Victorian State Taxation of Foreign Landowners

Foreign investors in Victorian land are subject to complex State taxes, including foreign purchaser additional duty, absentee owner land tax surcharge and vacant residential land tax.

Similar foreign purchaser additional duty rules apply to New South Wales and Queensland and are proposed to apply to South Australian from 1 July 2018 and to Western Australia from 1 January 2019. 

Similar absentee land tax surcharge rules apply to New South Wales and Queensland and are proposed to apply to Australian Capital Territory from 1 July 2018.

The legislative differences in the taxes between the jurisdictions makes managing property portfolios in multiple jurisdictions complex.

Between 1 July 2015 and 30 June 2016, an additional 3% and from 1 July 2016 an additional 7% foreign purchaser additional duty is levied where a foreign purchaser acquires an interest in residential property or in a landholder private unit trust or private company that owns residential property.

Between 1 July 2015 and 31 December 2016, an additional 0.5% and from 1 January 2017 an additional 1.5% absentee owner land tax surcharge is payable each calendar year by the absentee owner or deemed absentee owner of that Victorian land, unless exempt.

From 1 January 2018, 1% vacant residential land tax is payable each calendar year by the owners of residential land in specific inner city Councils which is not used and occupied for more than 6 continuous or aggregate months in the preceding year by the owner (or permitted occupant or individual tenant) as a principal place of residence (or during no more than 2 years construction or refurbishment) on the capital improved value of the land as at 31 December of the preceding year, unless exempt.

The foreign purchaser additional duty and absentee owner land tax surcharge applies to foreign individuals and foreign companies, but is extended to include certain Australian companies and Australian trusts associated with foreign individuals, foreign companies and foreign trusts.

It may be necessary to restructure Australian companies and Australian trusts and amend documentation or apply to the Commissioner of State Revenue (CSR) for a determination that the Australian companies and Australian trusts, are not subject to foreign purchaser additional duty or absentee owner land tax surcharge

Owners of residential land in specific inner city Councils will need to collate and retain records that establish use of the property as a principal place of residence so that vacant residential land tax is not payable.

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Landowner Partnership Reconstruction

The reconstitution of a general law partnership or a tax law partnership may have different income tax, capital gains tax and goods and services tax consequences that should be addressed in preparing a Partnership Reconstitution Deed.

A general law partnership may be reconstituted without the tax consequences associated with reconstituting a tax law partnership, a joint venture or co-ownership.

The Federal Commissioner of Taxation accepts that the reconstitution of a general law partnership (but not a tax law partnership) is the continuation of the partnership so does not have any income tax, CGT or GST consequences other than for any retiring partner.

Contrary to the approach of the Commissioner of State Revenue Victoria, the reconstitution of a general law partnership does not have duty consequences.

Reconstituting a general law partnership (e.g. of trusts or companies) without tax or duty consequences may encourage the establishment of landholding general law partnerships in Victoria.

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Deduction of Gaming Machine Expenditure

The Administrative Appeal Tribunal has clarified the tax treatment of gaming machine entitlement fees expenditure deciding the amounts constitute a general deduction in the income year incurred.

Gaming operators should consider amending or objecting to or extending time to amend or object to their assessments to preserve any rights for a tax deduction for game machine entitlement fee expenditure pending any appeal by the Commissioner.

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Forgiving Quarantined Div. 7A Loans & UPEs

Intra-family group Div. 7A loans and unpaid present entitlements (UPEs) represent a significant risk management issue for clients and advisors.  With effect from 1 July 2018, the 2016 Federal Budget announced amendments to Div. 7A adopting the recommendation of the Board of Taxation, which appears to bring quarantined pre-1997 loans and pre-2009 UPEs into Div. 7A. The inclusion of quarantined pre-1997 loans and pre-2009 UPEs into Div. 7A requiring repayment under the new Rule of 78 loan rules will renew investigations into forgiving or restructuring these amounts before 1 July 2018.

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Partitioning Land & Bare Trusts

Co-owners of land or parcels of land often wish to exchange ownership interests to become sole owners of specific land or specific parcels of land.

This process of partitioning land may have adverse income tax, capital gains tax (CGT), goods and services tax (GST) and Victorian stamp duty consequences if done incorrectly.

The administrative approach adopted by the Federal Commissioner of Taxation (FCT) or the Commissioner of State Revenue (CSR) for partitions and bare trusts also varies significantly

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CGT Event Time & Options

In structuring 30 June transactions it is often desirable to sign a contract before 30 June, but defer payment of capital gains tax (CGT) or the CGT event until a subsequent income year; particularly where settlement is deferred to a subsequent income year so there are no sale proceeds for the vendor to pay the tax or it is desired to set-off losses in the subsequent income year.

Deferring payment of CGT by the ATO’s deferred settlements administrative practice or by options may be appropriate.  Drafting the agreements to achieve the deferral requires care.

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Tax Litigation Security for Costs

Oswal v FCT [2015] FCA 1366 (2 December 2015) has clarified aspects of the law in respect of the Commissioner’s entitlement to security for costs in litigation.

In particular, the Federal Court of Australia (FCA) seems more amenable to ordering security for costs in tax matters (other than appeals) because such orders could be avoided by appealing to the Administrative Appeals Tribunal (AAT).  This may force taxpayers to appeal to the AAT.

Practitioners will need to advise taxpayers regarding security for costs to ensure otherwise meritorious FCA appeals are not restricted, stayed or dismissed as a result of a large security for costs order against the taxpayer.

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Establishing a Discretionary Trust

Trust instruments range from serviceable for simple tax affairs to comprehensive for complex tax and succession planning.

A discretionary trust is often selected as an investment or business structure to provide asset protection, family law protection and tax planning flexibility.

The terms of the trust instrument is central to the administration of a discretionary trust and the trustee is obliged to ascertain the terms of the trust.

Discretionary trust can be relatively complicated structures to administer.  Selecting the appropriate discretionary trust instrument is important to achieve these desired objectives.

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Service Trusts

It is common for asset protection purposes to establish a service entity to provide for a commercial service fee administrative services, staff, plant and equipment and premises to a trading entity.  Service entities may also provide income splitting advantages.

Since 2006, the Australian Taxation Office (ATO) has administratively restricted the service fee tax deduction to benchmark rates.  While many will voluntarily comply with the benchmark rates or restructure out of service entities, there remains uncertainty regarding the tax consequences of service entities.

The Victorian State Revenue Office (VSRO) groups the service entity with the trading entity for payroll tax.  Recent cases challenge the VSRO approach.

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CSR (Vic) v Lend Lease Development P/L - Duty on Infrastructure Works

On 10 December 2014, CSR (Vic) v Lend Lease Development P/L [2014] HCA 51 decided that stamp duty is calculated on the purchase price of land plus the value of infrastructure works and payments under related contracts.

 The High Court has overturned the decision in Lend Lease Development P/L v CSR (Vic) [2013] VSCA 207.

 Practitioners should consider if they have any past or current property acquisition contracts that have linked infrastructure works and payments upon which extra duty is payable on the value of infrastructure works and payments.

A voluntary disclosure may be necessary in respect of relevant past property acquisition contracts and current contracts may require re-negotiation and amendment. 

Appointors, Guardians & Fiduciary Duties

Appointors and Guardians have provided safeguards to protect beneficiary interests in trusts.  As courts adjudicate family disputes, we may see the actions of Appointors and Guardians more readily regulated through the laws of fiduciary duties.

Traditionally, the Appointor of a trust has the power to appoint and remove the trustee and the Guardian has the right to veto the otherwise wide powers of the trustee, such as to appoint and remove beneficiaries, make corpus distributions or resettlements, vary the trust terms and vest the trust.

The separate offices of Appointor and Guardian may be held by different people providing checks and balances to safeguard the trust from various hazards relating to the trustee, the beneficiaries or the trust property.

It is common practice to amalgamate the powers in the Appointor such that the scope and obligations of that fiduciary duty may be unclear and dependent on the terms of the trust and the powers to be exercised.

It has also become increasingly common practice to appoint a corporate Appointor or corporate Guardian with perpetual life to permit a larger number of individuals to participate in the decision making within the regulation of the corporations law.

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Contractors & Personal Services Income - Part 2

The independent contractors industry has been the subject of focused review by the ATO, the SRO and the FWO.

State payroll taxation and regulation of labour is complex, inconsistent and uncertain.

Incorrectly classifying the relationship between the end user, any intermediary and the worker can have significant tax consequences for them.

This article is Part 2 of a summary 'Independent Contractors & Personal Services Income', The Tax Institute (Vic), 9 October 2014.

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Contractors & Personal Services Income - Part 1

The independent contractors industry has been the subject of focused review by the ATO, the SRO and the FWO.

The Federal and State taxation and regulation of labour is complex, inconsistent and uncertain.

Incorrectly classifying the relationship between the end user, any intermediary and the worker can have significant tax consequences for them.

This article is Part 1 of a summary 'Independent Contractors & Personal Services Income', The Tax Institute (Vic), 9 October 2014.

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VIC 2nd Annual Tax Forum - 09-10 October 2014

The Tax Institute is holding the Vic 2nd Annual Tax Forum in Melbourne on 09 - 10 October 2014.

Papers of particular interest are:

  • Teresa Dyson - Chair of the Board of Taxation address
  • Arthur Athanasiou, Fiona Dillon and Simon Le Maistre: Trusts - What is keeping you awake at night?
  • Michael Flynn - Perfecting and protecting your RAP
  • Paul Sokolowski - The 2014 Offshore Voluntary Disclosure Initiative
  • Sam Ure - Promoter penalty provisions after Ludekens and Barossa Vines cases
  • Denise Honey - Operating your business abroad
  • Judge Pagone - A perspective on the New Part IVA

On 9 October 2014, I presented on Independent Contractors.  The paper discusses the complex income tax, superannuation guarantee charge, payroll tax, long service leave and workers compensation obligations in respect of employees, dependent contractors, independent contractors, labour intermediaries and contractor partnerships and trust.

Enterprise, Profit Making Scheme & Business Concepts

Mr K acquired a building to develop into five apartments with one to be Mr K’s home and the others for short term holiday letting to supplement the income from Mr K’s GST registered Architecture practice.  The development exceeds budget and the bank requires Mr K to sell the four holiday apartments.

Is the sale of holiday apartments subject to GST or income tax?

The fundamental concepts of ‘enterprise’, ‘profit making scheme’ and ‘business’ and their inter-relationship remain problematic and regularly result in disputes with the ATO.

Further clarity in and technical commentary regarding MT 2006/1: carrying on an enterprise is necessary to provide greater certainty for taxpayers and practitioners on the scope and relationship of these fundamental concepts.

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Trust Resettlements - Oswal v FCT [2014] FCA 812

It is common to vary a trust constitution to improve trust administration, accommodate asset protection and succession planning and improve the tax effectiveness of distributions.

Common variations include changes of:

  1.  powers (e.g. trustee distribution powers and discretions);
  2. trusts (e.g. vesting date and inclusion/exclusion of beneficiaries); and
  3. terms (e.g. appointor and guardian administration, powers and discretions).

A variation which creates a new trust may have adverse income tax consequences, including loss of carried forward losses and tax deductions and a liability to pay capital gains tax (CGT) on the value of any CGT assets of the trust (FCT v Clark [2011] FCAFC 5; [2011] HCA Trans 236).

 

A variation which is a declaration of trust or a change in beneficial ownership may have adverse stamp duty consequences, including a liability to pay duty on the value of any dutiable property (such as land) of the trust (CSR (Vic) v Lam & Kym P/L [2004] VSCA 204).

Recent court decisions have lessened, but not eradicated, the tax risks of trust variations.

 

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14th Annual States’ Taxation Conference

Payroll Tax Emerging Issues

Nathan Hamilton, PWC presented on the future of payroll taxes.

Legislative references are to the Payroll Tax Act 2007 (Vic) and the Payroll Tax Act 2007 (NSW) (PTA 2007),  the Taxation Administration Act 1953 (Cth) (TAA 1953) and the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GSTA 1999).

Nathan addressed the expanding scope of payroll tax for ‘employment agents’ who procure the services of a ‘service provider’ for an end user after CXC Consulting P/L v CSR (VIC) [2013] VSC 492 and Freelance Global Ltd v CSR (NSW) [2014] NSWSC 127.

I would add some additional observations.

An employment agency contract is a formal or informal, expressed or implied contract under which an employment agent procures the services of a service provider for a client of the employment agent but does not include a contract that results in a contract of employment between the service provider and the client.  The legislation deems the employment agent to be an employer, the service provider to be an employee and the payment to the service provider in relation to the provision of the services to be wages (sec. 37-39 PTA 2007).

CXC Consulting P/L and Freelance Global Ltd each operated as a payment intermediary and did not maintain a database of service providers, introduce service providers to end clients, negotiate the terms of the engagement or supervise the performance of the service provider typical of labour hire firms.

At issue concerned the scope of the concept of ‘procuring’ services.

In CXC Consulting P/L v CSR (VIC), the court gave an expansive meaning to ‘procure’ to mean ‘supply’, ‘obtain’ or ‘make available’ (at [67] & [101]) and considered the contract between CXC Consulting P/L and the service provider relevantly procured those services (at [93] & [101]). 

In Freelance Global Ltd v CSR (NSW), the court adopted the interpretation in CXC Consulting P/L v CSR (VIC) (at 141]) and considered ‘procure’ means more than facilitate or enable and requires the employment agent to cause the services of the service provider to be provided to the end client with the expenditure of care or effort by the employment agent (at [115]).

The interpretations of ‘procure’ are different and potentially limit the application of the provisions where the employment agent has the benefit of a contract without being a party to the contract.

The contract between the employment agent and the service provider relevantly engages the provisions.  In circumstances where there is a trust relationship of due administration between the employment agent and the beneficiary service provider, there would appear to be the necessary formal or informal, expressed or implied contract.

In Freelance Global Ltd v CSR (NSW), the employment agent provisions deemed the trust distribution to the beneficiary service provider to be wages.  The provision deems the payment ‘in relation to the provision of the services’ to be wages. 

It is unclear how a trust distribution qua beneficiary can be ‘in relation to the provision of services’ without a finding of sham.  The deeming of the trust distribution as ‘wages’ is inconsistent with the general policy that a trust distribution to a beneficiary made in lieu of wages is not subject to payroll tax (Ruling PTA.016; cf Bulletin PTX1/11 (Vic)).

The drafting of the provision and the expansive meaning of ‘procure’ does not limit the provisions to employment agents as ordinarily understood (Freelance Global Ltd v CSR (NSW) at [150]).

Freelance Global Ltd v CSR (NSW) considered without determining that:

  1. Any intermediate providing the services of directors and employees would be covered (at [156]).
  2. Any intermediate (such as a builder) providing labour and materials includes a contract for the performance of work so would be covered (at [159]); and
  3. Any intermediate (such as a lawyer) providing the services of a subcontractor (e.g. barrister) would be covered.

The provisions do not contain needed exemptions and the relevant contractor exemptions do not apply to rationalise the expansive scope of the employment agent provisions.

The pay-as-you-go withholding labour hire provisions require an entity to withhold PAYG from payments made to an individual in the course of a business of ‘arranging’ for persons to perform services for clients of the entity or of another entity (sec. 12-60 TAA 1953).

The ordinary meaning of ‘arranging’ in the context of the provision refers to the process by which a person negotiates for, or brings into effect, a dealing or agreement (ASIC Regulatory Guide 36; EM to GSTA 1999 at [5.160] - [5.162]; GSTR 2004/1 at [289] and GSTR 2009/3 at [28])).

The concept of ‘arranging’ focuses on the process of establishing rather than implementing the contract for services.  There is no case law in respect of the PAYGW labour hire provisions and the decisions of CXC Consulting P/L v CSR (VIC) and Freelance Global Ltd v CSR (NSW) have no real relevance.

The contrast of the meanings of ‘procure’ and ‘arranging’, highlights the difficulties for intermediate entities in complying with State taxes and Federal taxes obligations.

These issues will be part of the paper I am presenting at The Tax Institute 2nd Victorian Annual Tax Forum, Melbourne on 9-10 October 2014 on 'Personal Services Income'.

14th Annual States’ Taxation Conference

Tax Advocacy - Dear Commissioner

DCTR Jim Richards from Territory Revenue has presented on:

  1. suggestions provided by the revenue offices to improve the persuasiveness and effectiveness of written submissions;
  2. comparative obligations of taxpayers and advisers for honesty a full and true disclosure;
  3. comparative processes for informal administrative review, raising matters of policy and approaching a minister or the ombudsman; and
  4. suggested approaches to address ‘unfair’ outcomes.

I have presented on:

  1. general and technical writing style lessons that may improve written advocacy;

  2. effective structuring and corroborating taxable facts;

  3. the CRAC method - (C)onclusion, (R)ule, (A)nalyisis, (C)ases - for argument writing;

  4. drafting approaches for State Taxes internal reviews and objections with sample precedents;

  5. drafting approaches for penalty remission requests with sample precedents; and

  6. drafting approaches for interest remission requests with sample precedents.

It is great to have both sides of the table presented and encouraging that the approaches are highly aligned.

14th Annual States’ Taxation Conference 24 -25 July 2014

The Tax Institute will hold the States’ Taxation Conference in Hobart on 24-25 July 2014.

Papers of particular interest are:

  • Nicholas Kotros - Reassessments and Refunds
  • Barbara Phair - Duty Treatment of Tenants’ Fixtures
  • Nathan Hamilton - Payroll Tax Emerging Issues
  • Nathan Deveson - Dutiable Value
  • Greg Kent & Ian Phillips - Contractors and Payroll Tax
  • Gino Dal Pont - Charities

The update papers promise to be fantastic catch up and check list materials.

James Richards and I will also present on State taxes written advocacy.

Tax Planning & Reform

Tax planning is the professional art of balancing the relative tax and non-tax characteristics of different legal and tax entities.  Aligning tax neutrality of business forms is a whole of system approach.  The Coalition’s announced Tax White Paper presents an opportunity to address these complexities from a structural perspective.  Reform should address underlying policy distinctions or disconformities, insolvency laws and more closely align the planning priorities of clients and of adviser to reduce tax complexity and compliance costs.

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