Australia: Musings on 2018 Federal Budget

Image rights for sports people and actors

It is said that the Government will "improve integrity" in the tax system by ensuring from 1 July 2019, high profile individuals are no longer able to take advantage of lower tax rates by licencing their fame or image to another entity.

The Budget papers go on to say that this is currently available. What it does not note is that, the ATO had provided some "safe harbour" to this concept by their release of draft Practical Compliance Guideline PCG 2017/D11.

That draft PCG issued on 1 September 2017 referred to the Supreme Court of Queensland decision in Brisbane Bears-Fitzroy Football Club Ltd, which case dealt with Queensland payroll tax, and that payments for "image rights" received by footballers were wages.

The football club's appeal from that decision reported at (2017) QCA 233, was dismissed, making it all the more curious that PCG 2017/D11 took the form that it did, and that it is still on the ATO's website after the Budget.

This Budget announcement therefore seems to be the Government's reaction to the ATO's "own goal", and is reminiscent of the recent problem with introducing the small business company tax rate only for companies carrying on "genuine" trading activities, compared to the now notorious footnote 2 to TR 2018/D2, that the ATO thought that companies generally are incorporated to carry on business, notwithstanding 100 years of case law that this is not necessarily the case.

This announcement is also interesting because, contrary to the liberal attitude portrayed in PCG 2017/D11, the Commissioner withdrew his "guidelines" on taxation of professional practices in December 2017, which continued his campaign to treat professional persons more strictly in relation to income splitting and the like, than non-professional persons (now it seems including sports persons and actors).

Integrity of concessions relating to partnerships

The ATO originally had considerable difficulty explaining why they withdrew the "guidelines" in relation to professional partnerships in December 2017.

The Budget announcement that small business CGT concessions will no longer be available to partners doing Everett Assignments of their interests in partnerships, this now adds a little clarity to one of the mischiefs that they were apparently concerned about.

For a post CGT partnership interest, an assignment of a share of a partnership to a related entity would trigger a CGT liability based on the market value of the partnership interest, and since the Supreme Court of Western Australia decision in Reynolds' case (1986 – concerning WA stamp duty, giving a mark valuation of the partnership interest), even though partners may have come and gone without paying for goodwill, the practice of doing Everett Assignments "cooled off". Interestingly, the Australian High Court decision in Everett (1980) that such assignments are legally effective, did not find favour in either the United Kingdom or New Zealand.

Subsequently, the limitation on the tax deductibility by partnerships of payments to related services trusts took hold (TR 2006/2), the practice of Everett Assignments and claiming small business CGT relief obtained currency. Apparently some partners were making assignments to their family trust with the family trust borrowing money to do so, thus obtaining interest deductions in their trusts, while the proceeds of the assignments were paying out private debt or funding lifestyle.

More recently the ATO has also said the Guidelines were not meant to offer a safe harbour from Part IVA for restructures to come within them. Further they have said that it is necessary to prove that a restructure that moves wealth from a partner in a professional partnership, would need to prove "asset protection" as a motivation, notwithstanding the collapse of Arthur Andersen, or HIH Insurance leaving many professional partnerships uninsured, making asset protection objectively a non-tax reason for the assignment!

The fact that the Budget announcement said that some taxpayers, including large partnerships are inappropriately accessing these concessions, might have something to do with the $6 million net asset test not applying to all of the assets of the partnerships, but rather only to the business assets of the individual partner.

Again, partnerships outside the professions wouldn't have needed Everett Assignments since there would be no prohibition from introducing non-professionals into the partnership.

Extending director penalty regime to GST

It is said that "what the Lord giveth the Lord taketh away", and so it is some small relief to directors of companies that fail to pay GST, and who will be made personal liable for the unpaid GST, that as part of the "innovation agenda" of the government, the period of bankruptcy is to be limited to one year from the general three-year limit currently applicable. One wonders how it is likely that to provide more and more exclusions from protection by the corporate veil, will at the same time to stimulate business activity. More targeted measures such as requiring the purchasers of new residential property to pay the GST direct to the ATO, should have taken some heat out of the issue of lost GST from phoenixing activity.

Introducing new phoenix offences

Whilst no details are available concerning the proposed new offences to target those who conduct or facilitate phoenixing, one must query whether the authorities are using the current powers that they have appropriately, before introducing such new offences. The Banking Royal Commission has recently highlighted issues as to whether ASIC and APRA have appropriately used all of their powers to "crack down" on illegal activities in the financial services sector. No doubt there will be talk of creating new "offences" to deal with those as well. The real question that needs to be answered is what laws that we currently have are in fact inadequate.

Clarification of the operation of Div. 7A

The Budget announcement says that the government will ensure that unpaid present entitlements of companies from trust, will come within the scope of Div. 7A. This measure really does have deep history. Until 2010, the ATO accepted that an unpaid present entitlement was not within the definition of "debt" owed by a trust to an accumulated profits private company/beneficiary.

When the practice of introducing corporate beneficiaries, in the ATO's view, got out of hand, they did a "U-turn" on their view (TR 2010/3), but at least as an acknowledgement of making that U-turn, said that they would devote no compliance resources to dealing with UPEs that came into existence before 2009 (PS LA 2010/4).

The reality was that it would have been far preferable for the government to have changed the law back in 2010 instead of what unfolded, which was the introduction of incredibly complex administrative measures to provide some small relief to those adversely affected by the ATO's U-turn.

Somewhat symptomatically of this government, the measures relating to Div. 7A drawing on a number of recommendations from the Board of Taxation's post-implementation review of Div. 7A, which were to have applied from 1 July 2018, have also been deferred to a start date 1 July 2019. These measures may force the previously grand-fathered pre 16 Dec 2009 UPEs into the Div. 7A regime, repayable over 10 years from the date of enactment, potentially causing great hardship to taxpayers who had built up large UPEs before 16 Dec 2009.

Deductions to be denied for vacant land

Since the High Court decided Steele's case in 1999 it has been clear that interest was deductable for a taxpayer who had borrowed money to buy land which was to be developed some time in the future, notwithstanding the development did not actually take place for several years.

The Budget announcement says that deductions will be denied for expenses associated with holding vacant land, and that the measure is to "address concerns that deductions are being improperly claimed as expenses...where the land is not genuinely held for the purpose of earning assessable income", such measures to take effect from 1 July 2019.

The announcement is also expressed to be warranted on the housing affordability front, because it says that it will reduce tax incentives for land banking, which deny the use of land for housing or other development.

It also says that vacant land will not include land used by the owner to carry on a business, including a business of primary production. So owners who let to sharefarmers, or for agistment may be targets of the measure, as it would be usual practice of land banking urban fringe land, not to simply sit on it.

Whilst the measure says that denied deductions will still be able to form part of the cost base element for CGT purposes, one can only assume that the Government has finally decided to reverse the effect of the High Court's decision in Steele's case, without saying so.

Interestingly, for the taxpayer to be claiming deduction for interest on the vacant land, they would have essentially been telegraphing to the Commissioner that the taxpayer was saying that they held the vacant land on revenue account i.e. that it was part of a business, or part of a profit-making undertaking or scheme, which would mean that the profits on ultimate disposal of the land were on revenue account, and therefore not for instance, entitled to a 50% CGT discount.

Whilst details of this measure may make it clearer, the corollary of this measure seems to be that if the interest is going to be denied deductibility, that the profit on disposal of the land will be on capital account, and that the 50% CGT discount will be available?

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

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