Latest income tax developments – June – August 2023 

Legislative Updates 

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 (Cth)

• The Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 (Cth) was introduced into the House of Representatives on 22 June 2023.  The implications of the proposed amendments are discussed in our previous Bulletin.
• The Bill has passed the House of Representatives and is currently before the Senate. There is also a public inquiry into the Bill by the Senate Economics Committee.
• In the October 2022-23 Budget, the Government also announced an integrity measure to deny deductions for payments relating to intangible assets connected with low corporate tax jurisdictions. However, this aspect of the reform was not included in the current Bill.
• A transcript of the public inquiry hearings can be found here. Treasury appeared as a witness in the hearing, and their comments may be summarised as follows:

- Treasury accepted that there are unintended consequences associated with the Bill as introduced, and Treasury indicated that it was "working to resolve" these issues. 

- Treasury identified specifically the following technical amendments that (in their view) would resolve key issues with the third party debt test:

1. Clarifying that the "Australian resident" requirement in the third party debt test can be satisfied by a trust vehicle;
2. Expanding the forms of permissible recourse in the base third party debt test, to align it more closely with the conduit financer test.  This would imply security arrangements over the borrower entity and/or downstream security arrangements may be permissible (provided the relevant entities are Australian entities and security is over Australian assets).  

- Treasury also noted that amendments would be made to the "tax EBITDA" definition to more appropriately accommodate attribution managed investment trusts.  

- Treasury accepted that the drafting of the debt creation rules "is broader in its application than [Treasury] had in mind".  In particular, introducing some of the exclusions and carve-outs contained in Australia's former debt creation rules (in force prior to 2001) are being considered.  

• Taxpayers that are subject to the thin capitalisation regime should continue to monitor these measures, and should also consider the impact of the measures on their ability to claim debt deductions.  As the measures (as introduced) apply from 1 July 2023, and the legislation can have significant impacts on a range of common structures, the measures should be considered as a matter of urgency.

Treasury Laws Amendment (2022 Measures No. 4) Act 2023 (Cth)

• The Treasury Laws Amendment (2022 Measures No. 4) Act 2023 (Cth) (Act) enacts previously announced income tax measures in respect of the digital economy.  The Act received royal assent on 23 June 2023.  
• As initially announced in the 2021-2022 Federal Budget, the Act passes into law the digital games tax offset, which provides for a 30% refundable tax offset in respect of eligible digital game development.  Consultation on this measure was discussed in our previous Bulletin.
• As previously announced by Treasury in June 2022, the Act confirms that digital currencies are not "foreign currency" for the purpose of the Income Tax Assessment Act 1997 (Cth) (ITAA 97), and are therefore not subject to the forex realisation event regime contained in Division 775 of the ITAA 97.  Instead, the Act and accompanying Explanatory Memorandum confirm that the income tax treatment of disposals of digital currencies such as bitcoin will depend upon the particular circumstances of the taxpayer, such as whether the digital currency is held on capital account.
• However, the Act clarifies that "digital currency" will not include certain government-issued digital units of value, and therefore such government-issued digital currency can constitute "foreign currency" within the meaning of the ITAA 97. 
• While the Act confirms the existing practice of the Australian Taxation Office, the Board of Taxation Review of the Tax Treatment of Digital Assets and Transactions in Australia is ongoing, with a report anticipated by 30 September 2023.  Further amendments in respect of the regulatory and tax treatment of crypto assets are anticipated.

Exposure Draft: Small business energy incentive

• Treasury has released draft legislation which proposes to introduce the Small Business Energy Incentive, a temporary support measure for eligible small businesses.  Specifically, the draft legislation proposes to provide entities with annual turnover of less than $50 million with bonus deductions of 20% of the cost of qualifying assets, or improvements to existing assets, which support electrification or more efficient energy use.  This definition is an extension of the usual $10 million annual turnover threshold for small businesses in the ITAA 97 for the purpose of the temporary incentive measure. 
• In order to qualify for the bonus deduction, eligible small business expenditure must be incurred, or the asset must be first installed and ready for use, between 1 July 2023 and 30 June 2024. Expenditure is not eligible where it involves assets which are capable of being powered directly by fossil fuels (as opposed to assets only capable of being powered by electricity regardless of the source of the electricity), even if in practice the asset is predominantly or solely powered by electricity. 
• The bonus deduction will apply to eligible expenditure up to $100,000, with a maximum bonus deduction of $20,000.
• Consultation on this measure has now closed.  The draft legislation is proposed to apply retrospectively, from 1 July 2023. 

Exposure draft: Treasury Laws Amendment (Measures for Future Bills) Bill 2023

• The Federal Government has released draft legislation to implement a proposed measure to reduce the income tax compliance burden on taxpayers within the general insurance industry.  The draft legislation gives effect to the Government's announcement in the 2023-2024  Federal Budget, as discussed in our previous Bulletin.
• Division 321 of the ITAA 97, which applies to taxpayers within the general insurance industry, aligns with former mandatory accounting methodologies for insurance contracts contained in AASB 1023, which have since been replaced by AASB 17.  
• The draft legislation amends Division 321 of the ITAA 97 to align with the updated mandatory accounting methodology, which allows taxpayers to continue to use audited financial information as the basis for their tax returns.
• The consultation process has now closed. The amendment is proposed to commence for income years commencing from 1 January 2023, which is consistent with the general application of AASB 17.

Senate Economics Legislation Committee releases report into Treasury Laws Amendment (2023 Measures No. 1) Bill 2023

• The Senate Economics Legislation Committee (Committee) has released its report into the measures contained in the Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 (Bill).  
• The Bill proposes to enact changes first announced in the 2022-23 October Budget in respect of off-market share buy-backs, and certain distributions funded by capital raisings.  The announcement of these measures, and the introduction of the Bill to the Senate in 2023, have been discussed in our previous Bulletins in October 2022 and May 2023 respectively.
• The Committee recommended that the majority of proposed amendments set out in the Bill pass unamended, including in respect of the alignment of the tax treatment of off-market share buy-backs with on-market share buy-backs.  
• In respect of the proposed amendments concerning franked distributions funded by capital raisings, the Committee considered that submissions received by industry participants warranted further consideration, and recommended that the Bill be clarified to ensure it appropriately targeted the identified behaviour.
• Stakeholder views set out in the Committee's report highlighted concerns around potential unintended consequences of the proposed amendments.
• The Bill is currently before the Senate.  Whether the Committee's recommendations will be actioned remains to be seen.

Other

OECD: crypto-asset reporting framework and Common Reporting Standard

• The OECD has released its International Standards for Automatic Exchange of Information in Tax Matters (Standards), comprising the Crypto-Asset Reporting Framework (Framework) and a 2023 update to the Common Reporting Standard (CRS), with associated commentaries and exchange of information frameworks.  
• This publication actions the Revised Recommendation of the Council on the International Standards for Automatic Exchange of Information in Tax Matters (adopted 8 June 2023), to consolidate and revise previous OECD publications in respect of the global tax transparency framework.  The Framework was released by the OECD in October 2022 following public consultation earlier that year, as discussed in our previous Bulletin.  
• The 2023 update to the CRS extends the regime such that certain digital financial instruments, including derivatives in respect of crypto assets, are now within scope, and introduces more detailed reporting requirements.  
• As noted above in this Bulletin, the status of crypto-asset regulation within Australia is subject to change.  In particular, a report from the ongoing review by the Board of Taxation into digital assets is expected to be published in September 2023. 
• Impacted taxpayers should continue to monitor developments concerning the regulation and tax treatment of crypto-assets.

Cases

Commissioner of Taxation v Wood [2023] FCA 574

• The Federal Court has issued a timely reminder of the relevant principles to consider when determining whether payments associated with settlements of disputes are deductible.  In Commissioner of Taxation v Wood [2023] FCA 574 (Wood), the Court held that payments made to settle litigation were deductible under section 8-1 of the ITAA 1997.  
• The proceedings turned on whether the settlement sum was properly characterised as an amount incurred in gaining or producing assessable income, not being an outgoing of capital or of a capital nature.  
• The taxpayer provided consultancy services through a company which he owned, and by which he was employed.  Former clients brought proceedings against the taxpayer, and the taxpayer's company, in relation to the consultancy agreement.  The relevant payment at issue was an amount of $200,000, which the taxpayer paid to the applicant in accordance with a settlement deed.  
• At first instance, the taxpayer's objection to the Commissioner's decision to disallow the deduction was upheld in the Administrative Appeals Tribunal, which held that the sum was deductible.
• The Commissioner argued that the amount was not deductible on the basis that it was incurred in 2014, whereas the income was derived in the 2006 and 2007 years. The Commissioner also argued that the payment was made to protect the taxpayer's reputation.
• The Court dismissed the Commissioner's appeal, holding that the settlement payment was made in respect of a claim which arose directly out of the taxpayer's employment, and therefore in the course of gaining or producing income.  In reaching the conclusion, the Court also rejected the Commissioner's submission that the lapse of time between the origin of the dispute and its settlement was fatal to the taxpayer's claim, noting that this overlooked the principle that a loss that is a reduction in past income can also qualify as a general deduction.
• The Court further held that the amounts were of a revenue nature, as the benefit sought was an end to historical litigation risk, rather than future protection of reputation.  The Court noted that the discharge of liability from income producing activities could not be sensibly characterised as a loss or outgoing of a capital nature. 

Bechtel Australia Pty Ltd v Commissioner of Taxation [2023] FCA 676

• The Federal Court has held, in contrast to the decision in John Holland Group Pty Ltd v Commissioner of Taxation [2015] FCAFC 82, that the "otherwise deductible" rule did not apply to reduce the value of fringe benefits provided to FIFO employees in the form of travel expenses to and from a remote work site as the employees would not have been allowed a deduction had they incurred the expenses themselves.
• The taxpayer held a contract for services in relation to LNG projects on Curtis Island which is situated near Gladstone, Queensland, and is only accessible by sea or air. A large number of employees operated on a FIFO basis and travelled from their home base airports to Gladstone airport to undertake duties at the project site. The travel  expenses incurred as a result were paid by the taxpayer. 
• The travel expenses were included in deemed assessments of the taxpayer to fringe benefits tax as being the taxable value of the fringe benefits. The taxpayer accepted that the travel expenses were residual fringe benefits but objected to the assessments on the basis that they should be reduced to nil as they satisfied the "otherwise deductible" test under s 52(1) of the Fringe Benefits Tax Assessment Act 1986. The Commissioner disallowed the objection.
• Before the Court, the taxpayer submitted that the case was analogous to John Holland and the travel expenses should therefore meet the "otherwise deductible" test. However, the Commissioner contended that John Holland was distinguishable as it involved an arrangement where employees undertook air travel from their home base to the project site, and vice versa, during their shifts. In contrast, the present case involved employees undertaking air travel outside their rostered shifts. 
• The Court accepted the Commissioner's submissions and concluded that the travel expenses would not have been deductible had they been incurred by the employees themselves. This was in line with the principle that expenses incurred by people to travel between their homes and their regular place of employment are not deductible expenses allowable against their assessable income.
• The taxpayer has since filed a notice of appeal to the Full Federal Court.

Equality Australia v Commissioner of the Australian Charities and Not-for-profits Commission [2023] AATA 2161

• The Administrative Appeals Tribunal has, by a 2:1 majority, affirmed the Commissioner's determination that Equality Australia is not entitled to be registered as a "public benevolent institution" charity subtype, and therefore is not eligible for deductible gift recipient status.
• In reaching this conclusion, the Tribunal summarised the relevant common law principles governing eligibility as a "public benevolent institution", noting the requirement that an entity be organised for the relief of poverty, distress, suffering or misfortune.  
• As background, Equality Australia is a successor entity to Equality Ltd, an organisation established in connection with the marriage equality debate.  Following the enactment of the marriage equality legislation, Equality Australia amended its constitution to address the alleviation of LGBTQI+ distress more generally.  
• The Tribunal was persuaded by evidence that persons identifying as LGBTQI+ could experience forms of minority stress giving rise to a need for benevolence. 
• However, the Tribunal held that Equality Australia was not organised to provide assistance and relief to people in distress.  In reaching this conclusion, the Tribunal emphasised the scope and activities of Equality Australia, as opposed to the purpose provision in the governing Constitution, considering that the "distinct flavour" of many of Equality Australia's wide-ranging activities were of advocacy, campaigning and education.
• The Tribunal accepted that such advocacy was focused on changing laws and social practices that were injurious to LGBTQI+ persons, and therefore to address the distress those laws and practices caused.  
• However, the Tribunal held that the advocacy, education and campaigning did not provide sufficiently direct relief to individuals in need, emphasising that it was not sufficient for an entity's activities to inure to the benefit of a group in order to qualify as a public benevolent institution.  Rather, the Tribunal considered that the activities of Equality Australia were too far removed from the traditional concepts of benevolence in order to qualify for the particular charity subtype.
• In reaching this conclusion, the Tribunal accepted that the question of whether advocacy, education and campaigning for law reform and social change could constitute benevolent relief had not been squarely addressed by previous decisions.  
• An appeal has since been lodged against the Tribunal's decision.

Appeals update: Hyder v Commissioner of Taxation [2023] HCASL 99

• The High Court has refused a special leave application from the Full Federal Court decision in Hyder v Commissioner of Taxation [2023] FCAFC 29.
• At first instance, the taxpayers sought constitutional writs of prohibition and injunctive relief against the Commissioner on the basis that the Commissioner had issued alternate assessments to different taxpayers.  The Federal Court dismissed the application.
• The Full Federal Court affirmed the first instance judgment, reiterating the legal principle that there was no blanket rule that more than one taxpayer could not be assessed on the same income or income from the same source, and nor was the Commissioner's power to issue such an assessment to a taxpayer predicated on first refunding or reducing the assessments issued to the other taxpayer.
• The High Court has dismissed the taxpayer's application for special leave to appeal, on the basis that the application does not raise a question of law or public importance, and otherwise did not advance an arguable ground of appeal. 

Watching Brief – Tax Guidance for 2023

Taxpayers should be aware of the following expected tax guidance to be published by the Commissioner this year: 

• Taxation Ruling: Capital allowances – Composite items. A Taxation Ruling is expected to be provided in August 2023 to update the Commissioner's view on when a corporate limited partnership 'credits' an amount to a partner in that partnership within the meaning of section 94M of the ITAA 1936
• Privatisation and Infrastructure – Australian Federal Tax Framework. This document will be released in stages, and sets out the ATO's position in relation to a range of infrastructure-related tax issues. Draft guidance was issued on 31 January 2017 and the expected completion of the relevant stages is late 2023.
• Taxation Ruling: Royalties and software: character of receipts in respect of software. A draft Taxation Ruling is expected to be provided in mid-2023 (as an update to TR 2021/D4), and will provide (for public comment) the Commissioner's view on the circumstances in which amounts in respect of the licensing and distribution of software will be royalties as defined in subsection 6(1) of the ITAA 36. 
• Taxation Ruling: Expenses associated with holding vacant land. This Taxation Ruling will provide the Commissioner's view in relation to the application of section 26-102 of the ITAA 1997. It is expected to be provided in September 2023.
• Web Guidance: Tax treatment of crypto assets. The ATO's website will be updated to include information on recent developments relating to the use of crypto assets to provide greater certainty to the community and improve tax compliance. The updates are expected to be completed in December 2023.
• Practical Compliance Guideline: Intangibles arrangements. This Guideline will set out the ATO's compliance approach to international arrangements connected with the development, enhancement, maintenance, protection and exploitation of intangible assets. Focus will be placed on the potential application of the transfer pricing, general anti-avoidance rule and the diverted profits tax provisions, with additional consideration of the capital gains tax and capital allowances provisions. The Guideline is expected to be published in late 2023.
• Practical Compliance Guideline: Central management and control test of residency. This update to a previous Guideline includes a new appendix with a risk assessment framework outlining the ATO compliance approach for the central management and control test of residency according to three risk zones. The expected completion is to be advised.
• Practical Compliance Guideline: Back-to-back CGT rollovers. This Guideline will provide the Commissioner's view on the interpretation and application of the 'nothing else' condition in CGT rollovers. It is expected to be published in late 2023.

Authors: Vivian Chang, Partner; Sanjay Wavde, Partner; Steve Whittington, Partner; and Ian Kellock, Partner.