consolidated tax group and a number of subsidiary entities. In performing its tax consolidation calculations, the taxpayer was required to determine the allocable cost amount of the units it had rolled over in setting the tax base of underlying

Taxpayer has appealed to the Full Federal Court.


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assets. The taxpayer adopted a market value at the date of actual transfer in 2007 of $30m. At issue was the meaning of the words 'as at the time of acquisition' in section 110-25(3)(b) and whether the cost base of the units was to be determined in 2007 (ie approximately $30m) or pre-20 September 1985 (ie approximately $1.5m) being the date they were deemed to have been acquired under the rollover provisions in Division 122 – particularly pursuant to subsection 122-70(3). The taxpayer also argued that by virtue of section 705-65(1) in forming a consolidated group it was deemed to have acquired the assets 'at the joining time', and that Division 122 merely dealt with pre-CGT assets, not cost base. Judgment: The Court held that (amongst other references) the use of the word 'acquired' in subsection 122-70(3), and 'at the time of acquisition' in subsection 110-25(2)(b) reflect an intention that they operate together. The Court also held it was a false dichotomy to suggest that Division 122 dealt only with CGT status, and not the date of acquisition of assets because Parliament could not have intended that the taxpayer be entitled to preserve the pre-CGT nature of the units but also a reset cost base under section 705-125. Parliament intended for the cost base rules in the consolidation provisions to operate to set a cost base referable to market value at a time prior to 20 September 1985, and the cost base was $1,560,649.

19/02/15 Rio Tinto Services Ltd v Commissioner of Taxation

[2015] FCA 94

Davies Commissioner This case considered the supply of residential housing to employees. The taxpayer was the representative member of the Rio Tinto Limited GST group, which included Hamersley Iron Pty Ltd and Pilbara Iron Company (Services) Pty Ltd. Hamersley and Pilbara Iron provided and maintained residential accommodation in the Pilbara region for Hamersley's workforce. The accommodation was leased to workers but it was loss making as it was subsidised. It was common ground that the supply of accommodation by way of lease was an input taxed supply under section 40-35 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act).

The taxpayer sought a declaration that the supply of residential premises in this instance should not be input taxed under section 40-35(1) and the taxpayer should be able to claim the input tax credits for acquisitions made in relation to the accommodation. It maintained that the costs it incurred in

Taxpayer unsuccessfully appealed to the Full Federal Court – see decision summary below.


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relation to the provision of such accommodation was wholly for a creditable purpose as the supply of residential accommodation was incidental to the mining operation and was a necessary part of the operation given the remote location. Alternatively, the taxpayer argued that the costs should be apportioned to the extent they related to making supplies of residential accommodation, and on a revenue-based apportionment model about 98% of the relevant costs should be creditable.

The Commissioner did not challenge the essential facts. The Commissioner submitted that under section 11-15(2)(a) of the GST Act claimed for input tax credits would be denied as the acquisitions in question had a direct and immediate connection with the supply of residential accommodation by way of lease, being an input taxed supply. The Commissioner argued that taxpayer incorrectly relied on the concept of 'total purpose' which is distinct from the concept of creditable purpose.

Judgment: The Court dismissed the taxpayer's application and held that:

It is possible for something to be acquired in carrying on an enterprise and satisfy section 11-15(1), but also be acquired in relation to making supplies that are input taxed, satisfying section 11-15(2)(a).

Section 11-15 does not require an inquiry into 'purpose' in a general sense. For section 11-15(2)(a) to be satisfied, the nexus/relationship between the relevant acquisition and the input taxed supply must be 'sufficient' and 'material'.

The purpose for which an acquisition was made may in some cases bear upon whether the acquisition has a relevant relationship with the making of supplies that would be input taxed, but it is the existence of a connection or relationship between the acquisitions and supplies that would be input taxed that is the statutory criterion directed by section 11-15(2)(a).

There was no basis for apportionment as the acquisitions had a direct and immediate connection with the provision of residential accommodation, an input taxed supply.

03/03/15 Commissioner of Taxation v Moignard

[2015] FCA 143

White Commissioner This was a test case funded under the test case funding programme.

The taxpayer exercised an option to purchase a commercial property and shortly afterwards sold it for a profit. The net proceeds of sale were deposited in two bank accounts, a personal account in the taxpayer’s name and an account in the name of a corporate trustee of which the taxpayer was the sole director. The taxpayer maintained that the commercial property was acquired and disposed of


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by a discretionary investment trust.

The Commissioner issued an amended assessment to the taxpayer including the net profit on the sale of the property in his assessable income, on the basis that the amount was the taxpayer’s share of the net income of a trust estate to which he was presently entitled, pursuant to section 97 and section 101 of the Income Tax Assessment Act 1936 (Cth). The Commissioner also imposed an administrative penalty.

The Administrative Appeals Tribunal held in the taxpayer's favour on the basis that the Commissioner had been incorrect to assess the taxpayer on the basis that he was presently entitled to the income, as there was evidence that it was only properly assessable to the taxpayer as trustee. The Commissioner appealed to the Federal Court.

Judgment: The Court held that the Tribunal had not addressed the issues arising for its determination on the review. In particular, the Court held that the Tribunal determined the issue of 'present entitlement' without considering the trust deed and without making the necessary findings of fact about whether the taxpayer had in the 2007-2008 year made a determination in relation to the net income of the trust. This meant by itself that the appeal should be allowed.

The Court also held that the Tribunal had erred in law because the taxpayer had not discharged his burden of proof under section 14ZZK of the Taxation Administration Act 1953 (Cth) establishing that his assessed tax liability in respect of the 2007-2008 year was excessive because it did not consider whether there had been a determination in respect of the whole of the income of the trust in that year.

The matter was remitted to be reheard by the Tribunal.

17/03/15 Donoghue v Commissioner of Taxation

[2015] FCA 235

Logan Taxpayer During the course of an audit of the taxpayer, the ATO was supplied documents by a third party (Mr Simeon Moore) who had a grievance with the taxpayer. Mr Simeon Moore was a law student and not at that time a lawyer. A law firm operated by his father (Moore & Associates) had been engaged by the taxpayer and Simeon Moore was said to consult to that firm. Simeon Moore provided services to the taxpayer via the law firm. Following a fee dispute, without permission from the taxpayer and following some alleged threats by Mr Moore, Simeon Moore provided the Commissioner with the taxpayer's materials.

The ATO officer working on the audit was aware that some at least of the documents might be

Commissioner successfully appealed to the Full Federal Court - see decision summary below.


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subject to legal professional privilege but did not investigate further. The information supplied by Simeon Moore, along with other information gathered by the ATO, was utilised when determining the assessments which were ultimately issued to the taxpayer.

In a prior decision [2013] FCA 84 Justice Reeves issued interlocutory injunctions preventing the Commissioner from using the material for the purpose of making an assessment or using his powers under sections 263 or 264 of the Income Tax Assessment Act 1936 (Cth). The taxpayer applied for orders under section 39B of the Judiciary Act 1903 (Cth), declaring the assessments to be invalid, and seeking consequential orders preventing the Commissioner from taking any further action to recover the tax liability created under the assessments..

Judgment: The Court issued orders in favour of the taxpayer quashing all of the assessments issued by the Commissioner because they were invalid as the assessments were affected by conscious maladministration. The Court also quashed the penalty assessments, recovery proceedings (in a judgment issued on the same day see Donoghue v Commissioner of Taxation [2015] FCA 291) and a departure prohibition order issued to the taxpayer.

The Court held that:

The evidence established that the documents were subject to legal professional privilege, that Mr Simeon Moore was acting as an agent of Moore & Associates, that the taxpayer had engaged that law firm to provide advice, and that the taxpayer had not waived legal professional privilege.

Recklessness is sufficient to establish the element of consciousness in conscious maladministration, and to establish the tort of misfeasance in public office. The ATO officer knew that the documents could be subject to legal professional privilege, and chose to dismiss those concerns without making all necessary inquiries or establishing a process to protect the information prior to making those inquiries. While the ATO officer had not acted in bad faith, his conduct was reckless and recklessness was sufficient to establish consciousness.

While the assessments were formally issued by another ATO officer (Deputy Commissioner Mr Dufus), an assessment is a process, and the ATO officer who received the documents from Mr Simeon Moore was involved in that process, and his conclusions were adopted by his team leader and then the Deputy Commissioner.

Default assessments (such as those issued to the taxpayer) could not be issued on the basis of


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information that was subject to legal professional privilege, and none of sections 163, 166 and 167 of the Income Tax Assessment Act 1936 (Cth) authorised such assessments.

In a subsequent judgment issued on 24 March 2015, Justice Logan also ordered that the Commissioner deliver all hard copy documents referred to in its reasons for decision provided by Mr Simeon Moore and delete permanently all electronic material provided by Mr Simeon Moore. The Commissioner was also permanently restrained from using such material, and required to withdraw all garnishee notices issued: see Donoghue v Commissioner of Taxation [2015] FCA 301. Costs were also awarded, although not on an indemnity basis. In a subsequent judgment issued on 14 April 2015, Justice Edmonds stayed all of the above orders, pending the Commissioner's appeal to the Full Federal Court – see Commissioner of Taxation v Donoghue [2015] FCA 337.

25/03/15 Bond v Commissioner of Taxation

[2015] FCA 245

Mansfield Commissioner This case was an appeal from a decision of the Administrative Appeals Tribunal. The issue was whether a lump sum payment under a 'loss of licence insurance' scheme made to a former Qantas pilot who lost his pilot's licence for medical reasons was assessable to the pilot as an eligible termination payment pursuant to section 82-130 of the Income Tax Assessment Act 1997 (Cth), was subject to fringe benefits tax, was paid in relation to employment, or was subject to CGT.

The taxpayer argued that the payment was not an eligible termination payment because he received it for the loss of his pilot's licence, not in consequence of the termination of employment, or alternatively, it was a capital payment for his personal injury or subject to FBT in Qantas' hands. The case was heard together with Purvis v Commissioner of Taxation [2015] FCA 246 and Kentish v Commissioner of Taxation [2015] FCA 247 because the issues were materially the same.

Judgment: The Court upheld the Tribunal decision that the lump sum payments were assessable to the taxpayers as an eligible termination payment. In reaching its decision, the Court held that the entitlement to receive the payment arose from the termination of the taxpayers' employment, there was the required causal relationship and the Tribunal had not made an error of law. The Court also held that the Tribunal had not made an error of law in holding that the payments were not a capital payment for or in respect of personal injury to the taxpayers as (amongst other matters) the payments were not calculated in reference to the taxpayers' condition.

23/04/15 Hii v Commissioner of Taxation

[2015] FCA 375

Collier Commissioner This case involved applications for summary judgment by the Commissioner and Mr Hii respectively and amended originating applications by Mr Hii. The taxpayer alleged that in considering objections in relation to amended assessments the Commissioner was required to form a view that there had

Decision Impact Statement has been


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been an avoidance of tax due to fraud or evasion, and this was a jurisdictional fact upon which the power to issue the further amended assessments depends. The taxpayer also made allegations that the assessments were invalid due to conscious maladministration.

Judgment: The Court held:

The Commissioner made the further amended assessments in compliance with subsection 170(1) of the Income Tax Assessment Act 1936 (Cth).

It was not a necessary precondition of the exercise of the Commissioner’s power to issue amended assessments, that the Commissioner positively form a view concerning whether the taxpayer’s conduct constituted avoidance of tax due to fraud or evasion within the meaning section 170(1).

The failure of the Commissioner to form the relevant opinion at the time of the objection decision did not make that decision or the assessments invalid, or other than 'assessments' within the meaning of sections 175 and 177.

The amended assessments were not tentative or provisional, nor on the facts of the case attended by bad faith so as to constitute conscious maladministration.

issued.

13/05/15 ElecNet (Aust) Pty Ltd (Trustee) v Commissioner of Taxation

[2015] FCA 456

Davies Taxpayer In this case the taxpayer appealed to the Federal Court from the Commissioner’s objection decision disallowing taxpayer’s objection against a private ruling. The taxpayer was the trustee of the Electrical Industry Severance Scheme (EISS). The EISS provided benefits to 'workers' (as defined) who left or changed their employment in circumstances set out in the trust deed. The taxpayer applied to the Commissioner for a private ruling that the EISS was (amongst other matters) a 'unit trust' that was a 'public unit trust' and a 'resident unit trust' for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 (Cth). The Commissioner ruled that the EISS was not a 'unit trust' – which meant that it could not be a 'public unit trust', and disallowed the taxpayer's objection. Judgment: The Court held that: The EISS established for workers in the electrical industry was a unit trust for the

purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 (Cth). In determining the meaning of 'unit trust' in the context of Division 6C, the definition of

The Commissioner successfully appealed to the Full Federal Court – see decision summary below.


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'prescribed trust estate' incorporates by reference the term 'unit trust'. Given this, and the role of the definition of 'unit' in the structure of Division 6C, Division 6C must be read as a whole and while 'unit trust' is not defined, its meaning is affected by the definition of 'prescribed trust estate' in relation to which 'unit' has a defined meaning. Units described as such do not need to be issued.

The trust fund was held for the benefit of the persons in respect of whom the contributions were made by the employers and each worker had a discrete proprietary interest and a beneficial interest in the contributions paid in respect of the worker into the trust fund and standing to his or her worker’s account, although not a present right to immediate payment as it was contingent upon severance.

The proprietary nature of their interests was sufficient to give rise to 'beneficial interests in any property of the trust estate' within the meaning of 'unit' in section 102M of Income Tax Assessment Act 1936 (Cth).

The ruling request did not specify a crucial fact relating to the Trust Deed, which was whether there was a determination by the trustee as to whether the workers were 'active workers' as required under the Deed, and how that impacted upon the Trust and the judgment is qualified in this respect.

15/05/15 Hua Wang Bank Berhad v Commissioner of Taxation (No 19)

[2015] FCA 454

Perram Commissioner In a judgment issued in late December 2014, the Federal Court held that each of the taxpayers was resident in Australia and liable to tax on the proceeds of the sale of shares. The Court also held that the shares were trading stock of the taxpayers.

The issue in this case was whether section 70-40(2) of the Income Tax Assessment Act 1997 (Cth) required the value of the taxpayers’ shares in each year in dispute to be valued at nil under the trading stock rules if no assessment had been issued for the preceding income year. The taxpayers maintained that if they elected a valuation method under the trading stock rules and established the value of trading stock there was no need for there to be an assessment issued by the Commissioner and that section 70-40(2) did not require such an assessment.

Judgment: The Federal Court held that the process of taking into account the value of trading stock for the purposes of sections 70-35 and 70-40 of the Income Tax Assessment Act 1997 (Cth) required the Commissioner to take into account the trading stock in the previous year as part of the process of assessment. If there was no assessment for the previous year, section 70-40(2) required the

Taxpayer unsuccessfully appealed to the Full Federal Court – see decision summary below under Bywater Investments Ltd.


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value of an item of trading stock at the start of the new income year to be nil.

1/07/15 Commissioner of Taxation v Warner

[2015] FCA 659

Perry Commissioner In this case, the Commissioner served notices under both section 264 of the Income Tax Assessment Act 1936 (Cth) and section 353-10 of the Taxation Administration Act 1953 (Cth) on the liquidators of a group of companies which were part of a consolidated group for income tax purposes and a GST group for GST purposes. The liquidators took the position that section 486 of the Corporations Act 2001 (Cth) required a creditor of a company in liquidation to obtain a Court order before it can inspect the company’s records held by its liquidator, and that section 264 was inconsistent with section 486 of the Corporations Act. As a result, the liquidators did not propose to produce the documents required under the section 264 document notice absent a Court order. The Commissioner sought a declaration from the Court that the liquidators had to comply with the section 264 and section 353-10 notices and raised a series of questions of law. The liquidators were not represented and an amicus curiae was appointed to raise arguments countering the Commissioner's position. Judgment: The Court held that section 264 and section 353-10 authorised the Commissioner to require production of documents from any person, irrespective of whether or not the recipient of the notice is the liquidator of a company, taxpayer or putative taxpayer in liquidation. Section 486 of the Corporations Act does not affect the liquidators’ obligation to comply with a section 264 notice or a section 353-10 notice.

14/07/15 Agius v Commissioner of Taxation

[2015] FCA 707

Griffiths Commissioner This was an appeal by the taxpayer against a decision of the Administrative Appeals Tribunal rejecting the taxpayer's objections to default assessments. The taxpayer, a resident of Vanuatu, had been convicted of conspiring to defraud the Commonwealth and was serving a period of imprisonment. The taxpayer was assessed for Australian income tax for the income years 1997 to 2006 in respect of his Australian-sourced income.

The taxpayer argued that the Administrative Appeals Tribunal had applied the wrong legal test in reaching the conclusion that the income had an Australian source. The taxpayer also argued that there was no evidence to support the finding that the taxpayer had received amounts other than amounts in the categories of income identified by the taxpayer (in particular he maintained some of the amounts assessed to him had been derived by companies or a partnership and not by him), and that the Tribunal misconstrued the nature of the burden of proof under section 14ZZK of the Taxation



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Administration Act 1953 (Cth).

Judgment: Appeal dismissed.

There are no mandatory factors that must be taken into account when determining the source of income, rather a range of factors will be relevant, and the conclusions reached by the Tribunal were based upon the evidence before it. For the taxpayer to make good a claim of no evidence to support a finding of fact, it is necessary for him to demonstrate that there was a complete paucity of evidence to support the relevant finding and that the error was material in affecting the outcome. It was open to the Tribunal to find that the taxpayer failed to discharge his burden of proof of negating that there were other Australian sources of income.

31/0715 Davies v Deputy Commissioner of Taxation

[2015] FCA 773

Perram Taxpayer This case considered the interpretation of the employee share scheme provisions in Division 83A of the Income Tax Assessment Act 1997 (Cth). The taxpayer was an incoming executive director of Whitehaven.

In April 2009 Whitehaven agreed to grant a company controlled by the taxpayer the right to acquire shares and be granted options, subject to shareholder approval at an AGM (which occurred in November 2009). The shares and options were allotted in four stages between December 2009 and October 2011.

Under section 83A-15 of the Tax (Transitional Provisions) Act 1997 (ITTPA) if a beneficial interest in a right was acquired before 1 July 2009, and after 1 July 2009 that right become a right to acquire a beneficial interest in a share, Division 13A of the Income Tax Assessment Act 1936 (Cth) would apply as if the right had always been a right to acquire a beneficial interest in the share. At issue was whether for the purposes of the ITTPA the taxpayer's company acquired the rights in April 2009 (and pre-July 2009 so Division 13A applied) or at the date of the shareholder approval in November 2009.

If the shares and options were to be valued for tax purposes as at the date on which the taxpayer's company acquired the right to have the shares and options issued, any discount to the market value of the shares and options was to be calculated and brought to tax in the hands of the taxpayer (as an associate of his company) under the then section 139D(2) of the Income Tax Assessment Act 1936 (Cth), at that earlier date when the shares were trading at a low price, rather than as at the vesting dates when the share price had increased substantially.

Decision Impact Statement has been issued.


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Judgment: The Court held that when the taxpayer entered the agreement for the right to acquire shares and options, the taxpayer obtained contingent rights to acquire a beneficial interest in a share. Once the shareholder approval was granted, the right that the taxpayer had acquired under the agreement became a right to acquire a beneficial interest in a share. The requirements of the ITTPA were satisfied, and the taxpayer was taxed taking into account the lower price.

Following the decision, the Australian Taxation Office released a Decision Impact Statement withdrawing Taxation Determination TD 2014/21.

7/08/15 Rigoli v Commissioner of Taxation

[2015] FCA 803

Pagone Commissioner This case was an appeal under section 44 of the Administrative Appeals Tribunal Act 1975 (Cth) from the decision of the Administrative Appeals Tribunal which dismissed the taxpayer's proceedings challenging default assessments.

The taxpayer argued that the Administrative Appeals Tribunal erred in law in finding that the taxpayer could not rely on the Commissioner's expert report to prove that the default assessment was excessive or incorrect. The taxpayer had sought to 'concede' that the income identified in that report was correct, but then claim depreciation deductions (amongst other expenses) against that income reducing the overall assessments.

Judgment: The Court found that the Administrative Appeals Tribunal was correct to hold that the expert report did not establish the taxpayer's income and therefore he could not rely on the report. The expert had been engaged to provide an opinion on the income, expenses and changes in net assets of a partnership of which the taxpayer was a partner. The process undertaken by the expert was similar but not in the same form or substance as evidence of the taxpayer's taxable income. In addition, the Tribunal was correct to conclude that the taxpayer had not satisfied his burden of proof.


20/08/15 Kafataris v Deputy Commissioner of Taxation

[2015] FCA 874

Davies Commissioner In this case, the taxpayers sought to argue that CGT event A1 as opposed to CGT event E1 occurred in respect of the change in beneficial ownership of a property. The taxpayer argued that as a consequence rollover relief was available pursuant to section 122-125 of the Income Tax Assessment Act 1997 (Cth).

The taxpayers owned the property in question and transferred the equitable estate in the property to a company controlled by the taxpayers in exchange for a promissory note of $9 million. The company then issued 9 million shares to the taxpayer at $1 each. The taxpayers argued that CGT event A1 occurred as a constructive trust arose as a consequence of the taxpayers accepting the



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company's offer, and that rollover relief was available. For rollover relief to be available, CGT event E1 must not apply. The taxpayers maintained that CGT event E1 did not arise because the trust over the property was created by operation of law and not by 'declaration' or 'settlement' within the meaning of those terms in section 104-55(1) of the Income Tax Assessment Act 1997 (Cth)

Judgment: The Court held that the taxpayers had a clear intention to create a trust over the property in favour of the company by transferring the equitable estate and this triggered CGT event E1. It was an express term of the contractual documents that the taxpayers 'should be bound to hold the property on the trust' for the company. The declaration of trust was in writing as required by law. The word ‘declaration’ in section 104-55 takes its ordinary meaning: Oswal v Commissioner of Taxation [2013] FCA 745.

As a matter of ordinary language, a trust is created by 'declaration' when it is created by the holder of the undivided legal interest in property using words or actions which sufficiently evidence an intention to create a trust over that property.

In this case the contractual arrangements used the express language of trust and sufficiently evidenced an intention to create a trust. The more appropriate event was CGT event E1, and rollover relief was not available.

31/08/15 Thomas v Commissioner of Taxation

[2015] FCA 968

Greenwood Commissioner / Taxpayer (on penalties)

The taxpayers were a trustee and the two beneficiaries of the family trust (an individual and a company).

In the 2006 to 2009 income years the trustee had passed resolutions sharing franking credits and foreign tax offsets between the individual beneficiary at over 90% and the company beneficiary at less than 10%. Another resolution shared all the other net income (eg dividends) between the individual beneficiary at less than 1% and the company beneficiary at more than 99%. The purpose of this was to maximise the refundable tax offsets available only to the individual beneficiary and to ensure that section 99A of the Income Tax Assessment Act 1936 (Cth) did not apply.

The trustee had sought directions in the Queensland Supreme Court on the interpretation of the trust deed and the allocation of franking credits. In Thomas Nominees Pty Ltd v Thomas and Ors [2010] QSC 417, the Supreme Court ruled that the deed allowed the allocation of franking credits separately from the net income of the trust. One of the issues before the Federal Court was whether the Commissioner was bound by the directions of the Supreme Court.


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In 2011, the Commissioner issued amended assessments to the taxpayers and imposed shortfall penalties. The Commissioner contended the franking credits formed part of the income of the trust and therefore could not be distributed separately from the dividends to which they attached. Likewise, the allocation of other credits such as foreign tax credits was similarly at issue. The taxpayer objected to both the assessments and the application of penalties.

Judgment: The Federal Court held that:

The franking credits could not be dealt with by the trustee separately from the franked distributions to which they were attached, as section 207-55 required the franking credits and the dividends to be connected. The approach of the taxpayers represented an 'impermissible un-linking inconsistent with the legislation'.

Franking credits could not be 'streamed' independently from the net income of the trust in contrast to fully franked dividends which were 'dividends' and represented a category of distributable trust income.

The Court considered that in most cases there is a difference between the distributable income of the trust and the section 95(1) net income of the trust estate. In contrast to the finding of the Queensland Supreme Court, the distributable income of the trust was its 'net income' as calculated under section 95(1), not trust income.

Taxation Ruling TR 92/13 was not relevant as it failed to correctly state the position under Division 207 of the Income Tax Assessment Act 1936 (Cth).

The Commissioner was not prevented from making submissions on all questions of fact and law in issue in the present proceedings, even though there were directions made by the Queensland Supreme Court. The directions from the Supreme Court were made in the context of proceedings which were not contested and where the Commissioner was not a party. The Commissioner had to form a view based on the tax law. Further, there was no authority for the view that the principle of estoppel applies to the construction of a trust deed.

The Court set aside the shortfall penalties on the basis that they were excessive in the circumstances given that the taxpayer had a reasonably arguable position relying on the Queensland Supreme Court decision and Taxation Ruling TR 92/13 (now withdrawn), which allowed imputation credits to be attached non-proportionally to amounts of net income


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distributed to beneficiaries.

3/09/15 Bai v Commissioner of Taxation

[2015] FCA 973

Rares Taxpayer This was an appeal by the taxpayer against the decision of the Administrative Appeals Tribunal.

The Commissioner had amended the taxpayer's 2005 assessment pursuant to section 170(1) item 5 of the Income Tax Assessment Act 1936 (Cth) after conducting a tax audit, on the basis that he had formed the opinion there had been evasion.

The amendment resulted in the taxpayer's taxable income being assessed at almost $1.2m instead of the $13,790 that she had been returned. Amongst other things, the Commissioner claimed there had been a large number of unidentified deposits totalling $1.18m into the taxpayer's bank account in the relevant financial year.

The taxpayer appealed on a number of bases including whether she had received procedural fairness, whether the evidence established the receipts were not income and whether she had to show there was no fraud and evasion.

Judgment: The Court allowed the appeal and considered the Tribunal had erred in the way in which it considered and applied the onus of proof to the taxpayer's challenge to the Commissioner's opinion that there was fraud or evasion. The Court held that the Tribunal had erred when it stated that the taxpayer's onus of proof was to exclude the possibility of there being fraud or evasion, as opposed to establishing that on the balance of probabilities.

The Court said it was not possible to discern any error in the Tribunal's conclusion as to the characterisation of those receipts and indicated that it would have rejected the procedural fairness ground although it was not necessary to determine this issue. The Court ordered that the challenge to a 2005 tax assessment should be remitted to the Administrative Appeals Tribunal.

Commissioner has appealed to the Full Federal Court.

18/09/2015 Deputy Commissioner of Taxation v Ryan

[2015] FCA 1037

Edelman Commissioner The respondents were the trustees and only members of a self managed super fund (SMSF). Between 2009 to 2012, the SMSF made a number of loans and payments to the respondents. The loans and payments were in breach of the Superannuation (Industry) Supervision Act 1992 (Cth) (SIS Act). The Deputy Commissioner sought declarations as to those contraventions and penalties under section 196 of the SIS Act. The contraventions of the SIS Act were not in question.

Judgment: The Court imposed penalties of $20,000 each and issued declarations specifying the contraventions of the SIS Act.


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29/09/2015 Bell Group Limited (in liq) v Deputy Commissioner of Taxation

[2015] FCA 1056

Wigney Taxpayer In 1991, a liquidator was appointed to the taxpayer and a number of related entities. In 2008 the taxpayer commenced proceedings in the Supreme Court of Western Australia against a number of banks (including NAB). The taxpayer was successful, but the banks obtained special leave to appeal to the High Court. Prior to the appeal however, the parties entered into a Deed of Settlement which provided that the banks pay a settlement sum to the liquidator to be held for the benefit of the taxpayer and related entities. In 2015, the Commissioner issued garnishee notices under section 260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) to NAB in respect of tax liabilities arising from the payment of the settlement sum. At this stage the funds held by NAB pursuant to the Deed of Settlement had not yet been distributed. The taxpayer sought to have the garnishee notices declared invalid on the basis that they were an attachment against the property of the taxpayer and therefore void by reason of section 468(4) of the Corporations Act 2001 (Cth). This issue had been considered by the High Court in Bruton Holdings Pty Ltd (in liq) v Commissioner of Taxation (2009) 239 CLR 346. The Commissioner asserted that the subject of the notice referred to a post-liquidation tax liability and that his right to seek a remedy in respect of this liability was preserved by section 254(1)(h) of the Income Tax Assessment Act 1936 (Cth), which was to be given priority over section 468(4) of the Corporations Act. The Commissioner asserted that Bruton Holdings only applied in relation to pre-liquidation tax liabilities. Judgment: The Court held that Bruton Holdings equally applied to post-liquidation tax liabilities. The Court held that section 260-45 of Schedule 1 to the Taxation Administration Act (in respect of pre-liquidation tax-related liabilities) and section 254(1)(h) require the liquidator to set aside amounts to meet expected tax debts, but leave questions of payment and priority to the Corporations Act. The Court found that section 254(1)(h) did not confer a remedy for the Commissioner as against property of the taxpayer once winding up had commenced. The Court held that it was important to note that section 254(1)(h) used the word 'attachable' and whether the liability was 'attachable' was determined on the same basis as was considered in Bruton Holdings.



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07/10/2015 Tech Mahindra Ltd v Commissioner of Taxation

[2015] FCA 1082

Perry Commissioner This case considered Article 7 and Article 12 of the Australia/India Double Tax Agreement (the relevant Double Tax Agreement considered was the agreement pre-2011 amendments). The most important Articles considered were: Article 12(4) which provided that amounts constituting royalties are to be dealt with under

Article 7 or 14 where the services in respect of which royalties are paid are effectively connected to a permanent establishment in the source State; and

Article 7(7) which provided that where profits included items of income dealt with under other articles, then those other articles were not affected by Article 7.

The taxpayer was a company resident in India and registered in Australia. It had offices in Sydney and Melbourne through which it provided software products and IT services (including software development) to customers in Australia, and it was not disputed that those offices constituted permanent establishments under the Australia/India Double Tax Agreement. The services were provided to the customers partly by employees located in Australia and partly by employees located in India. The taxpayer did not dispute that income was taxable in Australia to the extent it was attributable to services carried out by Australian employees. The issue in this case was whether income derived from services the taxpayer provided to Australian customers which were performed by employees located in India was taxable in Australia. The Double Tax Agreement at the time included Article 7(1)(b) which provided (on the facts of the case) that Australia could tax sales of goods or merchandise of the same or a similar kind to those sold through the permanent establishment, as well as income from other business activities of the same or a similar kind as those carried on through the permanent establishment. The Commissioner's assessment proceeded on the basis that Article 7(1)(b) was applicable, and Article 12 did not apply, as Article 12(4) provided that Article 7 applied and Article 7(1)(b) applied to provide Australia the right to tax wherever the activities took place. In the alternative, the Commissioner contended the payments from Australian customers were 'royalties' (i) meeting the applicable definition under Article 12 (ie the 'rendering of any



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services (including those of technical or other personnel) which make available technical knowledge, experience, skill, knowhow or processes or consist of the development and transfer of a technical plan or design'), (ii) those royalties arose in Australia, and (iii) Australia could impose tax. Under that alternative argument, the Commissioner maintained that Article 12(4) only prioritised Article 7 over Article 12 to the extent that there was an attribution to a permanent establishment, and not otherwise. The taxpayer objected, and appealed the Commissioner's disallowance of that objection to the Federal Court. Judgment: The Court dismissed the taxpayer's proceedings, although the Commissioner's assessments were reduced. The Court held: Article 7 did not apply, and the income from the services supplied by Indian employees

was not 'business profits' taxable in Australia. However Article 12 did apply to some of the payments, as some of the services

comprised 'royalties' as defined. Those royalties were deemed to have an Australian source by virtue of Article 23, and Australia could impose tax to that extent (subject to Article 12). Those payments were taxable in Australia in accordance with section 6-5(3)(a) of the Income Tax Assessment Act 1997 (Cth).

Article 7(7) prioritised Article 12, and Article 12(4) did not apply as there was no effective connection to a permanent establishment in Australia. The contractual arrangements between customers and the Australian permanent establishment in respect of the services was not sufficient for an 'effective connection' rather the test is one of whether profits are attributable to the work of the permanent establishment.

The taxpayer was contending that while there was an 'effective connection' for the purposes of Article 12(4) requiring Article 7 to have priority, there was no effective connection or attribution to a permanent establishment for the purposes of Article 7, and tax did not arise. The Court held there was no discernible purpose for that outcome and it was not correct.

The services provided by the Indian employees of the taxpayer were 'royalties' as those services in part consisted of the 'development and transfer of a technical plan or design'. The Court held for completeness that the services did not 'make available' technical


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knowledge – technical knowledge was not supplied, services using that knowledge was.

19/10/2015 Millar v Commissioner of Taxation

[2015] FCA 1104

Griffiths Commissioner This was an appeal of a decision by the Administrative Appeals Tribunal which affirmed the Commissioner's decision to issue amended notices of assessment and notices of shortfall penalties (for intentional disregard of tax law).

The facts involved an Australian Superannuation fund controlled by the taxpayers (a husband and wife) which deposited money with a Samoan Bank (Hua Wang Bank Berhad), and the subsequent entry into a loan agreement with the Bank lending funds to the taxpayers in their personal capacity (the funds were used to purchase an apartment on the Sunshine Coast). The Administrative Appeals Tribunal affirmed the Commissioner's view that the taxpayers impermissibly had early access to superannuation benefits by making the deposit and then entering into the loan arrangement, and that the transaction was a sham loan transaction..

The Tribunal held the transaction was contrary to Part 6 of the Superannuation Industry Supervision Regulations 1994 (Cth), and attracted taxation under section 26AFB of the Income Tax Assessment Act 1936 (Cth). The arrangement was made by the taxpayer's financial advisor (Mr Vanda Gould) and it was common ground that the taxpayer had little understanding of the transaction.

The taxpayers appealed on a number of questions of law, including whether a 'sham' could arise given their subjective intention, whether there had been fraud or evasion, and whether the Tribunal's factual holdings meant that section 26AFB could not be applicable.

Judgment: The Court dismissed the taxpayer's appeal and held:

The knowledge and subjective intention of Mr Gould could not be disregarded for the purposes of considering whether the transaction was a sham, and was properly imputed by the Tribunal to the taxpayers. Where an advisor acts as an agent, his intention is relevant for the purposes of inquiry.

The Court held that the burden was on the taxpayers to disprove fraud or evasion and the Tribunal did not err in law on that aspect or on the application of section 26AFB.


21/10/2015 Study and Prevention of Psychological Diseases Foundation v

[2015] FCA 1117

Greenwood Taxpayer The taxpayer appealed against the decision of the Administrative Appeals Tribunal upholding the Commissioner's decision to revoke endorsements as a charitable institution and health promotion charity under the Income Tax Assessment Act 1997 (Cth), A New Tax System (Goods and Services


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Commissioner of Taxation Tax) Act 1999 (Cth) and Fringe Benefits Tax Assessment Act 1986 (Cth) respectively, and to issue assessments and apply penalties and interest.

Judgment: While the Court agreed with the Tribunal that the taxpayer was not a charitable institution because it did not fulfil the charitable purposes it asserted, the Court held in favour of the taxpayer and remitted the matter back to the Tribunal.

The Court held that the Tribunal failed to address two of the taxpayer's submissions (relating to whether the auditor was impartial, and whether the Commissioner was required to comply with the Taxpayers' Charter and the Compliance Model) and an inference arose that those matters were not considered.

23/10/2015 Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4)

[2015] FCA 1092

Robertson Commissioner This was the first major case in Australia to consider transfer pricing issues in relation to cross border related party financing. The dispute concerned the transfer pricing implications of a Credit Facility Agreement dated 6 June 2003 between Chevron Australia Holdings Pty Ltd (CAHPL) and Chevron Funding Corporation Inc (CFC), a Delaware based wholly owned subsidiary of CAHPL. The facility was for the AUD equivalent of USD 2.5 billion. The USD funds had been raised by CFC from the commercial paper market at approximately 2% interest and on-lent to CAHPL in AUD at approximately 9% interest. The Commissioner denied a proportion of the deductions claimed by CAHPL for the interest paid to CFC. The Commissioner issued amended assessments for the 2004 to 2008 tax years with penalties. The assessments relied upon determinations made by the Commissioner pursuant to Division 13 of the Income Tax Assessment Act 1936 (Cth). In addition, the Commissioner made determinations under Division 815-A of the Income Tax Assessment Act 1997 (Cth) for the 2005 to 2007 tax years. Division 815-B was not considered as a part of this case. The central issue was whether interest charged by CFC to CAHPL exceeded the arm's length amount, but other issues arose including the constitutional validity of Division 815-A, and whether Article 9 of the Australia-United States double tax agreement operated as an independent basis for assessment. Judgment: The Federal Court held in favour of the Commissioner, on the basis that the



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taxpayer had not discharged its onus of proof that the assessments were excessive. The case turned on the evidence that was before the Court. Critical holdings included: The Facility between CAHPL and CFC did not contain any security or covenants which

would be expected in arm's length agreements. If such provisions were included, the arm's length interest rate would have been lower.

Credit rating agency evidence presented by both the taxpayer and the Commissioner was not held to be relevant because the Court held that independent lenders do not rely upon published credit ratings, and instead complete their own credit analysis.

Although it was permissible to take the implicit support of a parent entity into account, it had very little impact on pricing by a lender (this was particularly important as the Commissioner had maintained that implicit support would have led to a higher credit rating for the borrower, and a reduced interest rate).

An arm's length loan may have been made in AUD for commercial reasons, despite carrying a higher interest rate than a loan in USD. This was in response to submissions from the Commissioner which focused on the 'property' for the purposes of the transfer pricing provisions.

'Consideration' in Division 13 was not limited to the interest rate, and included valuable promises of the borrower (such as restrictive covenants and security).

Division 13 does not treat a taxpayer which is a subsidiary of an entity as a stand-alone entity (ie without taking into account its status as a subsidiary).

Article 9 of the Australia/United States double tax agreement did not operate to provide an independent taxing power.

Division 815-A was constitutionally valid. The transfer pricing rules can be applied irrespective of whether the amount of debt is

below the safe harbour thresholds under the thin capitalisation rules.

13/11/2015 Rosgoe Pty Ltd v [2015] Logan Taxpayer This was an appeal from a decision of the Administrative Appeals Tribunal. Commissioner has


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Commissioner of Taxation FCA 1231

The taxpayer was the trustee of a discretionary trust. The taxpayer sought a private ruling with respect to the proposed sale of two adjoining parcels of land. Specifically, the Commissioner was asked to consider whether the sale of land would amount to a mere realisation of a capital asset, and subject to the CGT rules.

The taxpayer had initially purchased the land with the intention of developing and selling it as part of a joint venture. However, during the financial year the project fell through and the taxpayer contended that the land no longer formed part of his trading stock.

In the ruling the Commissioner found that the sale was an isolated, commercial transaction and that proceeds would therefore be assessable as income, and would not be taken into account under the CGT rules. The taxpayer objected, and the matter then proceeded to the Administrative Appeals Tribunal.

The Tribunal upheld the ruling, making a finding of fact that the taxpayer was carrying on a business during the relevant period. The Tribunal held that the sale occurred during the ordinary course of business (rather than an isolated transaction, as had been held by the Commissioner in the ruling).

Judgment: The Court held that the Administrative Appeals Tribunal did not have jurisdiction to assess the proceeds of the sale as income on an alternative basis to that of the Commissioner. When reviewing an objection decision in respect of a private ruling, the Tribunal was not permitted to redefine the 'arrangement' as stated in the ruling, and not permitted to engage in a fact finding exercise.

On the Commissioner's description of the facts in the ruling, the property was acquired for carrying out a scheme that was later abandoned. When the disposal of the property occurred, the Commissioner's ruling stated that the profit did not arise from the carrying on or out of the scheme, and there was no other basis for finding on the facts in the ruling that those profits were on revenue account.

The Court therefore found (in obiter) that the Commissioner was in error in assessing the proceeds as income rather than the mere realisation of a capital asset.

The matter was remitted to the Tribunal for a further hearing.

appealed to Full Federal Court.

04/12/2015 Pratten v Commissioner of [2015] FCA

Robertson Commissioner The taxpayer sought orders that the amended assessments issued by the Commissioner be declared invalid and quashed. The taxpayer also sought an interlocutory injunction preventing the


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Taxation 1357 Commissioner from making any further use of the amended assessments.

The taxpayer's central submission was that 'there is sufficient evidence to demonstrate the Commissioner’s audit processes leading up to the amendment(s) of the assessments, was performed in reckless disregard of due and fair process, and in a manner contrary to the principles of administrative law and the doctrine of natural justice ...'

Judgment: The taxpayer's application failed on the facts and the law.

04/12/2015 Keris Pty Ltd (Trustee) v Deputy Commissioner of Taxation

[2015] FCA 1381

Siopis Commissioner Pursuant to section 255-100 of Schedule 1 to the Taxation Administration Act 1953 (Cth), the Commissioner issued a notice requiring the taxpayer to give security for the due payment of future tax-related liabilities from a proposed subdivision. That notice sought to secure $350,000 by way of a mortgage over the land owned by the taxpayer which the taxpayer proposed to subdivide.

The notice included a statement to the effect that ATO officers had estimated that the sale of the subdivided lots would cause the taxpayer to incur GST liabilities of approximately $373,886 after taking into account development costs. The taxpayer commenced judicial review proceedings to set aside the notice.

Judgment: The Court did not accept the taxpayer's contention that the power in section 255-100 to issue the notice to provide security was not enlivened because the taxpayer had by the date of the notice not yet subdivided the land and so an event potentially triggering a future tax liability had not arisen. The Court held a 'future' liability could arise from anticipated facts on the plain meaning of the section, and that the other requirements in the section were satisfied. Constitutional arguments about the validity of section 255-100 were also dismissed.


07/12/2015 Orica Limited v Commissioner of Taxation

[2015] FCA 1399

Pagone Commissioner The taxpayer was the head entity of the Orica Australia consolidated group. This case considered the application of Part IVA of the Income Tax Assessment Act 1936 (Cth), whether the taxpayer had a reasonably arguable position, and the application of penalties under section 284-145 of Schedule 1 to the Taxation Administration Act 1953 (Cth). The issues related to the 2004-2006 income years (ie prior to the amendments to Part IVA in 2012). The background revolved around the booking of US tax losses by the Orica group in its consolidated balance sheet. The US tax losses could only be booked if it was virtually certain those losses would be used in future against income. Because the US operations were loss making those US tax losses were not anticipated to be able to be recognised through


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ordinary trading. The lack of recognition of the US tax losses in the balance sheet had the impact on the reporting of the group's profits, reducing assets and increasing the group's income tax expense. If the losses could be booked, there would be an increase in Orica's reported consolidated profits, by way of a reduction in its income tax expenses. When the Group considered that issue, ideas were considered to generate income in the US. The arrangement adopted involved a degree of circular financing which in relation to Australia involved: A member of the Orica tax consolidated group in Australia ('OEH') subscribing for three

tranches of redeemable preference shares (RPS) in a US subsidiary which had the US tax losses ('OUSSI'). The RPS carried a right to receive a non-cumulative annual dividend payable out of distributable profits. The subscription was funded by OEH borrowing funds from another member of the Australian consolidated group ('OFL');

OUSSI lending the funds to OFL at interest rates ranging from 4.46% to 5.43% per annum, guaranteeing OUSSI a flow of interest income in the US and enabling the US tax losses to be booked in the consolidated balance sheet;

OFL on-lending the funds it borrowed from OUSSI to OEH. From an Australian income tax perspective, the consolidated group claimed a deduction (at 30%) for interest incurred on the loan from OUSSI, remitted withholding tax to the ATO (at 10%) on the interest payments and was not assessed on the dividends received on the RPS. The Commissioner sought to apply Part IVA to deny deductions for interest on the loans from OUSSI on the basis that the dominant purpose of the scheme was to obtain those deductions. The case focused exclusively on the purpose element in Part IVA, as the scheme and tax benefit elements of Part IVA were conceded. The taxpayer argued the scheme was undertaken in order to re-recognise the US tax losses and in turn increase accounting profits. This, in turn, was anticipated to improve investor perceptions of the group's financial performance, increase Orica’s share price, reduce the risk of a hostile takeover and reduce the risk of a breach of financial covenants. The taxpayer maintained that the dominant purpose of the scheme was not to obtain tax benefits.


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Judgment: The Court held: The evidence did not establish a causal link with the purposes asserted by the taxpayer

and, in any case: 'any consequence from the schemes to the perceptions of investors or…financiers would necessarily have arisen from the after tax effect on reported profits for the group arising from the deductions for the interest paid…'

The shape or form of the transaction adopted indicated the presence of a dominant purpose of obtaining a tax benefit.

Citing Spotless and Hart, the existence of a commercial purpose relating to the accounting treatment did not vitiate the fact that obtaining the tax benefit was the dominant commercial purpose.

In reality, the accounting effect was an increase in group profits by the amount of the tax deductions obtained. The commercial benefit identified by the taxpayer represented a monetisation of a tax benefit, and without the tax benefit the schemes would not have made commercial sense. This supported the view that the dominant purpose was to obtain the tax benefits.

There was insufficient evidence to support the view OUSSI would otherwise have entered into a financing with an external provider, and generated income from a bank deposit.

In assessing the taxpayer's liability for penalties, the Court found that the taxpayer’s position did not meet the 'reasonably arguable' threshold and that penalties were appropriately applied. The taxpayer had argued at the time it entered the scheme the High Court's judgment in Hart had not been issued, but there was no evidence how the decision in Hart could have affected its conclusion.

17/12/2015 Normandy Finance and Investments Asia Pty Ltd v Commissioner of Taxation

[2015] FCA 1420

Edmonds Taxpayer / Commissioner

The taxpayers (each of which was an Australian company) received payments of money from related companies incorporated outside Australia and not resident in Australia. Mr Vanda Gould was the adviser involved in these transactions. The taxpayers maintained the payments were loans and the Commissioner maintained they were sham transactions designed to bring income into Australia, and assessed those receipts as income. The taxpayers' objections were disallowed.


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Another taxpayer which was the trustee of a trust claimed a capital loss from the disposal of a receivable to a related company. This was disallowed by the Commissioner on the basis that the arrangements were sham arrangements, and consequential assessments were raised to the trustee taxpayer and to individual taxpayers who were beneficiaries of the trust. An issue arose as to whether the amount included in the section 95 net income of the trust was a loan from a beneficiary company or merely recognition of unpaid present entitlements of anterior years of income. The taxpayers' objections were also disallowed.

Penalties were also imposed by the Commissioner on each of the taxpayers, and objections related to those penalties were also disallowed.

The taxpayers (who were all related parties) appealed to the Court.

Judgment: The Court held:

The parties were not dealing on arm's length terms.

After a review of the case law relating to 'shams', neither the loan transactions nor the trustee taxpayer's transfer transaction was a sham, as on the evidence presented those transactions were intended to operate as contended by the taxpayers. Accordingly the taxpayers' appeals were allowed to that extent and the assessments were set aside.

That factual issues alleged by the Commissioner to be relevant to whether shams arose, were not relevant.

The trustee taxpayer had not shown on the balance of probabilities that a capital loss arose from the transfer transaction. Accordingly the Commissioner's assessment was upheld to that extent.

Penalty assessments were set aside to the extent that the Commissioner's assessments had been set aside.

17/12/2015 Oswal v Commissioner of Taxation

[2015] FCA 1439

Griffiths Commissioner The taxpayers' solicitors sought an undertaking from the Commissioner that if the taxpayers returned to Australia that the Commissioner would not issue a departure prohibition order against them. This was refused.

The taxpayers applied for judicial review under section 39B of the Judiciary Act 1903 (Cth) of the Commissioner's refusal to give undertakings not to issue a departure prohibition order. The taxpayers claimed that the Commissioner misconstrued his powers under section 3A of the Taxation


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Administration Act 1953 (Cth) by refusing to give the undertakings and acting unreasonably.

Judgment: The Court held that the Commissioner did not make an unreasonable decision. It was open to the Commissioner to decline to give the undertaking sought having regard to the breadth of the discretion under section 14S of the Taxation Administration Act 1953 (Cth).

22/12/2015 Breakwell v Commissioner of Taxation

[2015] FCA 1471

White Commissioner This was an appeal by the taxpayer from a decision of the Administrative Appeals Tribunal concerning the whether the taxpayers were entitled to small business CGT concessions requiring (amongst other matters) the satisfaction of the maximum net asset value test (section 152-15 of the Income Tax Assessment Act 1997 (Cth)) in respect of the sale of a finance broking business.

The East Terrace Unit Trust conducted the finance broking business and the Alan Breakwell Family Trust was a beneficiary of the Unit Trust. The taxpayers were, in turn, beneficiaries of the Alan Breakwell Family Trust. The case concerned whether a loan by the family trust to Alan Breakwell (a beneficiary) in 1998 should be included as an asset in the maximum net asset value test (MNAVT).

The Administrative Appeals Tribunal held that the loan should be included, and this meant the maximum value of $6,000,000 under the MNAVT was exceeded and the taxpayers would not be entitled to claim CGT relief. The taxpayers appealed to the Court on the grounds that the loan was statute barred by section 35(a) of the Limitation of Actions Act 1936 (SA) and was not going to be repaid, so it was either of nil value, or could not be taken into account at law.

Judgment: The Court held that the loan was not statute barred and affirmed the decision of the Administrative Appeals Tribunal .

Section 35(a) of the Limitation of Actions Act 1936 (SA) does not have the effect of extinguishing a claim in contract (or for repayment of a debt) after six years. That provision bars the remedy, but not the cause of action. Further, the taxpayers' submissions overlooked the effect of section 48 of the Limitation of Actions Act 1936 (SA), which empowers the courts to extend limitation periods, including those set by section 35(a). Finally it could not be said that the loan had no value.



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28/01/15 Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Commissioner of Taxation

[2015] FCAFC 4

Perram, Robertson and Pagone

Commissioner This was an appeal by the taxpayer from the Federal Court.

The Federal Court had affirmed the Commissioner's assessments and confirmed that a CGT event had occurred when the taxpayer entered into a trust deed and joint venture agreement and transferred land to a trustee. The taxpayer had transferred legal title of its land to a third party to act as trustee and nominee of the joint venture, but remained a beneficiary of the trust.

The Federal Court held that CGT event E1 applied as there had been a 'settlement' within the meaning of section 104-55(1) of the Income Tax Assessment Act 1997 (Cth) or that CGT event A1 arose on the basis that the taxpayer did not remain beneficial owner of the land. The Federal Court held that a deemed gain being the market value of the asset arose to the taxpayer, less an allowed portion of development costs.

The taxpayer appealed to the Full Court.

Judgment: The Full Court dismissed the appeal.

The transfer of legal title in the land to a trustee subject to the joint venture agreement constituted CGT Event E1. The Court also held that because of the joint venture agreement the taxpayer did not remain the sole beneficiary of the trust.

Although the taxpayer had not received capital proceeds from the transfer it had received valuable rights in consideration in the form of interests in the land of other members of the joint venture. The Court held that Commissioner had correctly included development costs and soil remediation costs when calculating the land's market value, although the Full Court allowed development costs to be added to the cost base of the land.

23/02/15 Atkinson v Commissioner of Taxation

[2015] FCAFC 18

Foster, Yates and Gleeson

Commissioner This was an appeal by the taxpayer from the Federal Court.

The Federal Court dismissed an application by the taxpayer because the application was frivolous and vexatious. The taxpayer sought $450,000 from the Commissioner, and an order that the tax debts owed by the taxpayer to the Commissioner be discharged. The Commissioner sent the taxpayer a notice of account with details of a $96,592 income tax debt. The taxpayer

FULL FEDERAL COURT 2015 TAX CASES

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sent a letter responding to the notice of account, enclosing what he claimed was a bill of exchange to the value of $1 but which was the statement of account marked up in handwriting with various words. In a convoluted argument based on the Bills of Exchanges Act 1909 (Cth) the taxpayer maintained he had satisfied the tax debt and the Commissioner owed him or his assignee money.

Judgment: The appeal was dismissed with costs as the proceedings were vexatious. The Full Court agreed with the Federal Court that provisions in the Bills of Exchange Act 1909 (Cth) were not engaged when the Commissioner sent the statement of account to the taxpayer. The bill of exchange was not accepted by the Commissioner. Writing on a statement of account did not make it a bill of exchange. The bill of exchange, the stamps or handwritten notes on the account statement were of no legal effect.

16/03/15 Commissioner of Taxation v McGrouther

[2015] FCAFC 34

Allsop, Pagone and Davies

Commissioner This was an appeal by the Commissioner from the Federal Court.

In this case the taxpayers lodged objections against amended assessments. Prior to determining the objections the Commissioner issued a notice under section 264 of the Income Tax Assessment Act 1936 (Cth) requiring one of the taxpayers to attend for an examination. Two days later, the taxpayers served notices under subsection 14ZYA(2) of the Taxation Administration Act 1953 (Cth) requiring the Commissioner to determine their objections within 60 days (if that did not occur the objections were deemed disallowed).

The taxpayers then commenced proceedings in the Federal Court challenging the validity of decision to issue the section 264 notice. Following discussions between the parties it was agreed that:

the Commissioner would defer the examination until at least 7 days after final orders were made determining the validity of the section 264 notice; and

the taxpayer would withdraw the notices given under subsection 14ZYA(2) of the Taxation Administration Act 1953 (Cth), and not to issue further notices under subsection 14ZYA(2) in respect of the objections until the validity of the section 264 notice was determined.

A preliminary question arose at the Federal Court as to whether the taxpayer's section 14ZYA notice could be withdrawn, and the Court held that there was no explicit or implicit power to withdraw such a notice. The Commissioner appealed, and the taxpayer filed proceedings under

Decision Impact Statement has been issued. An application by the taxpayer for special leave to appeal to the High Court was dismissed.


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Part IVC challenging the deemed disallowance of the objection. The Commissioner sought to have those proceedings struck out.

Judgment: The Full Federal Court allowed the appeal. The Court held that a taxpayer could waive reliance on a notice given under subsection 14ZYA(2) of the Taxation Administration Act 1953 (Cth), because it was a provision existing solely for the benefit of the taxpayer and not one where observance was a condition of the exercise of a statutory power or enacted for a wider public purpose. Waiver of a subsection 14ZYA(2) notice can be validly effected by a notice to the Commissioner withdrawing the notice.

As the taxpayers had waived the subsection 14ZYA(2) notice given to the Commissioner, the Court held that there was no deemed objection decision and the Federal Court had no jurisdiction to hear the Part IVC application made by the taxpayers. Those proceedings were struck out.

06/05/15 Commissioner of Taxation v AusNet Transmission Group Pty Ltd

[2015] FCAFC 60

Kenny, Edmonds and Greenwood


This case considered the proper method of apportioning purchase price to copyright assets purchased by the taxpayer without an explicit statement of value. The taxpayers had claimed deductions in the financial years from 1998-2005 as a result of a purchase of a business. One taxpayer had claimed deductions on its own behalf ('the first taxpayer') and the other as head company of a consolidated group ('the head company taxpayer') which had been subsequently joined by the first taxpayer.

Under the purchase agreement, the assets of the business were defined to include the intellectual property rights of the business, which included copyright in technical drawings, plans and other works which were critical to the operation and maintenance of the business. The case proceeded on the footing that the works were original works in which copyright subsisted. The taxpayers claimed the copyright in the works was a ‘unit of industrial property’ in relation to which an amount equal to the residual value of the unit (calculated in accordance with a prescribed formula) was an allowable deduction under the former Division 10B of Part 3 of the Income Tax Assessment Act 1936 (Cth), and the former Division 373 and Division 40 of the Income Tax Assessment Act 1997 (Cth).

The main issue before the Federal Court was in respect of the first taxpayer and was the interpretation of section 124R(5) of the Income Tax Assessment Act 1936 (Cth) for the purposes

Taxpayer sought special leave to appeal to the High Court – this was later withdrawn (we understand the case was settled).


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of determining the amount of the purchase price to be allocated to the copyright in the works. In particular, the issue was whether that purchase price allocation process was subject to the Commissioner's discretion or whether it operated objectively requiring valuation evidence to be considered. The Commissioner had determined a nil allocation.

The Federal Court held that the question of value and allocation was to be determined objectively according to the applicable valuation methods (as an arm's length transaction was being considered in the case). On the evidence the Federal Court preferred the midpoint of the valuations previously obtained by the taxpayer as the basis of valuing the copyright. The matter was remitted to the Commissioner to revalue in light of the decision. The Commissioner appealed to the Full Court.

Judgment: The appeal was allowed.

The Court held:

On the threshold question of whether the first taxpayer could challenge the Commissioner's determination pursuant to section 124R(5) using Part IVC proceedings as opposed to as a judicial review proceeding, the majority of the Court said the first taxpayer could do so.

On the question of whether section 124R(5) involved a valuation of the copyright works, it was held that it did require a valuation.

However, the expert evidence before the Federal Court was held to be misconceived and should not have been admitted as evidence. In particular, factors which suggested that the copyright works had no value were not considered appropriately. The Court considered that if the first taxpayer had not acquired the copyright, it would have acquired an implied licence to use the copyright – with the copyright being of little to nil value as a consequence.

As the expert evidence did not show that the Commissioner's assessment of the first taxpayer was excessive, the Commissioner's assessment was upheld.

In relation to the head company taxpayer, the Court held that there were unresolved questions in relation to the valuation of the copyright at the relevant time that the first taxpayer joined the consolidated group, and remitted the matter to the Federal Court for determination.


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07/05/15 Channel Pastoral Holdings Pty Ltd v Commissioner of Taxation

[2015] FCAFC 57

Allsop, Edmonds, Gordon, Pagone and Davies

Commissioner This was a special case stated to the Full Court and was funded by way of test case funding. This case considered the application of Part IVA of the Income Tax Assessment Act 1936 (Cth) to a consolidated group. It followed the decision in FCT v Macquarie Bank Limited [2013] FCAFC 13 which somewhat confused the position on that issue. The questions considered by the Full Court were whether and how the Commissioner can apply Part IVA in connection with a scheme that involves the creation of a consolidated group. The critical facts were as follows: Channel Cattle Co Pty Ltd (CCC) owned two cattle stations with associated plant and

equipment, trading stock (cattle and horses) and the stations’ stock brand. All the shares in CCC were owned by Mr and Mrs Sherwin. They had acquired their

CCC shares prior to 20 September 1985 and were pre-CGT assets. Until 31 December 2007, Channel Pastoral Holdings (CPH) was a dormant company.

On that date, the Sherwins agreed to transfer their shares in CCC to CPH for consideration totalling $61.2m. Following that, CPH became the sole owner of CCC. The value of the trading stock held by CCC as at 31 December 2007, for the purposes of Subdivision 70-C of the Income Tax Assessment Act 1997 (Cth), was $6.5m.

CPH elected to form a consolidated group with effect from 1 January 2008, with CPH as head entity and CCC as a subsidiary entity.

In February 2008, CCC entered into a contract to sell the agricultural assets to a third party purchaser. The sale price of the agricultural assets was $70m. The sale of the agricultural assets by CCC was completed on 29 February 2008.

The Sherwins could have sold their shares in CCC for $70m without tax consequences. By entering the above transactions, CPH as head entity of the consolidated group obtained a capital loss on the sale of the land, derived $25.4m from the sale of trading stock and derived a deduction of just over $23m as a result of the tax cost setting amount for the trading stock (as calculated on formation of the consolidated group) exceeding the value of the trading stock at 30 June 2008.


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The Commissioner contended that if the steps described above had not been entered into and carried out, it might reasonably be expected that: CCC would not have joined the CPH consolidated group with effect from 1 January

2008. CCC would have sold the agricultural assets in February 2008 for $70m. This meant that for tax purposes (i) there would be no capital loss on the sale of the

land, (ii) CCC would have made an assessable net capital gain of $33.7m on the sale of the land, (iii) CPH would not have been entitled to a deduction for the trading stock and CCC would have been entitled to a lower $6.3m deduction, and (iv) CCC would have derived $25.4m in assessable income from the sale of the trading stock.

The Commissioner issued a number of alternate determinations under Part IVA and assessments as follows: first, a determination to CCC on the basis it had obtained a tax benefit, and to give

effect to that determination an assessment to CPH as head entity; secondly, a determination to CPH as head entity and an assessment to CPH; thirdly, a determination to CCC, and an assessment to CCC. The taxpayers contended that the determinations and assessments could not be made consistently with the consolidation provisions because of the single entity rule in Division 701 of the Income Tax Assessment Act 1997 (Cth). The special case considered whether the Commissioner was authorised to issue the above determinations and assessments. It arose following the earlier Macquarie decision where the majority of the Full Court held (amongst other matters) that a subsidiary member of a consolidated group could not be assessed under Part IVA as a result of the single entity rule, and the head company could not be assessed where under the counterfactual it was the subsidiary company and not the head company which would have obtained the tax benefit. (Note: The authors of this paper understand that it was agreed by the taxpayer that it would not proceed to challenge the Commissioner's alternative postulate above by


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suggesting that in the alternative the Sherwins would have sold the shares in CCC to the third party purchaser, without tax consequences arising to them. The case does not consider potentially arguable issues relating to purpose or tax benefit). Judgment: All five judges agreed that the third alternative of issuing a determination and assessment to CCC was authorised, and that CCC remained a 'taxpayer' despite the single entity rule. In the case of the majority this was because CCC obtained the tax benefit, and CCC was not a member of the consolidated group for the entire income year . This meant that section 701-30 provided a mechanism for determining how the provisions applied to an entity in those circumstances. The majority of the Court also determined that the first and second alternatives were not valid (this was dissented from by Justices Pagone and Davies).

11/06/15 John Holland Group Pty Ltd v Commissioner of Taxation

[2015] FCAFC 82

Edmonds, Logan and Pagone

Taxpayer This was an appeal by the taxpayers against a decision of the Federal Court.

Under the Fringe Benefits Tax Assessment Act 1986 (Cth), flights paid for by the taxpayers and taken by the taxpayers’ employees for travel between Perth and Geraldton under fly-in fly-out arrangements were considered 'external non-period residual fringe benefits'. Section 52 of the Fringe Benefits Tax Assessment Act operated so that the taxable value of the fringe benefit would be nil where the costs of the flight would be deductible by the employees under section 8-1 of Income Tax Assessment Act 1997 (Cth) had the employees paid for the flights themselves.

The taxpayers' employees were required to work at Geraldton and to do so were required to travel to Perth Airport after which they were flown at the taxpayer's expense to the worksite at Geraldton. After the end of the work period, the employees were flown back to Perth Airport at the taxpayer's expense.

At first instance, the Federal Court considered that the costs of the flights would not be deductible by the employees (had they paid those costs themselves). Amongst other matters, Commissioner of Taxation v Lunney (1958) 100 CLR 478 was relied upon by the Court when reaching its conclusion.


The Full Court held that the earlier judgment had misapplied Lunney. The critical factors noted by the Federal Court which included that the employees were paid during the flights, were



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subject to the directions of the taxpayer and were travelling in to the course of their employment, meant that the employees were not travelling to work but as part of their employment. The cost of the flights under the statutory hypothesis in section 52(1) of the Fringe Benefits Tax Assessment Act would be an allowable deduction to them under section 8-1 (had the employees incurred that cost).

30/06/15 Haritos v Commissioner of Taxation

[2015] FCAFC 92

Allsop, Kenny, Besanko, Robertson and Mortimer

Taxpayer This was an appeal by the taxpayers from a decision of the Federal Court.

The taxpayers had appealed to the Federal Court from a decision of the Administrative Appeals Tribunal under section 44 of the Administrative Appeals Tribunal Act 1975 (Cth) which requires appeals to be on questions of law. The taxpayers' proceedings were dismissed by the Federal Court on the basis that questions of law formulated by the taxpayers were not questions of law but were seeking a merits review by the Federal Court of the Tribunal's decision. The main part of this case considered this issue, as opposed to tax technical issues.

The issues considered in the Part IVC proceedings were whether payments received by the taxpayers from associated companies were income as opposed to loans to them, whether expenses paid to subcontractors should be deductible to the companies, and whether Division 7A of the Income Tax Assessment Act 1936 (Cth) was applicable. The Tribunal held that the payments were dividends, or deemed dividends under Division 7A or ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (Cth). The taxpayer appealed to the Federal Court.

Judgment: The Full Court allowed the taxpayers’ appeal. The Court held that posing a precise question of law is not a matter that goes to the existence of the jurisdiction conferred on the Court. Section 44 of the Administrative Appeals Tribunal Act does not require only a pure question of law and a 'mixed question of fact and law' was sufficient. This holding expands the concept of what was previously thought of as a question of law substantiating an appeal from the Tribunal.

The Full Court also held that the Tribunal had erred in law in concluding that payments made by the taxpayers to associates were ordinary income within section 6-5 and in applying Division 7A. The matter was remitted back to the Tribunal for decision in accordance with the correct law.

Application by the Commissioner for special leave to appeal to the High Court was dismissed.

03/07/15 Commissioner of Taxation [2015] Edmonds, Commissioner This was an appeal by the Commissioner from a decision of the Federal Court, dismissing the Decision Impact


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v Desalination Technology Pty Limited

FCAFC 96

Logan and Pagone

Commissioner’s appeal from the original decision of the Administrative Appeals Tribunal. This was funded under the test case funding programme.

The issue was whether expenditure had been incurred and the taxpayer was therefore eligible for an R&D tax offset.

The Tribunal considered whether research and development expenses were incurred by a taxpayer, entitling the company to the (former) refundable research and development offset under section 73B of the Income Tax Assessment Act 1936 (Cth). The taxpayer was part of a group of companies, one of which was called Innovative Design Technologies Group Pty Ltd (IDTG).

IDTG accessed relevant investment funds, provided the labour and equipment, and was essentially the project manager for the activities. It would then invoice the taxpayer on a monthly basis under a service agreement for the R&D done on its behalf. Those invoices were treated by the taxpayer as 'fully paid at the date [they were] rendered' but the taxpayer paid the invoice by debiting a running account in favour of IDTG, and it was accepted that the running account was subject to two contingencies. Payment of the running account was not required unless the taxpayer was in a position to pay, and considered it prudent to do so.

The Commissioner argued that the taxpayer had not 'incurred' the relevant expenditure. The Commissioner submitted that because payment of the invoices was contingent on the two factors, the expenses were not incurred. The Tribunal allowed the taxpayer's appeal, and the Federal Court upheld the Tribunal's decision on the basis that the research and development expenses were incurred when the invoice was issued as the taxpayer was definitively committed to the expenditure at that time and the contingencies did not affect the invoice, only the running account

Judgment: The Full Court allowed the appeal. The Court held that no obligation to IDTG came into existence on the delivery of each invoice because of the contingencies attaching to the loan account. If any obligation did arise, it was so infected by those contingencies that it was not open to the Tribunal to conclude that the taxpayer was definitively committed to the obligation. The Court held the taxpayer did not incur the relevant expenditure in the year of income for the purposes of section 73B(14) of the Income Tax Assessment Act 1936 (Cth) and remitted the question of penalties back to the Tribunal for consideration.

Statement has been issued.


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24/08/15 Rio Tinto Services Limited v Commissioner of Taxation

[2015] FCAFC 117

Middleton, Logan and Pagone

Commissioner This was an appeal from the Federal Court by the taxpayer (as head company of a consolidated group) dismissing its claim to credits for GST it paid for acquisitions relating to the supply of residential premises to employees.

The issue was whether the taxpayer was entitled to credits for the GST paid on the acquisitions made by the members of the group in relation to the supply of residential accommodation to employees, contractors and ancillary service providers in the remote Pilbara region. The Commissioner argued that the credits were denied to Rio Tinto by operation of section 11-15(2)(a) of A New Tax System (Goods and Services Tax) Act 1999 (Cth) as a supply of residential accommodation by way of lease, which was an input taxed supply and credits were not available. The Federal Court agreed with the Commissioner and the taxpayer appealed.

Judgment: The taxpayer's appeal was dismissed.

The Court held that an acquisition which relates wholly to the making of supplies that would be input taxed is not to be apportioned merely because that supply may also serve some broader commercial objective or purpose.

In this case, all of the acquisitions relate wholly to supplies that would be input taxed, being the supply of premises by lease. The supply of the premises for lease was for the broader business purpose of carrying on the taxpayer's enterprise however this did not alter the fact that the acquisitions in question all related to the making of the supply of the premises by way of lease.


28/08/15 Allan J Heasman Pty Ltd v Commissioner of Taxation

[2015] FCAFC 119

Siopis, Davies and Wigney

Commissioner This case was an appeal by the taxpayer from the Federal Court dismissing the taxpayer's appeal from the Administrative Appeals Tribunal affirming the Commissioner's decision to disallow an objection against tax and penalties.

This case was about whether payments made to an 'employee welfare fund' were deductible. Mr Vanda Gould was the adviser to the taxpayer. The Administrative Appeals Tribunal held in favour of the Commissioner, and the payments were not deductible. The taxpayer's appeal against that holding and holdings on penalties were dismissed on the basis it did not raise relevant questions of law.

The appeal was heard on one question of law which was whether the Commissioner's 2012 assessments which were labelled 'Amended Assessments' for income years 1998 and 1999 were out of time, given that assessments had been issued in 1999 showing zero tax was


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payable.

Judgment: The Court dismissed the appeal.

The Court held that as the Commissioner had only issued a statement showing that the taxpayer had $0 taxable income for the 1998 and 1999 income years, the Commissioner had not issued an original assessment and therefore the time bar to the issue of assessments did not apply.

The Court held that the Federal Court had also not erred by dismissing the appeal in respect of section 8-1 of the Income Tax Assessment Act 1997 (Cth) and penalties. The Court held that there was no evidence substantiating the view that the expenditure was incidental and relevant to the operations or activities of the taxpayer that are directed at the derivation of income. The connection was too indirect to qualify the payments as deductions under section 8-1. In addition there was no evidence to substantiate the challenge to penalties.

29/10/15 Blank v Commissioner of Taxation

[2015] FCAFC 154

Kenny, Robertson and Pagone

Commissioner This was an appeal by the taxpayer and a cross-appeal by the Commissioner from the Federal Court.

This case considered the nature of payments made to the taxpayer by his former employer. The taxpayer had worked for Glencore in several locations globally, and had been a participant in the company's profit participation plans. He acquired 'profit sharing certificates' in the Glencore companies. Following the termination of his employment, in March 2007 the taxpayer and Glencore determined that he was entitled to $160m in return for relinquishing his entitlements in the profit participation plans, and that the $160m would be paid in instalments plus interest over 5 years .

The Commissioner assessed the full $160m as either ordinary income, assessable dividends/non-share dividends (on the basis that the profit participation plan interests were equity interests under Division 974) or assessable eligible/ employment termination payments. The Commissioner treated each instalment payment as assessable when received. The taxpayer returned the income as a capital gain in the 2007 income year, and reduced the gain by 50% as a discount capital gain. As an alternative to the other bases of assessment, the Commissioner disputed the taxpayer's cost base in the profit participation plans.

The taxpayer appealed the decision of the Federal Court that the payments made by the Glencore group were ordinary income as a reward for services. Alternatively, the taxpayer

Taxpayer has sought special leave to appeal to the High Court.


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argued that the Federal Court erred in considering that section 23AG of the Income Tax Assessment Act 1936 (Cth) could not apply and that a substantial part of the payments should be held exempt under that provision as income from foreign services. Finally the taxpayer argued that the primary judge made an incorrect valuation of the cost base of the taxpayer's CGT asset.

The Commissioner cross-appealed, challenging the primary judge's conclusion that the payments were not ordinary income in accordance with FCT v Myer Emporium Ltd [1987] HCA 18 and that payments were not eligible termination payments. In the alternative, the Commissioner contended that the primary judge erred in the calculation of the cost base of the taxpayer's CGT asset.

Judgment: Both the appeal and cross-appeal were dismissed by majority judgment. The majority of the Court agreed with the Federal Court judgment that the amount received by the taxpayer was a reward for his services as an employee and that amount was assessable as ordinary income on that basis. The Court further held that the income was not exempt under section 23AG of the Income Tax Assessment Act 1936 (Cth) as foreign earnings derived from foreign service. Having found that the payments were income and there was no CGT asset, the Court declined to consider the Commissioner's cross-appeal or the taxpayer's appeal on cost base. Justice Pagone dissented, and would have allowed the taxpayer's appeal.

30/11/15 Commissioner of Taxation v Devuba Pty Ltd

[2015] FCAFC 168

Greenwood, Jagot and Pagone

Taxpayer This was an appeal by the Commissioner from the Administrative Appeals Tribunal. This was a test case funded under the test case funding programme.

On 19 May 2010 the taxpayer sold shares in a company and a capital gain of approximately $4.3m arose. After the application of the small business CGT concessions in Division152 of the Income Tax Assessment Act 1997 (Cth) the capital gain was reduced to nil. At the time of the CGT event, as well as there being ordinary shareholders, Mrs van der Vegt held a ‘dividend access share’ in the taxpayer. The taxpayer's ability to distribute a dividend to the dividend access shareholder was subsequently (by two resolutions) made dependent upon the prior determination and resolution by the directors.

The issue was whether the taxpayer satisfied the requirement in Division 152 for the taxpayer to have a 'small business participation percentage’ of at least a 90% immediately prior to the CGT event.


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The Commissioner maintained that as the taxpayer could have paid a dividend to the dividend access shareholder to the exclusion of any other classes of shares the small business participation percentage was 0% immediately before the CGT event and Division 152 did not apply. The Tribunal allowed the taxpayer's appeal.

Judgment: The Court dismissed the Commissioner's appeal. As at 19 May 2010 the company could not declare a dividend to the holder of the dividend access share, as the conditions precedent to so doing had not been satisfied. The small business participation percentage requirement in Division 152 was satisfied.

11/12/2015 Bywater Investments Limited v Commissioner of Taxation

[2015] FCAFC 176

Robertson, Pagone and Davies

Commissioner This was an appeal by the taxpayers from the Federal Court.

There were seven proceedings involving five taxpayer companies. There were two issues:

Whether the central management and control of a corporation for the purposes of determining its residence could be determined by the residence of an adviser, Mr Vanda Gould; and

In circumstances where shares held by the taxpayers had not been previously treated as trading stock, whether their opening value was nil.

Judgment: The appeal was dismissed. The Court held:

The Federal Court applied the appropriate test when considering residence, and it was possible for control to be exercised by Mr Gould. There was no reason to reject the Federal Court's findings on the evidence.

An assessment was required in a preceding year before the opening value of trading stock would be otherwise than nil.

14/12/2015 Commissioner of Taxation v ElecNet (Aust) Pty Ltd (Trustee)

[2015] FCAFC 178

Jessup, Pagone and Edelman

Commissioner This was an appeal by the Commissioner from the Federal Court and was test case funded. The taxpayer applied to the Commissioner for a private ruling that the Electrical Industry Severance Scheme (EISS) it was trustee of was a 'unit trust' that was a 'public unit trust' and a 'public trading trust' for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 (Cth). The Commissioner ruled that the EISS was not a 'unit trust' –


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which meant that it could not be a 'public unit trust' nor a 'public trading trust' and disallowed the taxpayer's objection. The Federal Court upheld the taxpayer's appeal, holding that the EISS was a 'unit trust', although whether it was a 'public unit trust' could not be determined from the evidence before the Court, and the judgment reserved its position on one aspect of the Trust Deed relating to whether there were "active workers". In reaching its conclusion that there was a 'unit trust' the Federal Court considered the definition of 'unit' in section 102M of the Income Tax Assessment Act 1936 (Cth) to give meaning to the term 'unit trust' in Division 6C. The Commissioner appealed on the basis that this was an error of law. Judgment: The Full Federal Court allowed the Commissioner’s appeal. The Court held: The EISS was not a unit trust because the workers did not have units in any

meaningful sense. Whatever their beneficial interests, they were not unitised. The definition of 'unit' in section 102M relied upon in the Federal Court was relevant. A 'unit trust' for the purposes of Division 6C is to be interpreted broadly, and includes

trusts where there was an element of discretion, trusts where beneficiaries had contingent rights, and a 'unit' could include persons entitled to a beneficial interest in any of the income or property of the trust estate. The Federal Court was correct in that regard.

The submissions of the Commissioner that a 'fixed trust' involves an interest in particular property, and a 'unit trust' was a fixed trust involving a proportionate share in trust rights in all trust property were rejected as proposing a concept that was too narrow.

A 'unit trust' revolves around considering the Deed, and also the core concepts of whether persons have (i) a beneficial interest in the income or property of the trust estate which is (ii) capable of being functionally described as involving units.

Three factors led to the conclusion that the EISS was not a 'unit trust' and all were


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based on the trust deed and discretions available to the trustee under that Deed. This case highlights the need for care to be taken with the Trust Deed.

The factors in the Trust Deed had the effect that the beneficial interest of the workers could not be described functionally as being capable of being a unitised interest under a unit trust. First, any rights of the workers were subject to them being an 'active worker' as determined solely by the trustee. Secondly, the taxpayer as trustee had the power to vary the amount standing to a worker's account under the trust. Thirdly, if amounts were to be paid out of the trust as a Severance Payment, those amounts were calculated by reference to a Prescribed Amount, not necessarily what was standing in the worker's account. It was possible for workers to receive less than the amount in their relevant account.

16/12/2015 LHRC v Deputy Commissioner of Taxation

[2015] FCAFC 184

Siopis, Pagone and Wigney

Commissioner This was an appeal by the taxpayers from the Federal Court. The taxpayers contended that the Federal Court erred in determining that the Commissioner's decision to issue a section 264 notice was not void for unreasonableness.

Judgment: The appeal was dismissed. Justice Wigney suggested that the Federal Court judge 'deserves a medal for discerning from the morass exactly what the [taxpayers' arguments] ultimately were'. The principle that a decision-maker may not exercise a power unreasonably does not permit merits review on appeal.

17/12/2015 Commissioner of Taxation v Donoghue

[2015] FCAFC 183

Kenny, Perram and Davies


The Federal Court had declared a number of assessments issued by the Commissioner invalid and quashed those assessments, on the basis that the Commissioner had engaged in conscious maladministration. This was due to the Commissioner utilising documents provided to him that were the subject to legal professional privilege. The Federal Court held that the documents were privileged but that the ATO official while aware of what he regarded as a risk that the documents might be privileged, did not know that they were and had not acted in bad faith. However, the Court held he had acted with reckless disregard and that this was sufficient to constitute conscious maladministration.


The taxpayer's action to prevent the use of the documents lay in an action for breach of


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confidence against the Commissioner. This had not been pursued. Legal professional privilege is not a rule of law conferring individual rights the breach of which may be actionable. The right to restrain use of grounded in equity, and those proceedings had not been pursued by the taxpayer. There was no material before the Court from which it could be concluded that the documents involved had the necessary quality of confidence. It is not correct that something that is legally privileged has the necessary quality of confidence required by the case law on breach of confidence. As there was no such evidence, there was nothing that could ground a claim that the ATO officer had been guilty of conscious maladministration.

It is clear from section 166 of the Income Tax Assessment Act 1936 (Cth) that the Commissioner is obliged to use information in his possession to make assessments. Limitations to powers in section 263 to access documents, do not impact upon section 166. Section 263 also had no operation in relation to documents held by the Commissioner on his own premises.

The Court also held that as the Federal Court had applied the law wrongly, the ATO official's conduct could not be said to be 'reckless' and there were no defaults in his conduct.

In obiter, the Court further held that the documents provided to the Commissioner may not all have been subject to legal privilege in any event, although it was not required that it consider that issue.

23/12/15 Kocharyan v Commissioner of Taxation

[2015] FCAFC 196

Gilmour, Murphy and Mortimer

Commissioner This was an appeal by the taxpayer from the Federal Court. The Federal Court which dismissed the taxpayer's appeal from the Administrative Appeal Tribunal.

The Commissioner disallowed the taxpayer's claimed losses from a partnership investment in a managed investment scheme. During the audit, the taxpayer voluntarily disclosed that the losses should be nil. The taxpayer objected against his assessments in the 2006 and 2007 income years on varying bases relating to the validity of returns, and the applicability of the statutory time bar.

Judgment: None of the taxpayer's grounds for appeal had merit and the appeal was dismissed.



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Summary Whether Decision Impact Statement

issued (as at the date of this paper)

05/08/15 AusNet Transmission Group Pty Ltd v Federal Commissioner of Taxation

[2015] HCA 25

French, Kiefel, Bell, Gageler and Nettle

Commissioner This was an appeal by the taxpayer from the Full Federal Court.

The issue was whether payments which were made by the taxpayer were deductible under section 8-1 of the Income Tax Assessment Act 1997 (Cth). The payments were required under an Order in Council made under section 163AA of the Electricity Industry Act 1993 (Vic). The Federal Court held that the payments were not deductible because they were not connected to the production of income and were payments from the taxpayer's profits, and, alternatively, because the payments were capital in nature, and the Full Court dismissed the taxpayer's appeal. The payments arose following the taxpayer's acquisition of assets and the transmission licence from Power Net Victoria and were noted in agreements relating to that asset acquisition.

Judgment: The appeal was dismissed (Nettle J dissenting).

The Court held that the payments were of a capital nature as they were part of the consideration for the acquisition of the business by the taxpayer. From a practical and business point of view the taxpayer assumed the liabilities in order to acquire the assets and transmission licence from Power Net Victoria.


02/12/15 Macoun v Commissioner of Taxation

[2015] HCA 44

French, Gordon, Bell, Gageler and Nettle

Commissioner This was an appeal by the taxpayer from the Full Federal Court. This was a test case funded under the test case funding programme.

The Commissioner issued amended assessments for two financial years to include a pension from the World Bank Group Staff Retirement Plan in the taxpayer's assessable income. The taxpayer objected on the basis that the pension consisted of payments for services rendered which arose in the course of his employment with the International Bank for Reconstruction and Development (which is part of the World Bank), even though that employment had been subsequently terminated, and such payments were exempt from tax.

Subsection 6(1)(d) of the International Organisations (Privileges and Immunities) Act 1963 (Cth) and regulation 8 of the Specialised Agencies (Privileges and Immunities) Regulations 1986 (Cth) distinguish between a person who holds an office in an international organisation and a person who has ceased to hold such an office. Privileges and immunities available to office holders include "Exemption from taxation on salaries and emoluments received from the organisation", but a former office holder is given only particular specified immunities.

Judgment: The Court dismissed the appeal. The Court held:

A tax exemption on the taxpayer's pension payments did not arise when he ceased to hold an office at the World Bank. The payments fell outside the requirement of 'salaries and

HIGH COURT 2015 TAX CASES

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Summary Whether Decision Impact Statement

issued (as at the date of this paper)

emoluments received from the organisation' in the Regulations.

The taxpayer did not receive the pension payments while he was still an officer, they did not vest in him while he was still an officer, and he did not receive them his employer, but rather a separate retirement fund body.

The Convention on the Privileges and Immunities of the Specialized Agencies [1988] ATS 41 did not require that Australia not tax monthly pension payments: the language of the Agencies Convention does not prohibit states from distinguishing between officials and former officials and there is no generally accepted state practice that suggests an obligation on Australia to exempt these pensions from taxation exists.

10/12/15 Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation); Commissioner of Taxation v Muller and Dunn as Liquidators of Australian Building Systems Pty Ltd (In Liquidation)

[2015] HCA 48

French, Kiefel, Gordon, Gageler and Keane

Taxpayer This was an appeal by the Commissioner from the Full Federal Court. This was a test case funded under the test case funding programme. The issue in this case was whether a liquidator is required under section 254 of the Income Tax Assessment Act 1936 (Cth) to retain money to meet any future taxation liability in respect of the income year in which a CGT event occurred following the sale of an asset, prior to an assessment being issued by the Commissioner. The issue was the meaning in section 254(1)(d) of a retention obligation arising where tax 'is or will become due'. Judgment: The Commissioner's appeal was dismissed. (Gordon J and Keane J dissenting) In absence of an assessment, section 254 had no application to the liquidators. At most, there was an obligation to pay income tax in the future, but this does not trigger a retention obligation for the liquidators in section 254(1)(d) as no tax 'is due' or 'will become due', in the sense of 'owing', and there is no certainty as what the tax is until an assessment is issued. This holding was consistent with the High Court's decision in Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598. Bluebottle considered section 255 of the Income Tax Assessment Act 1936 (Cth) where the same wording (tax 'is or will become due') is used in the context of retention obligations for persons in control or receipt of money from a non-resident. The High Court held there was no permissible rationale for section 254 to be treated differently from section 255 in this regard, and applied Bluebottle.


HIGH COURT 2015 TAX CASES

Date post:	10-Apr-2017
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