Recent developments

WR Carpenter Holdings Pty Ltd: High Court Appeal heard

Wednesday 7 May 2008

On 22 April 2008, the High Court heard the taxpayer's appeal against the Full Federal Court decision in WR Carpenter Holdings Pty Ltd & Anor v FCT (2007) 66 ATR 336. The High Court reserved its decision, but has released the transcript of the appeal hearing.

WR Carpenter Holdings Pty Ltd sold shares to a non-resident company within the same corporate group for a sale price of $129 million, of which $79 million was to be paid at the end of 15 years, with no interest payable. The commissioner made a determination under section 136AD which resulted in the taxpayer being assessed for imputed interest on the outstanding sum, amounting to over $17 million. Further determinations were made in relation to another company in the group, in respect of certain intra-group loans and guarantee fees. The taxpayers sought particulars of the matters taken into account by the commissioner in making the determinations. Justice Lindgren rejected the taxpayer’s request, WR Carpenter Holdings Pty Ltd v FCT (2006) 63 ATR 577, and his Honour’s decision was upheld by the Full Court.

Counsel for the taxpayer noted that the fundamental issue in the case was whether a determination made by the commissioner that the transfer pricing legislation should apply is examinable for error of law in proceedings under Part IVC, or whether section 177 of the Income Tax Assessment Act is effective to exclude such review.

Commissioner of Taxation v Lenzo

Monday 21 April 2008

The Full Federal Court has unanimously allowed the commissioner's appeal from the decision in Lenzo v FCT [2007] FCA 1402 and held that Part IVA did apply to deductions claimed by a taxpayer in relation to his investment in a sandalwood plantation project in Western Australia. It did so on the basis that the court at first instance had placed too much emphasis on the genuine commercial nature of the project, and did not give appropriate weight to the fact that the manner in which the project was financially structured was 'tax-driven'.

FCT v Lenzo [2008] FCAFC 50, Full Federal Court, Justices Heerey, Sackville and Siopis, 3 April 2008.

Tax treatment of call options: law to be amended to restore pre-McNeil position

Monday 21 April 2008

The government has confirmed that it will amend the income tax law to restore the longstanding taxation treatment of call options issued by companies. The treasurer said the amendments will provide certainty for taxpayers by restoring the taxation treatment of call options issued by companies that existed before the decision of the High Court in FCT v McNeil (2007) 64 ATR 431. The amendments will apply from the 2001–02 income year. The treasurer said legislation to give effect to this announcement would be introduced as soon as practicable.
Source: Treasurer's press release No 019, 8 April 2008

First decision on Australia’s transfer pricing rules (AAT Case [2008] AATA 261, Re Roche Products Pty Ltd and FCT)

Wednesday 9 April 2008

Roche Products Pty Ltd is a subsidiary of the multinational pharmaceutical company, Roche Holdings Ltd of Basel, Switzerland. The Roche Group carries on the business of selling and supplying prescription pharmaceuticals, over the counter pharmaceuticals and diagnostic products.

The commissioner assessed Roche Australia to income tax on the basis that amounts paid by Roche Australia to Roche Basel were more than the amounts which would be paid in arm's length transactions. The commissioner relied on both Division 13 of the Income Tax Assessment Act 1936 (Cth), and the Associated Enterprises Articles of Australia’s double tax agreements (DTAs) with Switzerland and Singapore to support his assessments.

Justice Downes, President of the Administrative Appeals Tribunal examined the various methods prescribed in the OECD Transfer Pricing Guidelines. The tribunal noted that while the best method for determining an arm's length price was by reference to comparable sales between independent parties, 'this is a particularly difficult task with pharmaceutical products' because there is a lack of comparable sales, and sale prices are inextricably linked to regulatory approval and marketing processes, making them unsuitable for comparison.
   
Justice Downes ultimately held that the assessments were excessive, but partially upheld the commissioner’s adjustments in respect of one of Roche’s operating divisions. Justice Downes did not make detailed findings on whether a DTA (generally aimed at reducing international double taxation) can be used to increase a tax liability, as the parties had agreed that the adjustments would in any event be identical under the DTA and Division 13, although he did note that there was a 'lot to be said' for the proposition that the treaties do not go past authorising legislation and do not confer power on the commissioner to assess.

In handing down his decision, Justice Downes noted the difficulties inherent in transfer pricing disputes, concluding:

‘This has been a very complicated matter in terms of economics and accounting. I may have erred with some of the figures I have arrived at or even in my understanding of some of the evidence. I may have misunderstood some of the economic or accounting concepts. That may have affected the validity of my reasoning. I accordingly propose to publish these reasons on a preliminary basis to enable the parties to consider whether they wish to put any further submissions to me…’

Federal Court introduces new procedures for tax cases

Friday 4 April 2008

The Federal Court is set to introduce new ‘Tax List Directions’ for dealing with taxation disputes before the court. 

One of the aims of the new directions is to ensure the just and efficient determination of taxation disputes in a timely manner.

Key features of the new directions are:

• a ‘Tax List Coordinating Judge’ will be appointed for each Federal Court state registry 
• that judge will examine all tax cases and will conduct Scheduling Conferences, usually at least 45 days from the commencement of the proceedings but after the filing of Appeal Statements and the completion of a pro forma questionnaire by each party 
• at the Scheduling Conference the parties will be expected to outline the issues and facts in dispute, provide an initial witness list, deal with matters in the pro forma questionnaire and establish a pre-trial schedule
• the matter will be allocated to a docket judge following the Scheduling Conference 
• the court will seek to set a trial date which is no later than 12 months from the date of the Scheduling Conference, and 
• parties will be expected to conduct a ‘good faith proportionate search’ in order to fulfil their discovery obligations.

For more information, see the Notice to Practitioners and Litigants (Taxation) issued by the Chief Justice – Tax List Directions and the Pro Forma Questionnaire.

Taxpayer liability in Futuris Corporation Ltd decision

Monday 9 July 2007

On 22 June 2007, the full Federal court handed down its decision in Futuris Corporation Ltd v Commissioner of Taxation [2007] FCAFC 93.

The court considered the validity of an amended assessment by which the commissioner sought to tax an amount of income which was greater than the taxpayer’s maximum potential liability. The commissioner sought to defend the assessment on the basis that he contemplated making a compensating adjustment under Part IVA to reduce the taxpayer’s liability.

The court concluded that while the assessment was neither tentative or provisional, it was invalid because it was 'not a bona fide exercise of the power to assess'. The commissioner had applied the tax legislation 'to facts which he knew to be untrue'—there was no possibility of the taxpayer being liable for the amount assessed.

For more information, see the judgment.

ATO Guidance on Conduct of Tax Litigation

Tuesday 3 July 2007

The ATO has released Law Administration Practice Statement PS LA 2007/12 'Conduct of Tax Office Litigation in Courts and Tribunals'. This Practice Statement is said to apply to all civil litigation in which the Commissioner is a party. The Practice Statement outlines 27 principles that guide the ATO’s conduct of litigation, including that the ATO aims to resolve disputes in a fair and timely manner, consistent with the law and that the ATO’s model litigant obligations do not prevent the Commissioner from acting firmly and properly to protect its interests. The Practice Statement also outlines the role of the Legal Services Branch (LSB) and the Tax Counsel Network (TCN) in litigation.

For more information, see the Practice Statement.

Update on ATO action against promoters of tax schemes

Friday 29 June 2007

Jennie Granger, the ATO’s Second Commissioner, has recently provided an update on the ATO’s administration of the recently enacted promoter penalty laws. The ATO’s specialist branch which has been set up with responsibility for considering whether to take action under the laws, has already considered 27 cases. Of those, the ATO was investigating 6 and 10 others were under a watching brief. Ms Granger also stated that the promoter penalty laws, amongst other things, were having an effect in deterring tax schemes. For more information see the ATO’s interim administration arrangements and our article on the promoter penalty regime.

Amendment to income tax legislation following the McNeil decision

Tuesday 26 June 2007

In February this year, the High Court ruled in Commissioner of Taxation v McNeil [2007] HCA 5, that the market value of sell back rights was income at the time the rights were issued.

A class ruling issued by the commissioner to Hutchison Telecommunications (Australia) Limited on 23 May 2007 gave taxpayers the first indication of how the commissioner intended to apply the High Court's decision. The commissioner's ruling focused on the High Court's statement that the character of the grant of rights to the shareholders was decisive. The ruling states:

the character of the rights as income was determined when the rights were granted to SGL shareholders; what they did with their rights subsequently did not affect their characterisation as income on receipt.’

Assistant Treasurer Peter Dutton today announced that the Federal Government had approved changes to the income tax laws to restore the position prior to the McNeil decision.

‘Shareholders issued with rights by companies seeking to raise capital will not have an income tax liability at the time of issue. Instead, the long standing position to treat rights issues on capital account will be maintained’, Mr Dutton said.

The amending legislation has not yet been drafted, but is expected to apply from the 2001/2002 tax year.

A further tax brief on the topic will appear shortly on the Greenwoods & Freehills website: http://www.gf.com.au/.

ATO application for leave to appeal rejected — FCT v Rio Tinto

On Friday 29 Sptember 2006, the High Court rejected the Commissioner of Taxation’s application for leave to appeal against the Full Federal Court’s decision in Commissioner of Taxation v Rio Tinto—which concerned the commissioner’s claim of legal professional privilege over documents disclosing matters that the commissioner relied on in making his assessment.

The Full Federal Court had found that where the commissioner ‘put the contents of the eight documents in issue, or necessarily lay them open to scrutiny, the consequence [is] that there is an inconsistency between the making of the assertion and the maintenance of the privilege’. The result being that the commissioner had waived any privilege in the documents.

Click here to view our article discussing the Full Federal Court decision.

Guidance from the ATO on promoter penalty regime

On 24 August 2006, the commissioner released the 'interim administration arrangements' for the application of the promoter penalty regime, contained in the Tax Laws Amendment (2006 Measures No 1) 2006 Act, pending the release of the final tax office administration guidelines.

These interim administration arrangements are as follows:

• Where potential application of the new promoter penalty laws is identified by the ATO, approval is to be obtained from the ATO’s Promoter Taskforce prior to the matter being raised with a taxpayer, their representative, a promoter or other external party.
• The Promoter Taskforce will undertake active compliance case work involving the investigation or potential application of the promoter penalty laws.
• Decisions to apply the provisions will be made at a high level of the ATO, with the support of advice from counsel after recommendations for the application of the provisions are made to the deputy commissioner, Aggressive Tax Planning.

For more information see the ATO’s interim administration arrangements and our article on the promoter penalty regime. 

ATO guidelines for remission of SIC and GIC

On 1 August 2006, the ATO released a practice statement providing guidelines for the remission of shortfall interest charge (SIC) and general interest charge (GIC). The practice statement outlines the commissioner’s remission guidelines in relation to interest charges that are imposed on shortfall amounts (that is, an amount understated at the time of assessment or notification) and that accrue during the shortfall period (that is, between when the shortfall would have been due for payment and when the shortfall is corrected). The practice statement aims to assist decision-makers to make fair and consistent decisions concerning the remission of SIC and GIC having regard to the circumstances of the particular taxpayer involved.

For more information see the media release and the practice statement.

Macquarie Finance special leave application denied

On 10 February 2006, the High Court (Gleeson CJ and Heydon J) denied special leave to Macquarie Finance Limited to appeal from the decision of the Full Federal Court in Macquarie Finance Limited v Commissioner of Taxation [2005] FCAFC 205. The case before the Federal Court concerned the application of the general deductibility provisions (section 8-1 of the Income Tax Assessment Act 1997) and the general anti-avoidance provision (Part IVA). The majority of the Full Federal Court (2:1) characterised the outgoing in a way which led to the conclusion that the outgoing was not deductible under section 8-1.

In denying special leave, Gleeson CJ said:

'The characterisation of the relevant outgoing by [the Federal Court] involved the application of settled principles to the complex and unusual circumstances of the particular case.'

For more information see the transcript.

Introduction of draft legislation concerning promotion of tax avoidance schemes

On 16 February 2006, the government announced the introduction into Parliament of draft legislation to 'deter the promotion of tax avoidance and evasion schemes' whilst 'allowing flexibility for legitimate tax planning'.

The draft legislation introduces civil penalties and other remedies for promoters of 'tax exploitation schemes'. The government stated in the press release:

'Legitimate tax effective investments, including schemes that have a Product Ruling from the Commissioner of Taxation and are implemented in accordance with that ruling, will not be at risk under the regime.'

This legislation, if passed into law, is expected to lead to more requests for Product Rulings and other advice from the Australian Taxation Office.

For more information, see the press release, the text of the bill and explanatory material.

To view developments prior to 2006, click here.