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  • Appendix 4: Strategic litigation

    For the 2017–18 financial year, 79% of reported litigation outcomes under Part IVC of the Taxation Administration Act 1953 were fully favourable to the ATO. This excludes cases funded by the ATO under the Test Case Litigation Program. Of the litigation decisions under Part IVC, 90% were either fully or partly favourable to the ATO.

    Table 5.10 lists significant cases decided by the courts and Administrative Appeals Tribunal (AAT) in 2017–18. The main issues of each case are listed, as well as the outcome or status as at 30 June 2018. The significant cases reported are those with the potential for ongoing impact on the tax system.

    Those marked with an asterisk (*) were funded by the ATO under the Test Case Litigation Program 2017–18. For more information about the test case funding program, see ato.gov.au/testcaselitigationprog.

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

    TABLE 5.10 Significant cases, 2017–18

    Income tax cases – Part IVA

    Issue

    Outcome

    Commissioner of Taxation v Normandy Finance and Investments Asia Pty Ltd [2016] FCAFC 180

    Whether the Full Federal Court erred in finding it was not open to the primary judge to find written loan agreements were shams limited to the deception of third parties.

    The taxpayers were refused special leave to appeal the Full Federal Court’s decision to the High Court.

    Hart v Commissioner of Taxation [2018] FCAFC 61

    Whether the Federal Court erred in upholding a Part IVA assessment of income from a law firm. The income was distributed by a discretionary trust through a number of entities, to avoid tax.

    The Full Federal Court dismissed the taxpayer’s appeal against Part IVA assessments being upheld by the Federal Court.

     

    Income tax cases – trusts

    Issue

    Outcome

    Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953

    Whether a bankrupt trustee’s right of indemnity out of trust assets can be used by his creditors (or only his trust creditors), and whether the trust’s unpaid superannuation guarantee charge debts have priority over other trust creditors.

    The court found the trust assets are available to trust creditors out of trust funds, but that no priority applies to superannuation guarantee charge debts.

    The Commissioner is appealing the decision to the Full Federal Court.

    Commissioner of Taxation v Thomas & ors [2018] HCATrans 62–63

    Whether the Commissioner was bound by an ex parte Supreme Court decision that a trustee could distribute franking credits separately from their related dividends.

    The Commissioner was granted special leave to appeal the Full Federal Court’s decision to the High Court. The High Court’s decision on the appeal is reserved.

    Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 1525

    Whether a property purchased by a self-managed super fund for the beneficiary’s daughter to lease through a managed investment scheme was an in-house asset.

    The Federal Court found the investment was an in-house asset, and the lease to the beneficiary’s daughter breached the sole purpose test.

    Ellison v Sandini Pty Ltd [2018] FCAFC 44

    Whether the taxpayer was entitled to CGT rollover relief in transferring shares to his wife’s family trust as part of a court-ordered property settlement.

    The Court allowed the Commissioner's appeal. It found rollover relief was not available to the taxpayer, as the transfer was made to a trust, not to his spouse.

     

    Income tax cases – other

    Issue

    Outcome

    Commissioner of Taxation v Jayasinghe* [2017] HCA 26

    Whether the taxpayer’s earnings from the United Nations Office of Project Services were exempt from taxation pursuant to the International Organisations (Privileges and Immunities) Act 1963. The taxpayer was engaged on a contract basis.

    The High Court upheld the Commissioner’s appeal that under his contract the taxpayer did not ‘hold an office’ with the UN, and was therefore not entitled to taxation immunity.

    The decision clarified the interpretation and construction of the meaning of 'holds an office' in the IOPI Act, and confirms the Commissioner’s view and application of Tax Determination 92/153.

    Cable & Wireless v Commissioner of Taxation [2017] HCASL 231

    Whether an amount debited to the buy-back reserve was a debit to Optus’s share capital account, and not subject to dividend withholding tax.

    The taxpayer was refused special leave to appeal to the High Court against the Full Federal Court’s decision that the buy-back reserve was subject to dividend withholding tax.

    Commissioner of Taxation v Andrew Miley [2017] FCA 1396

    Whether the arms-length sale price of shares was their market value for the purposes of the maximum net asset value test, where the shares were purchased with other shares to give the buyer control of the company.

    The court allowed the Commissioner's appeal. It found that the actual arms-length sale price was the market value of shares sold, and no discount for the circumstances of the buyer applied.

    Chhua v Commissioner of Taxation [2018] FCAFC 86

    Whether an assessment may be challenged outside the Part IVC process, where the Commissioner allegedly erred in the requirement to satisfy a precondition to the issue of that assessment.

    The Full Federal Court dismissed the taxpayer’s appeal unanimously. The court held it cannot be challenged outside Part IVC, except where there is a tentative/provisional assessment or conscious maladministration in the assessment process.

    MWYS and Commissioner of Taxation [2017] AATA 3037

    Whether profits relating to the purchase of commodities by a Swiss-controlled foreign company were assessable to the taxpayer as ‘tainted sales income’.

    The Federal Court found that the related entities were not ‘associates’ within the meaning of the controlled foreign company provisions, so the profits were not assessable as ‘tainted sales income’.

    The Commissioner is appealing the decision to the Full Federal Court.

    Resource Capital Fund IV LP v Commissioner of Taxation [2018] FCA 4

    Whether it is partnerships or partners individually who are assessable for gains made on Australian share trading by Cayman Islands partnerships, and the application of tax treaty benefits to those gains.

    The Federal Court found that the taxpayers were assessable individually, and entitled to tax relief under the double-tax treaty with the USA.

    The Commissioner is appealing the decision to the Full Federal Court.

     

    Tax administration cases

    Issue

    Outcome

    Commissioner of Taxation v Hacon Pty Ltd & Anor [2017] FCAFC 181

    Whether the Commissioner is entitled to exercise his discretion to decline to rule on a private ruling application which requires him to make assumptions about future events without making enquiries of the taxpayer as to those assumptions.

    The Full Federal Court upheld the Commissioner’s appeal that he is entitled to decline to rule where any further information required to enable him to rule would amount to assumptions about future events.

    Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCAFC 217

    Whether funds borrowed by a taxpayer for the limited purpose of satisfying a tax debt are recoverable as an unfair preference in insolvency.

    The Full Federal Court found that the taxpayer had no legal or equitable interest in the loan funds so they could not be recovered as an unfair preference in her insolvency.

    Commissioner of Taxation v International Indigenous Football Foundation Australia Pty Ltd & Anor [2018] FCA 528

    Whether taxpayers contravened promoter penalty provisions in relation to 10 separate schemes which exploited the R&D tax incentive program.

    The court found that both the company and Ms Amede had contravened the promoter penalty provisions, and imposed over $4 million in fines on the company.

    Deputy Commissioner of Taxation v Rennie Produce (Aust) Pty Ltd (in liq)* [2018] FCAFC 38

    Whether the Harman obligation prevents or excuses a person from complying with a statutory notice to provide court documents, or prevents the Commissioner from using information obtained in carrying out his duties under the taxation legislation.

    The Full Federal Court found the provision of court documents in response to a statutory notice does not fall within the scope of the Harman obligation.

    The decision provides certainty on the scope of the Harman obligation, and whether a person owing the obligation is prevented or excused from complying with a valid notice issued under paragraph 353-10(1)(c) of Schedule 1 to the Taxation Administration Act 1953.

    Comptroller General of Customs v Domenic Zappia* [2018] HCATrans 051

    Whether an employed manager of a bonded warehouse was liable, under section 35A of the Customs Act 1901, to a penalty for failing to safely keep dutiable goods in his possession or control.

    The Full Federal Court found that the manager as an employee was not subject to penalty, because his control over the dutiable goods was at the direction of his employer, and incomplete. He therefore did not have possession, custody or control of the goods.

    This decision is inconsistent with how section 35A of the Act has previously been administered, and could undermine the effectiveness of the provisions.

    The Commissioner (acting for Comptroller General of Customs) was granted special leave to appeal the court’s decision to the High Court. The appeal has not yet been heard.

    Keris Pty Ltd (Trustee) v Deputy Commissioner of Taxation [2017] FCAFC 164

    Whether a security bond demand under section 255-100 of Schedule 1 of the Taxation Administration Act 1953 was an acquisition of property other than on just terms in breach of section 51(xxxi) of the Australian Constitution, and whether a specifically attainable future tax amount is required before the power is enlivened.

    The court found that a security bond demand is not an acquisition of property within section 51(xxxi) of the constitution, and that the provision looks to future events and future tax amounts, not those specifically ascertainable or currently due and payable.

    Commissioner of Taxation v Tomaras & ors* [2018] HCATrans 56

    Whether in matrimonial property proceedings the Family Court has the power under section 90AE of the Family Law Act 1975 to order that one spouse be substituted as taxpayer for the tax liability of the other spouse.

    The Full Family Court decided in the affirmative.

    This raises uncertainty around the proper construction of section 90AE, where the liability to pay income tax to persons who are assessed under the tax law also confers the rights of objection, review and appeal.

    The Commissioner was granted special leave to appeal to the High Court against the Full Family Court’s decision that it had power to make a substitution order. The appeal has not yet been heard.

    Commissioner of Taxation v Primary Health Care* [2017] FCAFC 131

    Whether the Administrative Appeals Tribunal erred in granting the taxpayer an extension of time to lodge objections for the 2003–2007 financial years. It was argued this did not take into account the prejudice the Commissioner would suffer with an extension of time, and that the taxpayer did not have a reasonable basis for delay (changing its professional advice).

    The Full Federal Court upheld the Tribunal’s decision to grant the extension of time. It found that while prejudice to the Commissioner was considered by the Tribunal, this was given ‘no real weight’, and that the change in professional advice which prompted the application was itself prompted by the Commissioner’s actions and change of view.

    The ATO will issue a decision impact statement.

      Last modified: 26 Oct 2018QC 57134