Birchstone Brief for the week ended 12 August 2022

ATO Updates

Draft update to GST ruling on financial supplies and related supplies and acquisitions

The ATO has released GSTR 2022/2DC1, a draft consolidation outlining proposed changes to GSTR 2022/2?(which covers the Commissioner's view of the GST treatment of financial supplies and related supplies and acquisitions). The proposed changes reflect changes in the GST law?since the ruling was first released, include new examples, insert references to new guidance relating to financial supplies and?are intended to broadly modernise?the ruling overall.?

Guidance updated following Div 7A determination

Following the publication of?TD 2022/11?(which sets out the Commissioner's view on when an unpaid present entitlement or amount held on sub trust will?become the provision of ‘financial accommodation’ for the purposes of Div 7A) and the associated withdrawals of TR 2010/3 and PS LA 2010/4, the ATO has amended?the following guidance to reflect its updated views:?

• TD 2011/15 — Income tax: Division 7A — Unpaid present entitlements — Factors the Commissioner will take into account in determining the amount of any deemed entitlement arising under s 109XI of the Income Tax Assessment Act 1936;?
• ?TD 2015/20?— Income tax: Division 7A?—?Is a release by a private company of its unpaid present entitlement a “payment” within the meaning of Div 7A of Pt III of the Income Tax Assessment Act 1936?
• TR 2015/4 Income tax: CGT small business concessions?—?Unpaid present entitlements and the maximum net asset value test; and
• PCG 2017/13 Div 7A — PS LA 2010/4 sub-trust arrangements maturing in or after the 2016–17 income year.

Practice statement on dealing with taxpayers who claim tax laws are invalid updated

The ATO has updated PS LA 2004/10, which sets out guidance for ATO staff on how to deal with correspondence from taxpayers claiming that they are exempt from fulfilling their taxation obligations (on the basis that either the relevant taxation law is invalid or does not apply to them for a particular reason).?

Class Rulings issued

The ATO has issued the following class rulings:

• CR 2022/72?Qantas Airways Ltd — Executive Recovery Retention Plan;?and
• CR 2022/73?Qantas Airways Ltd — Employee Recovery Retention Plan.

State Taxes

Duties Act (WA): ruling on connected entities exemption updated

The Commissioner of State Revenue released Revenue Ruling?DA 19.2, which replaces?DA 19.1?with effect from 8 August 2022. DA 19.2 discusses the interpretation of certain terms relevant to?applying for a connected entities duty exemption?under Chapter 6 of the Duties Act 2008 (WA). This exemption applies to certain?relevant?transactions between corporations and unit trust schemes that are members of a family. The most significant difference between DA 19.1 and DA 19.2 is that DA 19.2?includes commentary on the Commissioner's approach to notifiable events (which can result in revocation of an exemption) at the pre-transaction ruling and exemption application stages.?

Cases

Prescott v FCT?[2022] AATA 2478 - SMSF payments taxed as superannuation income stream benefits

The AAT has?found that payments an applicant received from?their SMSF were correctly taxed as?superannuation income stream benefits?rather than superannuation lump sums in circumstances where the applicant had not validly?elected that those payments should not be treated as superannuation income stream benefits.

The applicant and his wife were the sole members of their?SMSF and the only directors and shareholders of its corporate trustee.?In addition to the SMSF's investment accounts managed by a licenced?financial planner, the applicant established and managed two accounts himself. After reaching preservation age in 2012, he elected to take an allocated pension. However, as he was often in need of additional funds, the applicant repeatedly directed the financial planner via email during the 2013 to 2015 income years to deposit funds into the accounts?managed for him to draw down on in his capacity as a member of the SMSF. The applicant did not execute a formal election, and the corporate trustee did not create any formal documentation, before each relevant payment was made.?

The issue before the AAT was whether the additional amounts drawn down by the applicant should be taxed as superannuation lump sums (as contended by the applicant) or as superannuation income stream benefits (as assessed by the Commissioner). This turned on whether the applicant had elected for the amounts not to be treated as superannuation income stream benefits under former regulation 995-1.03 of the Income Tax Assessment Regulations 1997 (Cth).

The AAT found that the regulation created a requirement for ‘words, acts and or deeds’ to provide evidence that the applicant had made a choice the relevant payments should not be treated as superannuation income stream benefits.?This was found not to be present in the email correspondence to the financial planner and?nor could it be implied or found elsewhere. As such, the applicant's contention that his email requests?supported finding that he had?made?a blanket choice that all the relevant payments were to be treated as superannuation lump sums was rejected. The AAT therefore concluded that?the applicant had not made an election complying with former regulation 995-1.03 and that the?relevant amounts had therefore been correctly treated as superannuation income stream benefits. The Tribunal further noted that while the failure to comply with the regulation over an extended period in an otherwise commendable governance framework was unfortunate for the applicant,?the legislation?did not provide the Commissioner?with any discretion to correct the failings of a trustee and/or the trustees' or members' professional advisers.?

Goulopoulos?v FCT [2022] AATA 2540 - Responsible officer of SMSF corporate trustee disqualified over multiple SIS Act violations

The AAT has upheld the Commissioner's disqualification of an individual (Mr G) from being the responsible officer of a SMSF corporate trustee under section 126A(2) of the Superannuation industry (Supervision) Act 1993 (Cth) (SIS Act) as he was the responsible officer of his SMSF's corporate trustee when it contravened the SIS Act several times.

The AAT was satisfied on the evidence that the corporate trustee had contravened numerous provisions of the SIS Act while Mr G was one of its responsible officers, including:?

• section 34 (for failing to comply with prescribed operating standards by allowing a member's benefit to be paid out of the SMSF to Mr G or to?his benefit in breach of those operating standards);?
• section 35D (for failing to lodge its annual returns on time in the 2009 and 2013 to 2016 income years);?
• section 62 (for breaching the sole purpose test - for example the SMSF made a loan to Mr G and related parties?(which was also in breach of section 65), borrowed money from related parties (which was also in breach of section 67), and gave Mr G access to superannuation benefits without his meeting a condition of release);
• section 66 (for acquiring certain assets from members of the SMSF);?
• section 84 (for not complying with the in-house asset rules); and
• section 109 (for not complying with the arm's length basis requirements by making and/or maintaining investments with related parties on an otherwise than arm's length basis).?

In light of the above, the Tribunal?found that the nature, seriousness and number of the contraventions of the SIS Act provided grounds for Mr G's disqualification under section 126A(2). It was evident the contraventions (especially those involving the unauthorised drawings or member loans and the failure to lodge returns) were serious. The SMSF was virtually depleted of all its funds as a result. As such, the Tribunal affirmed the decision under review - finding that it was the correct and preferable decision that Mr G be disqualified. Moreover, although not strictly necessary, the Tribunal also accepted the Commissioner's alternative submission that, in the circumstances,?Mr G should be disqualified under section 126A(3) on the basis that he was not a fit and proper person to be a?trustee, investment manager or custodian (or a responsible officer of a body corporate that is a trustee, investment manager or custodian) within the meaning of the SIS Act.?

The Trustee for JC Mobile Sharpening Discretionary Trust v FCT [2022] AATA 2482 - Knife sharpening business found ineligible for CFB

The AAT has affirmed the Commissioner's decision that a discretionary trust operating a knife sharpening business that paid its sole worker a salary in January 2022 (instead of making a distribution of business profits to him at the end of the income year as it had done previously) was ineligible for the cash flow boost (CFB) on the basis that:

• it did not satisfy the payment and withholding requirement of section 5(1)(a)(i) of the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2022 (Cth) (as?there was no reliable contemporaneous evidence that the purported salary had been actually or constructively paid); and
• moreover, it had entered into a scheme for the purposes of section 5(1)(g) of the Act.

TOC Processing Pty Ltd v FCT [2022] AATA 2479 - Company fails to show substantial credit card deposits were not assessable income

In the absence of contemporaneous documentary evidence to the contrary, the AAT has affirmed the Commissioner's decision to treat substantial?credit card deposits to a company's?merchant facility account in the 2012 and 2013 income years as assessable income.?

Goldsworthy v FCT [2022] AATA 2472 - Taxpayer fails to prove unexplained deposits were not assessable income

An individual taxpayer (one Mr Goldsworthy, the individual controlling the company?in the TOC Processing case above) has failed to convince the AAT that his 2012 income tax assessment was excessive, as:

• he failed to prove what his actual taxable income for the year was (as he did not provide any evidence capable of fully explaining his income earning activities or even a statement of the amount he maintained was his taxable income for the year); and
• the AAT was?satisfied that, despite his health issues, he had been provided with a reasonable opportunity to present his case (as he was represented by counsel experienced in taxation matters).?

Legislation

Treasury Laws Amendment (2022 Measures No 1) Bill 2022 – Bill Providing for miscellaneous tax and superannuation measures now law

The Bill (first covered in the Birchstone Brief for the week ended 29 July 2022?and incorporating the Senate amendments discussed in the?Birchstone Brief for the week ended 5 August) received royal assent on 9 August?and is now law.

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