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  • Appendix 4: Strategic litigation

    Significant cases

    Table 5.5 lists significant cases decided by the courts and Administrative Appeals Tribunal (AAT) in 2016–17. The main issues of each case are listed, as well as the outcome or status as at 30 June 2017. The significant cases reported are those with the potential for ongoing impact on the tax system.

    The Commissioner has released decision impact statements in a number of these cases. These are available on ato.gov.au.

    TABLE 5.5 Significant cases, 2016–17
    Matter Issue Outcome
    Income tax cases – Part IVA
    Hart v Commissioner of Taxation (no 4) [2017] FCA 572 This was the taxpayer’s application to the Federal Court for review of a Part IVA assessment income from a law firm. The income was distributed by a discretionary trust through a number of entities to avoid tax. Penalties were imposed at the rate of 50%. The Federal Court found there was no reasonable argument that Part IVA did not apply, and no proper basis to remit the penalties imposed. The taxpayer’s review application was dismissed.
    Commissioner of Taxation v Normandy Finance Pty Ltd & Ors [2016] FCAFC 180 This was the Commissioner’s appeal against the Federal Court’s decision that, despite the written loan agreements being shams, the underlying transactions were not a sham because the sham was limited to the deception of third parties.
    The Commissioner argued in the appeal that the Court erred in determining the case on an argument that was inconsistent with the case made by the plaintiff taxpayers and had been rejected by them.
    The Full Court found that it was not open to the primary judge to find that the written agreements were shams limited to the deception of third parties.
    The Commissioner’s appeal was allowed. The taxpayers have applied for special leave to appeal that decision to the High Court.
    Income tax cases – trusts
    ElecNet (Aust) Pty Ltd v Commissioner of Taxation [2016] HCA 51 This was the taxpayer’s appeal to the High Court against the Full Federal Court decision that the Electrical Industry Severance Scheme (EISS) was not a unit trust for the purposes of Division 6C of the Income Tax Assessment Act 1936.
    The Full Federal Court found that that the term ‘unit trust’ in Div 6C bears its ordinary meaning, and the EISS was not a ‘unit trust’.
    The High Court unanimously found that the EISS was not a ‘unit trust’ because the interest of workers in the trust could not support that conclusion.
    The High Court dismissed the taxpayer’s appeal.
    Thomas v Commissioner of Taxation [2017] FCAFC 57 These were the taxpayers’ appeals to the Full Federal Court on whether franking credits of a trust could be distributed separately from the franked distributions to which they were attached, which was the subject of a Supreme Court declaration where the Commissioner was not a party. The Full Court found that the orders of the Supreme Court were determinative until set aside, and allowed the taxpayers’ appeal.
    The Commissioner has applied for special leave to appeal that decision to the High Court.
    Sandini Pty Ltd v Commissioner of Taxation [2017] FCA 287 This was the taxpayer’s application to the Federal Court seeking declarations of entitlement to rollover relief in respect of shares the Family Court ordered be transferred by Sandini Pty Ltd to the wife in a property settlement but which were instead transferred to her family trust at her request. The Federal Court made the declaration sought by the taxpayer. The Court found that the conditions for relief were satisfied.
    The Commissioner and the wife have appealed that decision to the Full Federal Court.
    Whitby Land Company Pty Ltd (Trustee) v Deputy Commissioner of Taxation [2017] FCA 28 This was the taxpayer’s 39B application for review of the Commissioner’s decision to issue multiple assessments to a Trustee, on alternative bases, for the same income year. The Federal Court found the Commissioner is empowered to issue multiple assessments to a trustee of a trust estate for a single income year.
    The taxpayer has appealed the decision to the Full Federal Court.
    Income tax cases – other
    News Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCA 645 This was the taxpayer’s application to the Federal Court for review of the Commissioner’s decision that interest paid on a loan from its wholly-owned subsidiary, SRC Holdings Limited, was derived on an accruals rather than cash basis in the 2010 financial year.
    In substance, the dispute relates to whether the interest income of SRC was derived in the 2010 or 2011 tax year.
    The Federal Court dismissed the review application, finding that, since lending funds was a substantial aspect of SRC’s business, the accruals basis of accounting gives the substantially correct reflex of the taxpayer's true income.
    The taxpayer has appealed the decision to the Full Federal Court.
    Cable & Wireless & Pacific Holding BV (in liquidation) v Commissioner of Taxation [2017] FCAFC 71 This was the taxpayer’s appeal to the Full Federal Court regarding whether an amount debited to a buy-back reserve to fund a share buy-back was a debit to an account of Optus’s share capital, with the consequence that it should not be treated as a dividend and dividend withholding tax was therefore not payable. The Full Court dismissed the taxpayer’s appeal, finding that although the buy-back reserve recognised a debit to equity, it did not record the financial position of Optus in relation to its shareholders, so was not a share capital account.
    The taxpayer has applied for special leave to appeal the decision to the High Court.
    Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62 This was the taxpayer’s appeal to the Full Federal Court against transfer pricing assessments for related-party loans, and the constitutionality of subdivision 815-A of the Income Tax Assessment Act 1997 (ITAA 1997). The Full Court held that sub-div 815-A was constitutionally valid, and that the taxpayer had failed to prove the assessments were excessive, as their expert evidence did not show what an arms-length interest rate should have been between parties in the same circumstances.
    The taxpayer has applied for special leave to appeal the decision to the High Court.
    Tech Mahindra Limited v Commissioner of Taxation [2016] FCAFC 130 This was the taxpayer's application for special leave to appeal to the High Court whether income earned by the Indian head office from Australian customers was taxable as royalties. The case involved the allocation of taxing rights between Australia and India under articles 7 and 12 of the Double Tax Agreement between India and Australia. The High Court refused to grant the taxpayer special leave.
    Commissioner of Taxation v Seven Network Ltd (s164/2016) This was the Commissioner's application for special leave to appeal to the High Court in respect of whether payments made to the International Olympic Committee, for the right to use their ITVR signal in broadcasting events at the Olympic Games, were royalties and therefore subject to withholding tax. The High Court refused to grant the Commissioner special leave.
    Bywater Investments Limited v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45 This was the taxpayers’ appeal to the High Court from decisions of the Federal Court that five foreign incorporated entities were residents of Australia for tax purposes, as they were controlled by an Australian resident, despite having overseas boards who were not the real decision-makers. They were assessed to tax on their profits from share trading on the Australian Stock Exchange. The High Court held that the central management and control of the foreign companies was in Australia and not where the overseas directors were located, and they were therefore Australian residents for tax purposes.
    Blank v Commissioner of Taxation [2016] HCA 42 This was the taxpayer’s appeal to the High Court regarding whether payments received by the taxpayer from Glencore International under a profit participation agreement were assessable as ordinary income as a reward for services, derived when received.
    The Commissioner cross-appealed as to the date of receipt of a payment in one year.
    The High Court dismissed taxpayer’s appeal and the Commissioner’s cross-appeal.
    The High Court found that the termination payments Blank received were assessable as ordinary income as a reward for services, derived when received.
    Commissioner of Taxation v Financial Synergy Holdings Pty Ltd [2016] HCATrans 232 This was the Commissioner’s application for special leave to appeal to the High Court regarding whether Financial Synergy was able to retain the pre-CGT status of units in a wholly owned unit trust, as well as obtain the benefit of a market value uplift for the cost base of those units as a result of forming a consolidated group. The High Court refused to grant the Commissioner special leave.
    Taxation administration cases
    Hacon Pty Ltd v Commissioner of Taxation [2017] FCA 659 This was the taxpayer’s judicial review application to the Federal Court regarding whether the Commissioner made a jurisdictional error in refusing to give a private ruling in relation to a Part IVA scheme in circumstances where he did not have sufficient information to do so, and would be required to make assumptions about future events. The Federal Court found that the Commissioner had fallen into jurisdictional error by refusing to rule before requesting all relevant information from the taxpayer.
    The Commissioner is appealing the decision to the Full Federal Court.
    Eastwin Trade Pty Ltd v Commissioner of Taxation AATA [2017] This was the taxpayer’s AAT application regarding whether the taxpayer made credible acquisitions of scrap gold (as opposed to precious metal) from purported unidentified suppliers, and was therefore entitled input tax credits on those acquisitions. The Tribunal found in favour of the Commissioner that the taxpayer had not met his onus of proving there had been a ‘supplier’ of a creditable acquisition to enliven entitlement to the input tax credits claimed.
    Commissioner of Taxation v Socrates Vasiliades [2016] FCAFC 170 This was the Commissioner’s appeal to the Full Federal Court against the decision of a primary judge setting aside an order for security for costs against the taxpayer in a Part IVC Federal Court proceeding. The majority of the Full Court upheld the Commissioner’s appeal finding that the defensive nature of the proceeding was only a factor to be considered and not determinative, and the fact that the taxpayer was resident out of the jurisdiction and without assets in the jurisdiction was a significant factor in favour of an award of security.
    Uber B.V. v Commissioner of Taxation [2017] FCA 110 This was Uber BV’s application for declarations from the Federal Court that Uber drivers do not have to register for GST, as they do not provide ‘taxi travel’ services within the meaning of the A new Tax System (Goods and Services Tax) Act 1999 (GST Act). The Federal Court found that Uber drivers do provide tax travel, and as such are required to register for GST regardless of their turnover.
    Anglo American Investments Pty Ltd v Deputy Commissioner of Taxation [2017] NSWCA 17 This was the taxpayers’ appeal to the NSW Court of Appeal regarding whether the Supreme Court has the jurisdiction, in debt recovery proceedings, to make a declaration that notices of assessments tendered as conclusive evidence in that proceeding were a nullity on the basis that they are infected by conscious maladministration, without the need for a judicial review application to be made. The NSW Court of Appeal held that the Supreme Court does not have the power to make a declaration in a debt recovery proceeding, that notices of assessments tendered as conclusive evidence in that proceeding are a nullity, and proceed to treat them as such in determining the proceeding, in the absence of a successful judicial review application in respect of those assessments.
    Gould v Deputy Commissioner of Taxation [2017] FCAFC 1 This was the taxpayers’ appeal to the Full Federal Court against the Federal Court decision striking out their s39B counterclaims and entering judgment against them in debt recovery proceedings.
    The taxpayers’ counterclaims alleged conscious maladministration in the making of the assessments through the use of documents allegedly obtained from the Cayman Islands dishonestly.
    The Full Federal Court found unanimously that the taxpayers had no prospect of success at trial in their defences on the facts, as nothing in the evidence could found the allegation of dishonesty.
    The majority also considered the facts alleged, if proved, could not have constituted conscious maladministration in the making of the assessments.
    Margaret Binetter for the Estate of Erwin Binetter v Commissioner of Taxation; Binetter v Commissioner of Taxation; Bai v Commissioner of Taxation [2017] HCATrans 126 This was the taxpayers’ appeal to the Full Federal Court against the decision of Federal Court regarding whether the taxpayer has to ‘disprove’ the Commissioner’s finding of fraud/evasion, or the Tribunal has to form its own fraud/evasion opinion, and whether the definition of ‘outstanding tax-related liability’ is broad enough to include tax on income earned by a deceased person, but not assessed during his life. The Full Court dismissed the appeals, unanimously finding that the onus remains on the taxpayer to establish that the conditions for the exercise of the amendment power did not exist, and that the Commissioner could assess a deceased person.
    The taxpayers were refused special leave to appeal the decision to the High Court.
    Millar & Anor v Commissioner of Taxation [2016] HCASL 293 This was the taxpayers’ application for special leave to appeal to the High Court against the Full Federal Court’s decision that the applicants impermissibly had early access to their superannuation benefits through a sham loan; and that the shamming intention of Mr Gould, who was their agent for the transactions, could be imputed to them. The High Court refused special leave on the papers because the taxpayers’ application did not raise any issue of general principle, and the decision of the Full Court was not attended by sufficient doubt.
    Zaps Transport (Aust) Pty Ltd, Domenic Zappia & John Zappia (Taxation) [2017] AATA 202 This was the taxpayers’ application to the AAT regarding whether cigarettes that were stolen had been in the care, custody or control of the taxpayers such that they were liable to an amount equal to the customs duty which would have been payable on cigarettes if they had entered home consumption. The AAT upheld the Commissioner’s decision. The taxpayers have appealed the decision to the Full Federal Court.
    Ogden and Commissioner of Taxation (Taxation) [2016] AATA 574 This was the taxpayer’s application to the AAT to review the penalty decision related to the substantive tax decision in Ogden and Commissioner of Taxation [2016] AATA 32. The Tribunal remitted the objection decision back to the Commissioner to reconsider the correct penalty applicable to Mr Ogden’s circumstances. The Tribunal increased the penalty originally imposed by the Commissioner in light of some of the claims made being reckless, rather than just a failure to take reasonable care.

    Test case funding program

    Table 5.6 lists cases funded by the ATO under the Test Case Litigation Program, 2016–17. The Commissioner has released decision impact statements in a number of these cases.

    More information about the program is available on ato.gov.au.

    TABLE 5.6 Test case litigation, 2016–17
    Case Issue Outcome, clarification obtained and status
    Denmark Community Windfarm Ltd v Commissioner of Taxation [2017] FCA 478

    This was the taxpayer’s appeal to the Federal Court of Australia against an appealable objection decision under Section 14ZZ of the Taxation Administration Act 1953.

    The issue was whether the Renewable Remote Power Generation Program (RRPGP) grant is an assessable recoupment under:

    a) Subsection 20-20(2) of the Income Tax Assessment Act 1997; and/or

    b) Subsection 20-20(3) of the Income Tax Assessment Act 1997.

    The Federal Court dismissed the taxpayer’s appeal on 10 May 2017.

    The Federal Court found that the three requirements must be established for the grant to be assessable:

    1. DCW received the grant as a recoupment of a loss or outgoing;

    2. DCW received the grant by way of insurance or indemnity; and

    3. The loss or outgoing is deductible.

    The Federal Court found that all three requirements were satisfied and that the grant was an assessable recoupment.

    The decision clarified the law by confirming the Commissioner’s view regarding the applicability of the assessable recoupment provisions in respect of the payment of a capital grant to the taxpayer to assist in the construction of a windfarm in southern Western Australia.

    The taxpayer filed a notice of appeal on 31 May 2017.

    Commissioner of Taxation v Financial Synergy Holdings Pty Ltd [2016] HCATrans 232

    This was the Commissioner’s special leave application to appeal the decision of the Federal Court of Australia in Financial Synergy Holdings Pty Ltd v Commissioner of Taxation [2016] FCAFC 31.

    The issue was whether the court arrived at the proper interpretation of s 110-25(2)(b) of the ITAA 1997, in particular the phrase ‘the time of acquisition’, when read in conjunction with s 122-70(3).

    The High Court dismissed the Commissioner’s appeal on 7 October 2016.

    The High Court refused the Commissioner’s SLA on the basis that this was a matter of statutory construction in relation to the particular facts of this case and was not a matter of public importance.

    The decision clarified the scope of the deeming rule in subsection 122-70(3). This deeming rule only applies for the purpose of exempting pre-CGT assets from the operation of the CGT provisions. The deeming rule does not determine the acquisition time for the purpose of calculating the cost base of a pre-CGT asset under paragraph 110-25(2)(b).

    ATO ID 2014/14 was withdrawn on 13 January 2017.

    Commissioner of Taxation v Kamal Jayasinghe No. S117 of 2016

    This was the Commissioner’s special leave application to appeal the decision of the Full Federal Court of Australia in Commissioner of Taxation v Jayasinghe [2016] FCAFC 79.

    The issue was whether the taxpayer’s foreign source income payments he derived while engaged by the United Nations Office of Project Services are exempt from income tax pursuant to regulations made under the International Organisations (Privileges and Immunities) Act 1963 (Cth) (IOPI Act).

    Specifically, whether the foreign source income payments are exempt from taxation as being salaries and emoluments received by the taxpayer as a person who ‘holds an office’ in an international organisation pursuant to section 6(1)(d) of the IOPI Act.

    At 30 June 2017, a decision is yet to be handed down.

    Commissioner of Taxation v Primary Health Care Limited No. NSD 613 of 2017

    This was the Commissioner’s appeal to the Federal Court of Australia from the decision of the AAT [2017] AATA 393.

    The issues were:

    • Whether the Tribunal erred in law in the exercise of its discretion in s14ZX(1) of the Taxation Administration Act 1953 (Cth) (Administration Act) to treat an objection lodged after the period in which the objection is required to be lodged has passed as if it had been lodged within that period, by failing to consider the inability of the Applicant to consider whether to amend the assessments of other taxpayers in the event that the objection is allowed as a species of prejudice to the Applicant which the Tribunal is required to take into account.
    • Whether the Tribunal erred in law in the exercise of its discretion under s14ZX(1) of the Administration Act because, on the facts as found, it was not reasonably open to the Tribunal to regard the Respondent’s explanation for the delay in lodging objections to the assessments for the relevant income years as a factor which weighed in favour of the exercise of the discretion in s14ZX(1).
     
    At 30 June 2017, a decision is yet to be handed down.
    Susan Elizabeth Tselepy v Aaron John William Tselepy and Anor No. BRC 11325 of 2013

    This was the Commissioner’s application to the Federal Circuit Court of Australia to have the issue dealt with by the Full Court of the Family Court of Australia under section 94A of the Family Law Act 1975.

    The issue was whether section 90AE of the Family Law Act 1975 (Cth) enables the Family Court of Australia and the Federal Circuit Court to make an order altering the taxation liabilities of one or both of the parties to a marriage or any related entity.

    At 30 June 2017, a decision is yet to be handed down.
      Last modified: 30 Oct 2017QC 53719