Implications of the High Court decision in the Sharpcan case

On 16 October 2019 the High Court handed down its decision on the Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36.  This judgement, which is on one of the few modern revenue v. capital cases to make it all the way to the High Court, has the capacity to assist taxpayers and advisers with regard to the income v. capital distinction, but may also bring up new areas to consider.

Without providing a detailed summary of the case, readers may recall that the case was concerned with the income tax treatment of a number of gaming machine entitlements (‘GMEs’) bought at auction by the operator (a trust) of a hotel in regional Victoria (Sharpcan was a beneficiary of this operator, and so it was the taxpayer affected in terms of tax payable).  The need to purchase GMEs arose due to the Victorian State Government changing in the way Victorian hotels, clubs etc. provided poker machine gambling facilities (the change ended the duopoly held by Tattersalls and Tabcorp).  The State Government replaced the old licensing arrangements through the creation of GMEs with a ten year duration.  From 2012, hotel operators etc. who wished to provide poker machines to the public needed to acquire a GME for each machine.   The operator purchased 18 GMEs at the auction held in 2009 so that customers of the hotel would still have poker machines available to them following the rule change.  The Victorian State Government has since held a further auction for GMEs which provide an entitlement relating to a ten year period starting in 2022.  Further GMEs may be sold for future periods.

The operator sought to claim an outright deduction in the 2012 income year for the amount paid to purchase the GMEs.  Alternatively the operator sought to claim the purchase price over five years (beginning in the 2012 income year) under section 40-880.  As the Commissioner did not agree with this treatment, the matter went to the AAT and on to various appeals.

The decisions by both the AAT and the Full Federal Court (by a majority of 2:1, with Thawley J dissenting) were that the expenditure was of a revenue nature and so allowed a full deduction for the purchase cost.

However, upon appeal to the High Court, the five High Court judges unanimously held that the purchase of the GMEs was on capital account and, therefore, not deductible.

In its decision, the High Court quoted with approval the dissenting Full Federal Court judgement by Thawley J who said that the acquisition of the GMEs “… was not an expenditure which would need to be repeated over and again as a necessity of trade…”, and also held that the GMEs were a separate asset (and thus not eligible for a deduction over five years under section 40-880).

Whilst it is clear that the GMEs provided benefits for ten years and that is a significant period of time, there is clearly a contrary argument that there is a necessity to incur repeat expenditure for the right to operate a poker machine to continue.  It should be noted that the High Court was not asked to consider what period would be short enough to conclude that expenditure of this nature could be classified as revenue in nature, rather than capital; it is likely to refuse to do so, as this is not a question of law.  It can only be asked to decide the outcome for the facts presented to it.  The High Court was perhaps seeking to highlight the real underlying question when it indicated that the test perhaps should be whether one is acquiring ownership of an asset, or merely a right of use of the asset (as occurred in the Citylink case where the payments made by the taxpayer were found to be deductible).

The outcome of this case raises a number of interesting issues and consequences for taxpayers, from both commercial and taxation perspectives.

The primary commercial consequence of this decision is that it will impact the price hoteliers etc. will be willing to pay for GMEs (and potentially for other types of Government licences) in the future; a result that seems at odds to the outcome being sought by the Victorian Government. This raises a query regarding whether State Governments should/could consider the likely income tax implications for the buyers in such arrangements and structure their transactions in a way that more clearly allows a deduction to be available.

The next aspect is the consequence of the decision for affected taxpayers. The outcome is that taxpayers who bought GMEs in 2009 have acquired a capital asset which will cease to exist in 2022.  Whilst one might think that a capital loss equal to the GME’s purchase price will arise when the GME ceases to exist, the GMEs are a statutory licence for CGT purposes, so the specific roll-over rules regarding statutory licences would apply.  Specifically, if the same number of GMEs are acquired then no capital loss will arise; if a lesser number of GMEs are acquired then a capital loss will on the GMEs which are not renewed.  It will fall on taxpayers and their accountants to track this. Additionally, GMEs rolled over in this way will, over time, accumulate significant cost bases.

This then leads into the impact on any sale of the overall business.  As the High Court has found that the GMEs are assets in their own right then consideration of the apportionment of sale proceeds to these assets will be required when a business is sold, as well as to the impact on the allocation of proceeds to goodwill.  Taxpayers may also be keen to know whether the GMEs are active assets as well.

The third aspect of interest will be to see whether the Commissioner seeks to use this decision to restrict deductions in other areas.  The GMEs were necessary to allow a taxpayer to offer gaming services, and so could be seen to be a preliminary acquisition which allowed the business to operate.  The decision might be applied by the ATO to other assets which are required to be held in order to conduct some or all of a business.  An example close to home would be the fee paid to be a registered tax agent.  Without it an accounting firm cannot legally charge a fee to prepare and lodge tax returns, give advice etc.  So there is a superficial similarity; however as a tax agent registration is not able to be sold, the similarity is partial only.  Time will tell whether and in what way the Commissioner seeks to extend the application of this judgement.

The final aspect considered in this article is what would need to be done if there was a will to change the outcome.  There is no appeal available from a High Court decision, and so any change would need to come from either the Victorian Government changing the bundle of legal rights which constitute a GME so it is more like a recurring usage fee for a right to own and operate a poker machine, or the Federal Government changes the Tax Act.  Such a change would be quite simple, as there already is a regime where capital assets which reduce in value over time give rise to a deduction – the depreciation rules.


This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

A Victorian land tax New Year’s surprise

Buried in the Victorian 2019/20 Budget Papers was a change to the land tax treatment of a common scenario that will prove to be an unwelcome surprise for many land owners when the Victorian 2020 Land Tax assessments roll out.

Where a natural person owns land that is used as the person’s principal place of residence (‘PPR’), it is exempt from land tax under s. 54(i) of the Land Tax Act 2005 (LTA).

Until now, s. 54(3) extended the exemption to other land owned by the person where the other land:

  • is contiguous to the PPR land (or is separated by a road or railway or similar area across which movement was reasonably possible);
  • enhances the PPR land;
  • is used solely for the private benefit and enjoyment of the person who uses and occupies the PPR land; and
  • does not contain a separate residence.

In practical terms, this means that where a person’s residence (the building structure) and gardens, garage or other amenities such as tennis courts or swimming pools were located on adjacent titles the land tax exemption would routinely apply to all pieces of land.

This scenario may have arisen from acquisition of adjacent titles over the years.

However, a more recent trend is for a subdivision of a single title with sale/development opportunities in mind. The ‘aggregated’ land (despite comprising multiple adjacent titles) may still serve as a person’s PPR land. For example, with a view to taking advantage of future sale/development opportunities, a single lot might be subdivided into 3 lots comprising and separate certificates of title issued for each lot: title A – the front garden; title B – the residence; and title C – the rear garden and garage.

The Budget change (now enacted) has imposed an additional condition in section 54(3). From the 2020 Land Tax year, the section 54(3) exemption will now only apply to ‘contiguous’ land where both it and the PPR land are wholly in regional Victoria. As the term ‘regional Victoria’ suggests, the change will have a major impact on landowners closer to the CBD. The scope of what is in regional Victoria is detailed on the Victorian Revenue website.

The outcome is that many landowners should now expect to receive land tax assessments in 2020 for separately titled land, notwithstanding that land is used and enjoyed as part of their principal place of residence.

Consideration of anti-avoidance provisions (e.g. ss. 101 and 102 LTA) aside, a landowner who may be willing to consolidate titles through lodgement of a plan of consolidation so as not to be subject to the measure must have the plan registered with the Register of Titles by 31 December 2019 for this to be effective for the 2020 Land Tax year.

In many instances, as the SRO will not know on which title the building structure is located, assessments may be received for all titles. As a result, landowners will need to take action to ensure at least the title(s) containing the residence enjoy exemption.

Landowners who might be affected by the change should immediately consider their precise circumstances in the context of the SRO’s approach to applying the LTA and the SRO’s view of the nuances of the practical reach of the change.

Further (presently limited) explanation of the change is available on the Victorian Revenue website.

This article was prepared by Michael Doran and Andrew Orange.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

Payroll tax – the music continues, although not always in harmony

For what is supposed to be an efficient harmonised revenue collection measure, the payroll tax (‘PRT’) system certainly generates plenty of litigation, from time to time with conflicting decisions between courts of different States/Territories.

One common instance is the constant stream of PRT grouping cases which show few signs of abating. Grouping cases, generally deal with the Commissioner’s discretion to exclude a business from a group.

Routinely, these cases are decided in Revenue’s favour. A reader of the judgements is often left wondering why, based on the stated facts, the taxpayer bothered to argue businesses were carried on independently of each other such that the discretion should be granted.

More interesting to us, however, is the recent string of decisions exploring the scope of, and interaction between, the ‘employment agency contract’ and ‘relevant contract’ rules.

Despite decisions in these areas beginning to form a nucleus of precedent, there remain plenty of uncertainties and issues.

To top things off, the recent decision concerning The Optical Superstore (a Victorian PRT ‘contractor’ matter with national significance) has raised a new set of questions which are particularly relevant for transactions in the medical industry.

In this article we explore a few of the ongoing and emerging issues in relation to the employment agency and relevant contract rules.

While the issues are raised in the context of Victorian and NSW PRT compliance, they will have relevance in most States/Territories due to their harmonised legislative provisions.

Employment contracts cases and remaining issues

For PRT purposes, certain payments relating to ‘relevant contracts’ or ’employment agency contracts’ are deemed to be taxable wages paid by the respective principal/employment agent and subject to PRT.

As a general rule, the ’employment agency contract’ rules apply in priority to the ‘relevant contract’ rules.

Simply put:

  • An employment agency contract involves a contract between two parties where one of the parties (the employment agent) procures the services of a person (the worker) for a client (the end user). Payments by the employment agent to the worker are subject to PRT.
  • A ‘relevant contract’ taxes a payment made by a person who receives services (the principal) from a service provider (the contractor), unless one of several exemptions applies.

Exemption under the employment agency contract rules is largely limited to allowing an employment agent access to an exemption that would be available had the end user procured the labour directly.

The far broader range of exemptions available for what would otherwise be a ‘relevant contract’ encourage taxpayers to prefer any PRT liability be determined under those rules.

Taxpayers must therefore be clear as to which set of rules apply to labour/service procurement transactions.

However, as recent cases have shown, determining which set of rules apply is not simple. We comment on leading employment agent case law below and follow this with some observations on decisions in relation to ‘relevant contracts’.

UNSW Global a welcome decision

The UNSW Global case (2016) considered whether the provision of services of experts for litigation or business constituted an employment agency arrangement.

Thankfully, its interpretation of employment agency provisions recognised the statutory history and gave effect to the reason for which the rules were introduced (which reflected the evolution of the labour market and growth of contracting and labour on-hire).  In the decision, White J held that the rules should only apply in situations where the end user’s workforce was comprised of, or supplemented by, ‘employee-like’ labour supplied through an intermediary (commonly referred to a labour hire business or employment agency).  The decision confirmed that the employment agency rules should not, however, apply where what was being supplied through the intermediary was a service that, whilst benefitting the end user’s business, was not provided in the conduct of the end user’s business.

As White J stated at paragraphs 64 and 65 of the decision:

‘… Where the services of the individual are provided through the intermediary, that is, the employment agent, to help the client conduct its business in the same way, or much the same way, as it would do through an employee, then the arrangement is within the intended scope of the section.

But where the services, although provided for the client’s benefit, are not provided by the service provider working in the client’s business, the arrangement does not fall within the intended scope of the provision.’

Following UNSW Global, a number of decisions have applied White J’s interpretation to matters such as labour supply for hotel and commercial premises cleaning and security staff.  For example, in the H R C Hotels case, housekeeping staff supplied through an intermediary to a hotel were held to be working in the conduct of the hotel business under an employment agency contract. In the Bayton Cleaning case a similar finding was made in relation to cleaners supplied through an intermediary to corporates, aged care and health care service providers. However in the JP Cleaning case, because the cleaners supplied through an intermediary supplied cleaning services outside the normal operating hours of the end user businesses it was held the contracts were not employment agency contracts.

NSW Revenue has also recently issued Commissioner’s Practice Note 005 ‘Employment Agency Contracts Guidelines. It provides some useful insight and with plenty of examples about how to interpret the provisions post UNSW Global and later decisions.

The outcome of the case law is now, hopefully a more settled view on when a contract will be subject to the employment agency rules, allowing taxpayers to more confidently discharge resulting compliance obligations. However, where the employment agency rules do not apply, it is still necessary for taxpayers to consider the relevant contract rules.

Outstanding issues with the employment agency contract rules

A number of other interpretive issues remain even after a contract is classified as an employment agency contract.

For example, it is possible for a labour supply chain to include several employment agency contracts prior to the ultimate contract for supply of procured labour to an end user. A common scenario is:

  • IT specialist Harry is on the books of Employment Agency A.
  • Government Department X needs IT specialists with skills of the type possessed by Harry.
  • Government Department X contracts with Employment Agency B to source those skills.
  • Employment Agency B contracts with Employment Agency A for Harry to be on-supplied to Employment Agency B for on-supply by it to Government Department X.
  • Both the contract between Government Department X and Employment Agency B and the contract between Employment Agency B and Employment Agency A are employment agency contracts from a PRT perspective.

So, what happens next in this scenario? Which is entity liable for PRT?

Arguably, both Employment Agency B and Employment Agency C are subject to PRT in relation to the contracts. However, an administrative fix ‘of sorts’ is advocated by both NSW Revenue and Victoria Revenue to determine which employment agency is then responsible for PRT in the above type of situation. The basic administrative approach is to seek only to recover PRT from the employment agency closest to the end user.

However, this administrative approach involves a burdensome ‘declaration’ process by which the parties are expected to document agreement in relation to PRT responsibility.

In practical terms, whether the process is followed will depend on the parties. Often it will not be followed, with result that either PRT is not paid or a party other than the employment agency closest to the end user pays the PRT (albeit in a lower amount, given upstream margins have not been included).

In the situation where an employment agency other than the agency closest to the end user remits PRT, this raises a query regarding whether this results in no other party being liable for PRT. If this is the case, does this mean Revenue’s administrative views and processes would ‘not be worth the paper they are written on’?

Clearly, there is ‘more water to go under the bridge’ as these administrative arrangements are further tested.

A further issue has recently emerged. It involves an exemption that is available for an employment agent which supplies labour to an end user that would have been exempt from PRT had it employed the worker directly. The relevant exempting provision contemplates a declaration being given by the exempt end user as a means of substantiating the exemption claim.

However, in a very recent change (see ‘Timing of Declarations’), Victorian Revenue has now advised taxpayers that the declaration must be provided in the year of tax to which it relates. Subject to a limited transition period, refund claims will not be accepted where a declaration was not obtained within the period to which it relates.

Relevant contract cases and issues

Recent case law developments in relation to ‘relevant contracts’ have struck a discordant note.

The  decision in Commissioner of State Revenue v The Optical Superstore Pty Ltd  (September 2019) has challenged long-held notions regarding whether PRT applies where a medico contracts with a third party to receive certain administrative/practice management services in relation to patients treated by the medico at a clinic/facility operated by the third party.

After unsuccessful attempts before VCAT and the Supreme Court, the Victorian Revenue Office has been successful in the Court of Appeal in securing a decision  that The Optical Superstore’s collection for, and later payment of monies (including bulk billed Medicare fees)  to, optometrists were amounts ‘paid or payable [by The Optical Superstore] for or in relation to the performance of work’. As a result, the payments were prima facie captured as taxable wages by the PRT relevant contract rules. It should be noted the decision did not consider whether exemptions available under the relevant contract rules may applied.

Structuring of these types of arrangements has historically been understood to result (at least where the patient is bulk-billed) in two separate services:

  • a service being provided by a medico to the patient;
  • a separate service (access to premises, administration support etc.) from the third party to the medico for a fee (usually expressed as a percentage of the medico’s patient fees whether payable by Medicare or Department of Veteran Affairs); with payments for neither service being considered to be subject to PRT.

The Optical Superstore decision causes a major re-think of the PRT outcomes of such arrangements, which are widely used throughout the medical profession.

Curiously, in a recent NSW Civil and Administrative Tribunal decision (Homefront Nursing), a similar factual scenario also involving a medico (a General Practitioner) contracting to receive services from a third party whilst servicing patients from the third party’s premises, there was a different conclusion. In this case, the third party collected all medical fees generated by the medico and paid the amounts, net of a charge for its services, to the medico. To the extent that the third party’s payment to the medico represented fees collected from Medicare and Veteran Affairs Department, the payment was held not to be taxable wages under the ‘relevant contract’ rules, on the basis that to this extent the payment was not made ‘for in relation to the performance of work’ by the medico. To such extent, the payment did not have a ‘relevant relationship’ to the relevant contract between the medico and the third party. However, the balance of the payment (representing fees paid directly by patients, fees for medical reports, etc.) were taxable wages.

All very interesting stuff!

Onwards we forge … stay tuned as the music continues …


This article was prepared by Michael Doran and Andrew Orange.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

Super contributions for those 65 and over:12-month work test exemption

Until recently regulated superannuation funds (including self-managed superannuation funds (‘SMSFs’) were prohibited from accepting voluntary superannuation contributions from, or for the benefit of, members aged 65 to 74 unless the member was gainfully employed on a part-time basis during the financial year in which the contributions were made. For this to occur required the member to have been ‘gainfully employed’ (i.e. worked for at least 40 hours within 30 consecutive days) in the relevant financial year (the ‘work test’) (Reg 7.01(3), Reg. 7.04 to Reg. 7.05 of SIS Regulations 1994).

An exemption to the work test was first announced in the 2018-19 Federal Budget as part of the More Choices for a Longer Life package, with the measure implemented on 7 December 2018 by the Treasury Laws Amendment (Work Test Exemption) Regulations 2018.The measures are focused on providing benefits for those with superannuation balances of up to $300,000.

This article considers the operation of the work test exemption, as well as its interaction with the small business capital gains tax (‘CGT’) concessions, and the bring-forward rule for non-concessional contributions. Each of the relevant issues is considered in the context of ‘Sandra’ who:

  • as at 30 June 2019: was 64 years old, had $200,000 in her superannuation fund, and had been gainfully employed during the financial year;
  • ceased to be gainfully employed from 1 July 2019 and will turn 65 on 1 October 2019.

Can Sandra make contributions to her super fund after she turns 65?

As a result of the abovementioned measures, from 1 July 2019, a 12-month exemption from the work test is available for those aged 65 to 74, provided all of the following conditions are met:

  • the member satisfied the work test in the financial year prior to the financial year in which the contributions are made;
  • the member had a total superannuation balance (‘TSB’) of less than $300,000 at the end of the previous financial year; and
  • no contributions have been accepted by a regulated superannuation fund in respect of the member under the work test exemption in the previous year or any other earlier financial year.

Applying this measure to Sandra (who has not previously utilised the exemption), as she was gainfully employed in FY2019 and had a TSB as at 30 June 2019 of less than $300,000, she can rely on the work test exemption and contribute into her superannuation fund in FY2020 after she turns 65, despite not being gainfully employed in that year.

Note: the work test exemption can only be used once, hence if Sandra chooses to apply the exemption for FY2020, she will no longer be able to make super contributions in the future unless she can demonstrate that she is gainfully employed in the relevant year(s). Additionally, if Sandra does not utilise the exemption in the year directly following the year in which she was gainfully employed, she effectively loses the exemption (i.e. if Sandra didn’t make a contribution in FY2020, she would not be able to make a contribution in FY2021 unless she was gainfully employed).

How does the work test exemption interact with Sandra’s contribution caps?

The work test exemption only impacts a member’s ability to contribute an amount into their superannuation fund. Accordingly, a member will still be subject to the annual contribution caps being $25,000 p.a. for concessional contributions (‘CC’) and $100,000 p.a. for non-concessional contributions (‘NCC’).

As Sandra satisfies the work test exemption, she can contribute up to $100,000 of NCC into her superannuation fund in FY2020. Depending on Sandra’s circumstances, she may also be able to make up to $25,000 of CC in that year.

Can Sandra contribute more than the annual NCC contribution cap?

The author notes that when the measures were first announced, it was initially proposed that members applying the work test exemption would not also be able to access bring-forward NCC arrangements. However, the final version of the measures did not have any such restriction. What this means is that if the bring-forward rules for NCC are met, members relying on the work test exemption may make NCC amounting to more than the annual $100,000 NCC cap over a 3 year period.

The bring-forward rules are contained in s.292-85(3) of ITAA 1997 and broadly require that:

  • the individual must be under 65 at any time during a financial year (“first year”);
  • the individual must make a NCC in the first year that exceeds the annual NCC cap; and
  • immediately before the start of the first year, the taxpayer’s total superannuation balance is less than the general transfer balance cap for the year (i.e., $1.6 million for FY2019).

If Sandra does not have a bring-forward period that is currently in operation, and given she turns 65 only on 1 October 2019, Sandra can trigger the bring forward rules in FY2020 (i.e., the first year) by  making  up to 3 years’ worth of NCC in that year. In other words, Sandra can make an additional NCC in FY2020 to bring her up to $300,000 after she turns 65 under the work test exemption rules (as opposed to the previous $100,000 NCC cap as outlined above). Sandra will need to contribute the full $300,000 NCC in the first year (i.e., FY2020) as in the second year, her fund will be unable to accept any contributions from her (as she is over 65, not working and not able to rely on the work test exemption a second time). Note: the ability to utilise the bring-forward rule would not be available to Sandra if she had instead turned 66 on 1 October 2019.

The interaction of the work test exemption rules and super contributions under the small business CGT concessions

According to Reg. 7.04(6A) of the SIS Regulations 1994, regulated superannuation funds may accept contributions that are covered under s.292-100 ITAA 1997 (i.e., super contributions relating to amounts covered by the small business CGT concessions) provided the amount contributed does not exceed a member’s CGT cap amount (for FY2020 the CGT cap amount is $1.515 million) and the superfund is not prevented from accepting the amount as a contribution had it been made to the fund in the financial year in which the CGT event happened (e.g. because the small business CGT concession stakeholder for which the contribution is made was 65 or over and did not satisfy the work test in the CGT event year).

This means for business owners who qualify for the small business 15-year exemption the maximum amount that can contributed is $1.515 million (in FY2020). If the small business 15-year exemption is not available, then the amount that can be contributed is limited to the exempt capital gain under the small business retirement exemption (subject to the relevant individual’s CGT lifetime retirement limit of $500,000).

In the context of the small business CGT concessions, the introduction of the work test exemption now provides greater opportunity for those who were previously prevented from contributing amounts under the small business CGT concessions into their super fund to be able to do so subject to the above conditions for exemption being met.

Further, the introduction of the exemption creates additional considerations for members regarding the timing of contributions as while contributions that qualify for the small business CGT concessions are not treated as NCC, they are still counted as part of a member’s TSB. What this means is that if a contribution covered under the small business CGT concessions was made for the benefit of Sandra (e.g., because she was a CGT concession stakeholder in FY2019), it could cause her TSB to exceed the $300,000 threshold at the end of FY2019. In that case, Sandra will need to meet the work test criteria in order to be eligible to make a NCC after she turns 65 as she is no longer able to meet the requirements to access the work test exemption. If the super contribution covered by the small business CGT concessions was delayed until after 30 June 2019, Sandra will be able to apply the work test exemption for FY2020 (assuming she was gainfully employed in FY2019).


In conclusion, the work test exemption in conjunction with existing rules provide ample scope and opportunities notably for those turning 65 to plan their retirement strategies. For others who are in the 65 to 74 age bracket, the work test exemption allows for additional NCC to be made in the year following their retirement provided the requirements for exemption are met.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

Director penalties and GST – some matters to know

It is proposed to extend the existing director penalty regime to enable the Commissioner to recover unremitted GST from directors. Presently, the regime allows the Commissioner to take recovery action against directors of non-complying companies for unpaid PAYG withholding and SG charge. Further, it is proposed that the Commissioner’s tax estimate collection power, which currently allows him to make and recover estimates of an entity’s PAYG withholding and superannuation guarantee (SG) charge, will be extended to GST liabilities.

The proposed changes are contained in the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. The Bill also makes some other far-reaching changes to the Corporations Act 2001 that potentially extend a director’s liability for permitting the company to make creditor defeating dispositions.

This article explains the proposed changes to the Tax law.

Extension of the Commissioner’s power to make estimates of GST — Div. 268 of Sch. 1 to the TAA

The Commissioner will have the power to make and recover an estimate of a net amount of GST for a tax period (estimated GST). The Commissioner will be able to issue estimates to any taxpayer registered/required to be registered for GST, not just to a company.

The liability of a taxpayer to pay an estimate is created by the Commissioner issuing a notice to the taxpayer. It is a liability separate from the underlying liability to pay assessed GST. However, payment of an estimate will correspondingly be a payment of the underlying liability for GST and vice versa.

Extension of the director penalty regime to unpaid GST – Div. 269 of Sch. 1 to the TAA

The director penalty regime will be extended to allow the Commissioner to recover a company’s liability to pay net amounts of GST for a tax period (assessed GST), estimated GST, and instalments of GST from the company’s directors. The regime applies to companies registered under the Corporations Act 2001 and, more specifically, to ‘directors’ within the meaning of that Act.

Existing and intending directors should understand their obligations under the Tax law and the personal risks that they incur if they do not take appropriate timely action in circumstances where the company of which they are a director fails to comply with its obligations to account to the Commissioner for GST (or the other taxes to which Div. 269 Sch. 1 TAA applies). A ‘director’ includes persons who act in the position of director even though not validly appointed as such and a person in accordance with whose wishes the conventional directors are accustomed to act.

Persons who were directors on/after the last day of a tax period (the initial day) and were not ‘new directors’ (discussed below) will be personally liable, by way of a penalty, for the net amount of GST payable in respect of that tax period where the company has not paid the GST on/before the day on which payment is required under the GST Act (due day). The penalty arises automatically unless the company has gone into administration or liquidation on/before the due day.

Similarly, where a GST instalment for a quarter has not been paid on/before the day required by the GST Act (also ‘the due day’) and the company has not gone into administration/liquidation on/before that due day, a person who was a director on the last day of the GST instalment quarter (also the ‘ initial day’) and is not a new director incurs a penalty in the amount of the instalment.
A separate director penalty in the amount of the Commissioner’s estimate arises where:

  • a person is a director of the company on the last day of a tax period (also the ‘initial day’) and is not a new director;
  • the company has been given a notice of an estimate of GST for that tax period under Div. 268; and
  • the company has not paid the estimate by the end of day on which the notice was given (also the ‘due day’) or gone into administration/liquidation by that time. (Note that s. 268-15(4) provides that a notice ‘is taken to be given at the time the Commissioner leaves it or posts it’.)

A director penalty for an estimated amount in relation to a tax period can co-exist with a director penalty for an assessed amount in relation the same tax period, as the Commissioner can make an estimate ‘to the extent that the net amount has not been assessed before the Commissioner makes the estimate’ (proposed s. 268-10(1)(c)). Payment in respect of one penalty will reduce the other (s. 269-40 and s. 268-20).

‘New directors’ are persons who become directors after the due day. New directors incur a director penalty for the company’s outstanding liability to remit GST (or, as the case may be, a director penalty for previously estimated GST) if the company does not pay the relevant amount or go into administration/liquidation within thirty days of the person becoming a director.

In effect, under the proposed changes, a company’s directors are giving a personal guarantee that their company will remit GST to the Commissioner.

Resignation as a director after the initial day does not relieve a director of liability. Note also that the Bill includes separate amendments that will prevent directors from backdating resignations or leaving a company without a director.

Understanding what is required of directors

The time-frames for taking action

Directors need to be aware of the statutory time-frames for action which leads to relief from personal liability for assessed GST/estimated GST for a tax period. If they await receipt of a director penalty notice (DPN), they may be out of time to obtain relief.

Broadly speaking and subject to one qualification described below, where the director penalty is for the net amount of GST payable in relation to a tax period, the level of relief for directors depends on whether the company:

  1. goes into administration/ liquidation before the earlier of: (i) the expiration three months after the due day and (ii) the expiration of 21 days after the issue of the DPN; or
  2. has actually lodged its BAS within that three-month period and has gone in to administration/ liquidation before or within 21 days after the issue of the DPN.

Case (a) leads to full relief. Basically, Case (b) provides relief to the extent that the corporate liability for the net amount for the tax period has been disclosed to the Commissioner in the three-month period.

The qualification mentioned earlier arises where a person becomes a director within the specified three-month period. In lieu of that three-month period, there is a substituted a period of three months after the day the person became a director. However, action prior to the earlier of expiration of the substituted period and expiration of 21 days after issue of the DPN to the later-appointed director will only protect the later-appointed director. The other directors must rely on action within the primary period.

Again broadly speaking and subject to a qualification corresponding to the one above, where the director penalty is for estimated GST referable to a tax period, relief from the penalty depends on whether the company goes into administration/ liquidation before the earlier of: (i) expiration of three months after the date on which the BAS for the underlying GST should have been lodged and (ii) expiration of 21 days after the issue of the DPN. Where the company meets the requirement, directors obtain full relief from liability from estimated GST.

The expression in point (i) summarises the formulation in the Bill. Effectively, it aligns the three-month action window for estimated GST with the three-month action window applicable in each of Cases (a) and (b) for assessed GST. Forward planning should be considered, as the window may have closed prior to the notice of estimate being issued.

It will be noted that relief from a director penalty for estimated GST is prima facie less generous (absence of a counterpart to Case (b)) than relief from a director penalty in relation to the underlying liability for assessed GST. However, a director actually avoids a penalty for an estimate through the company’s timely lodgment of a BAS. Lodging a BAS for the tax period creates a deemed assessment of GST and proposed s. 268-10(1)(c) denies the Commissioner power to make an estimate to the extent of an assessment.

It follows from the foregoing, that lodging a BAS on time, even if payment is not made, gives a director a period of 21 days after issue of DPN in which to place the company in administration/liquidation in order to be relieved of penalty for both assessed GST and estimated GST to a potentially significant extent.

In relation to director penalties with respect to GST instalments, full relief is available provided the company goes into administration/liquidation before or within 21 days after the Commissioner gives the director penalty notice.

Although Div. 269 provides some defences to director penalties, these have limited scope.

Due diligence before becoming a director

Clients often ask their accountants and other professional advisers to become directors of their investment/trading companies and corporate trustees (professional directors). This includes companies which are passive investors, which have not been subject to taxes within the existing ambit of Divs. 268 and 269.

Professional directors may be alert to the prospect of personal liability as a director of an active corporate client, especially where there are employees. However, with the extension of Div. 269 to GST, directors of passive investors will also need to pay closer attention to their company’s day-to-day affairs, as distinct from merely ensuring compliance with the more general rule against insolvent corporate trading.

In the course of treating trusts as taxable/accounting entities, there is a tendency to overlook the principles that the trustee is the legal entity liable to pay the tax and the ATO recognises (e.g. see PS LA 2012/2 at para. 41) that Div. 269 applies to directors of corporate trustees. Directors of retiring corporate trustees, being dependent on the incoming trustee meeting any outstanding BAS lodgment/payment obligations, will especially need to monitor incoming trustee compliance.

Professional directors should consider how they will approach the prospect of a future imposition of director penalty, particularly where there may be Board tensions with shareholders/beneficiary directors being more willing to accept the risk of a director penalty ‘guarantee’ in view of their expectation of ultimate commercial benefits that will not be derived by the professional director. With a vested interest in the continuity of the company, shareholder/beneficiary directors may resist a professional director’s desire to avoid personal liability by placing a solvent company (with a short-term cash flow impediment precluding immediate payment of GST) in administration/liquidation.

Apart from close consideration of the ‘reasonableness’ defence, this might include consideration of reaching an upfront understanding with the other directors and which would enable the professional relationship to continue in the aftermath of DPN circumstances arising.

A practical approach

Persons contemplating becoming a director need to be aware of the desirability of undertaking due diligence with respect to GST before accepting appointment. It seems preferable to have the choice of declining appointment where there are outstanding GST obligations for which they may become personally liable rather than having to rely on relatively tight windows within which the company has to go into administration/liquidation.

All directors will need to be aware of their potential liability and the need to monitor their company’s GST compliance in a timely way. In the absence of tailored information flow, it is to be expected non-executive directors will be especially vulnerable.

Directors will require understanding of when GST is payable in their company’s circumstances, timely notice of any anticipated problem, and timely receipt of advice on actual non-compliance. All directors will need to ensure management alerts them immediately to any receipt of a notice of GST estimate, as its receipt indicates an existing problem as well as giving rise to a director penalty in its own right.

While the extension of Div. 269 to include GST will expand the set of companies/corporate trustees that need advice in relation to director penalties, advisers may want to take the opportunity to review the sufficiency of arrangements for director oversight of all taxes within the ambit of Div. 269. For instance, it is anticipated that the relatively recent expansion of Single Touch Payroll will intensify ATO scrutiny of timely payment of superannuation contributions and directors need to be aware of the stringent time-frames within which to obtain relief from director penalties for superannuation guarantee charges.

All taxpayers, and not just companies and their directors, need to be aware that estimate notices require immediate attention. The Commissioner is able to take court proceedings against taxpayers to recover the estimate. (Where a director is not relieved from the relevant director penalty, the Commissioner can also take proceedings to recover the estimate from the director following the elapse of 21 days after issue of the DPN.) Unpaid estimates attract GIC, although payment of this GIC also reduces GIC on the underlying unpaid assessed GST (and vice versa).

As estimates will be based on limited information available to the Commissioner, it is to be expected that these will be inaccurate. However, inaccuracy does not preclude recovery action. Div. 268 prescribes time-frames and processes for correcting an inaccuracy. Because the processes require statements on oath, access to reliable business transaction records will be critical.

As a further practical observation, all taxpayers should be mindful that the Commissioner’s estimation power appears to enable an estimate to be raised where he considers there is a shortfall in disclosure of GST in a BAS.

Conclusion and implementation date

In conclusion, as a stand out practical matter, directors will likely need to act without awaiting the issue of a DPN – it may be too late to seek relief when a DPN issues. It is also worth emphasising that the Commissioner considers that the director penalty regime extends to directors of corporate trustees.

The proposed changes are scheduled to commence from the beginning of the first quarter (1 January; 1 April, 1 July or 1 October) to occur after the relevant Bill receives Royal Assent. In the circumstances, it might be prudent to anticipate the Bill will be passed and the changes operative from 1 October 2019.

The changes will not have retrospective effect. They apply (Item 22 Sch. 3 of the Bill) to ‘net amounts and assessed net amounts for tax periods that start on or after’ the specified commencement date and to ‘GST instalments for GST instalment quarters that start on or after’ that date.

Editor’s Note: Webb Martin Consulting Pty Ltd is able to assist you in relation to your preparation of advice that alerts clients to the proposed director liability for GST and/or director liability for taxes already within Div. 269 and to practical protective action that should be taken.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

The active asset test and vacant land used partially for business – where should the line be drawn?

Practitioners would be well aware that in order for taxpayers to be able to access the small business capital gains tax (“SBCGT”) concessions, they must first satisfy the basic conditions under Division 152 of the Income Tax Assessment Act 1997 (“ITAA 1997”). One of these basic conditions requires that the subject CGT asset passes the active asset test, that is, the asset is an active asset for a specified period of time. Pursuant to section 152-40, an asset will qualify as an active asset where it is used, or held ready for use, in the course of carrying on a business (whether alone or in partnership) by the taxpayer, their affiliate (a defined term) or their connected entity (also a defined term). The phrase “used in the course of carrying on a business” is not defined.

In relation to land, particularly in relation to otherwise vacant land that has had some business use,  a query arises over the degree of connection required between the activities conducted on the land and the business in order for the land to qualify as an active asset. The Commissioner’s long held view is that whilst section 152-40 does not require an exclusive use of the asset for business purpose, the degree of connection required under section 152-40 is expressed by the words “in the course of” which mean “integral to the process by which the business is carried on”. In other words, the activities conducted on the land must have a direct connection that is not merely incidental with the business operations. Historically, the Administrative Appeals Tribunal (“AAT”) has also been found to hold this view.

This view was first manifest in the AAT hearing Karapanagiotidis and Commissioner of Taxation [2007] AATA 1961; (2007) 68 ATR 348; 2007 ATC 2746 (16 November 2007). In this decision, the taxpayer was seeking to apply the SBCGT concession to the sale of land they owned that was partially used to store old records of a business. The relevant business was operated not by the taxpayer, but by a company which the taxpayer owned and controlled. The Tribunal found that passively storing old records in containers placed on the property was insufficient to be regarded as integral to the carrying on of a business and, therefore, section 152-40 could not be satisfied.

A similar decision was handed down by the AAT in Rus and Commissioner of Taxation (Taxation) [2018] AATA 1854 (14 May 2018). In that decision, a home office was established to conduct the plastering/housing construction business operated by a company controlled by the taxpayer, and that home office was manned by two full time staff. A shed was constructed on the land and used to store tools, plant and equipment and three motor vehicles for that business. Additionally, there were two containers outside the shed containing material supplies, the property had been used as the postal address for the business and the company’s website lists the property as the operations office. However, the AAT found that, as less than 10% of the total land was used in carrying on the business (with the balance of the land being vacant), the land was not being sufficiently ‘used’ for the purposes of the active asset test. In reaching its decision, the AAT considered it was necessary to form a view on whether the asset as a whole could be said to have been used in carrying on the relevant business. As the nature of the company business did not call for a level of activity on the land than the use of a very small proportion of it, the land could not be considered integral to the business.

However, the recent AAT decision in Eichmann and Commissioner of Taxation (Taxation) [2019] AATA 162 (15 February 2019) appears to indicate a shift in this long-held view. In this decision, whilst the AAT agreed that minimal or incidental use of an asset would not be sufficient to cause the asset to satisfy the active asset test, the AAT rejected the Commissioner’s contention that the phrase “in the course of” requires the use to be integral to the process by which the business is carried on. The AAT said the legislature could easily have used the word “necessary,” “integral” or “essential” in order to further limit the availability of the concession should it so desire. It did not do so.

The AAT also restated one of the key principles of statutory construction from the High Court decision of FCT v Consolidated Media Holdings Ltd (2012) 250 CLR 503 and was that

…the task of statutory construction must begin with a consideration of the [statutory] text…in its context… Legislative history and extrinsic materials cannot displace the meaning of the statutory text [emphasis].

The factual circumstances in Eichmann were to an extent similar to those in Rus. The taxpayer carried on a business of building, bricklaying and paving through a trust that they controlled. The subject land was adjacent to the land that contained the taxpayers’ main residence and had two 4m x 3m sheds, a 2-metre-high brick wall and a gate to secure the property. Similar to the Rus case, there was no business signage on the subject land. The two sheds were used for the storage of work tools, equipment and materials. The open space on the subject land was used to store materials that need not be stored under cover, including bricks, blocks pavers, mixers, wheelbarrows, drums, scaffolding and iron. Work vehicles and trailers were also parked on the property. Tools and items were collected on a daily basis. In some cases, the property would be visited a number of times in a day between jobs depending on what tools each job required. The property was mainly for storage as work would be done on work sites although, on occasion, some preparatory work was done at the property in a limited capacity.

Considering the above, the AAT was satisfied that the extent of the use of the land was far from minimal or incidental to the carrying on of the business. In particular, the AAT determined that the use of the land contributed to the efficiency of the business and was not trivial or insignificant, finding that the taxpayer did not merely hold the land passively as an investment.

It would appear the decision in Eichmann was aided by the fact that tools and items were collected from the property on a daily basis and the property would be visited a number of times in a day between jobs.  While Eichmann provides some authority for the argument that a taxpayer can use land outside the main function of their business (in this case, as storage of equipment etc used in a business necessarily carried on at other locations) and still be able to pass the active asset test in respect of the land, it is the author’s view the nature of the activities undertaken on the land and their frequency are also key elements to the decision making process. Unfortunately, it is not clear from the Eichmann case what proportion of the land used for business purposes. Based on Rus case, a use in the business of 10% or less would not be sufficient to pass the active asset test. Nonetheless, the question still remains as to where should the line be drawn – would use of more than 10% but less than 50% of a parcel land that would otherwise be vacant land be sufficient, or some other percentage?

Ultimately, whether a taxpayer will be able to satisfy the active asset test in relation to otherwise vacant land will be a question of fact and depend on all the circumstances of the case. However, following Eichmann case, arguably the test should be viewed more broadly. It will be interesting to understand how the law will be interpreted and administered by the ATO in the future.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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