The importance of identifying the facts and circumstances

Fundamental to any tax advice is the identification and clarification of the relevant, underlying facts and circumstances. Without doing so it is difficult, maybe even impossible, to determine the tax implications applicable to those facts and circumstances. Also, even minor changes to such facts and circumstances may alter the tax implications.

This is evident across all aspects of tax analysis.

Tax Rulings

See the comments below extracted from various recent public rulings issued by the ATO, particularly where examples are provided to illustrate how the ATO interprets its application of the law.

TR 2024/1 states:

This Appendix provides examples which illustrate the principles in the Ruling. Identifying the relevant depreciating asset or assets will depend on the facts and circumstances of each case. Consequently, the conclusions reached in the following examples are not necessarily determinative of the Commissioner’s views on cases with similar, but different, facts.

TR 2024/3 states:

8. The examples in this Ruling are for illustrative purposes only. You should not assume that your situation will have the same outcome as the example, even if you have similar facts or undertake the same study as shown in the example. Differences in occupation and industry requirements, your specific income-earning activities, and the relevance of the expense to the income-earning activities may produce different outcomes.

GSTR 2019/1 states:

Each case is to be determined on an overall assessment of the individual facts and circumstances of the supply.

And GSTR 2020/1 states:

Determining whether there is a relevant connection between an acquisition and the making of supplies that would be input taxed requires an objective assessment of the surrounding facts and circumstances to determine whether the acquisition is used or intended to be used in making those supplies.

Ensuring the taxpayer’s facts and circumstances are consistent with the relevant ruling is important because a taxpayer only has the protection afforded by ATO rulings if “the facts, assumptions or conditions set out in the ruling are met” (as per the Explanatory Memorandum for section 357-60 in Schedule 1 to the Taxation Administration Act 1953).

Case Law

Identifying the facts is fundamental to common law decisions. While this article is not intended to provide a commentary on the recent Full Federal Court decision in the PepsiCo case, we use this case in the context of the importance of identifying the specific facts and circumstances. (We also note that at the time of writing this article, it was yet to be determined if the ATO would appeal this decision.)

The case dealt with two matters:

1. whether royalty withholding tax applied in relation to a payment made; and
2. if not, whether the Diverted Profits Tax (DPT) anti-avoidance rules applied (incidentally, this is the first case to consider the DPT rules).

Insofar as is relevant, Schweppes Australia (the Bottler) entered into an agreement with PepsiCo Inc (PepsiCo), (referred to as the EBA), to acquire concentrate. The EBA allowed PepsiCo to nominate the entity that would sell the concentrate, and it nominated an Australian resident company (referred to as the Seller). The EBA determined the purchase price of the concentrate, and also included a grant by PepsiCo to the Bottler of the right to use the trademarks and other intellectual property associated with the beverages (such as bottle and can designs). However, the EBA did not make any provision for the payment by the Bottler of any royalty for its use of the trademarks and other intellectual property (referred to here as the ‘intellectual property’).

The Commissioner’s case was that, as the EBA referred to the supply of concentrate and the provision of the intellectual property, the payments made by the Bottler were in part consideration for the use of the intellectual property (and therefore fell within the definition of a royalty, which would then be subject to the royalty withholding tax rules).

The decision at first instance (see the single judge, Federal Court decision here) was in the Commissioner’s favour – that is, the payments were for both concentrate and the intellectual property. However, the Full Court concluded that the payments made by the Bottler to the Seller were for concentrate alone and did not include any component which was a royalty for the use of PepsiCo’s intellectual property.

It should be noted that appeals are only able to be made in relation to a question of law (and not a question of fact). In this case the question of law related to the proper construction of the EBA. PepsiCo argued that the proper construction was that the price being paid was for the concentrate only. The Commissioner argued that the price included a component for the intellectual property, otherwise PepsiCo ‘was giving away something so valuable for nothing’.

The Full Court did not agree with the Commissioner’s view that the intellectual property was otherwise being granted for nothing, noting that the licence rights did not exist in isolation. The terms of the EBA imposed on the Bottler obligations for distribution of the beverages and while, in doing so, it obtained the benefits of the intellectual property it was also subject to restrictions in relation to the use of such intellectual property (i.e., it could not use it for any other purpose other than in distributing the beverages), burdens (being subjected to testing and inspections), and PepsiCo benefitted by its goodwill being promoted in Australia.

Ultimately, the Full Court concluded that the proper construction of the EBA was that there was a price payable for the concentrate which did not include any component for the licence to use the intellectual property.

It was acknowledged that there are situations where the facts and circumstances may not be confined to what has been expressly agreed to and reflected in a written agreement between the parties. In this regard it referred to the High Court decisions in Davis (where the price agreed to between the parties reflects the consideration for the transaction, the transaction occurs at that agreed price), and in the Dick Smith and Lend Lease cases (where the consideration for the transfer of property could be different to that which the parties had agreed). Ultimately, the decision in Davis was followed here, and the decisions in Dick Smith and Lend Lease were distinguished.

The Facts and Circumstances

The above illustrates the importance of identifying the relevant facts and circumstances.

Sometimes, in the context of determining how the tax laws apply, it may be that not all of the facts are known. In such circumstances, this may require assumptions to be made to illustrate how the tax laws may apply. However, wherever possible those assumptions should be clarified, as this will impact the application of the relevant laws.

Sometimes differences of opinion arise on how the law applies and this relates to the interpretation of the law itself. But sometimes it relates to differences in the facts. This may be based on how the facts are presented, or it could be a difference of opinion as to how the facts, e.g., the terms of the EBA in the PepsiCo case, should be construed.

We have seen these types of differences in the context of dealing with the ATO (whether as part of a review, audit or application for a private ruling). Sometimes the circumstances of a case provide clear facts, but this is not always the case. Wherever possible, such facts and circumstances should be documented along with supporting, corroborating evidence to ensure consistency in interpretation by both the taxpayer and the ATO.

——-