Significant cases

Table 4.5 lists significant cases decided by the courts and Administrative Appeals Tribunal (AAT) in 2015–16 and describes the main issues of each case and the outcome or status as at 30 June 2016. 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. Decision impact statements are available on ato.gov.au.

TABLE 4.5 Significant cases, 2015–16

Matter

Issue

Outcome

Income tax cases – Part IVA

Orica Limited v Commissioner of Taxation [2015] FCA 1399

This was the taxpayer’s Federal Court review application.

The issue was whether schemes involving deductions claimed by Orica for interest payments created in Australia, that were offset against pre-existing United States tax losses, were entered into for the main purpose of obtaining a tax benefit.

The court upheld the Commissioner’s application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936).

The court also held that the scheme shortfall penalties were correctly imposed.

Income tax cases – trusts

Commissioner of Taxation v ElecNet (Aust) Pty Ltd (Trustee) [2015] FCAFC 178

This was the Commissioner’s appeal from the decision of the Federal Court [2015] FCA 456.

The Federal Court found, contrary to the Commissioner’s argument, that the definition of ‘unit’ in section 102M of the ITAA 1936 informed the meaning of ‘unit trust’ in Division 6C, and that the beneficial interest of workers in the Electrical Industry Severance Scheme (EISS) satisfied that definition.

The Full Federal Court allowed the Commissioner’s appeal on 14 December 2015.

The court concluded that the definition of ‘unit trust’ is informed by Division 6C, according to the nature of a unit trust, such that the EISS is not a unit trust.

The taxpayer has since made an application for special leave to appeal to the High Court. As at 30 June 2016 the special leave application had not been heard.

Millar v Commissioner of Taxation [2015] FCA 1104

This was the taxpayer’s appeal to the Federal Court against the decision of the AAT.

The AAT’s decision was that the applicants had impermissible early access to their super benefits after using their fund to deposit $600,000 with the Hua Wang Bank Berhad, which was then loaned back to them. The AAT found this was contrary to the payment standards in Part 6 of the Superannuation Industry (Supervision) Regulations 1994.

The Federal Court dismissed the taxpayer’s appeal.

The taxpayer has since appealed to the Full Federal Court and as at 30 June 2016, the decision was still reserved.

Income tax cases – other

Cable & Wireless Australia & Pacific Holding BV (in liquidation) v Commissioner of Taxation [2016] FCA 78

This was the taxpayer’s Federal Court review.

The issue was whether part of the consideration from a buy-back of shares should have been treated as a dividend, with dividend withholding tax withheld.

The Commissioner argued that the buy-back reserve account was not a share capital account.

The Federal Court found that the consideration from the buy-back of shares should have been treated as a dividend, as the account in question was not a share capital account, such that dividend withholding tax was properly withheld.

In reaching this conclusion, the court considered the accounting treatment and the commercial context in which the buy-back took place.

The taxpayer has since appealed to the Full Federal Court and, as at 30 June 2016, the decision was reserved.

Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092

This was the taxpayer’s application to the Federal Court challenging transfer pricing assessments under subdivision 815-A for related-party loans.

The taxpayer also sought to challenge the method used for establishing an arms-length interest rate for a related-party loan, and the constitutionality of subdivision 815-A.

The taxpayer is an Australian member of the Chevron worldwide group and was loaned US$2.45 billion by a member of the group at interest rates significantly higher than the funds were sourced at. The taxpayer’s claims for deductions for interest paid at an above arms-length rate were rejected by the Commissioner.

The Federal Court held that subdivision 815-A was constitutionally valid.

The court also held that the taxpayer had failed to prove the assessments were excessive, as their expert evidence did not show what an arms-length interest rate would have been. What had to be proved was what consideration would be required between hypothetically independent parties dealing at arms-length.

The taxpayer has since appealed to the Full Federal Court. As at 30 June 2016, the appeal had not been heard.

Financial Synergy Holdings Pty Ltd v Commissioner of Taxation [2015] FCA 53

This was the taxpayer’s appeal to the Full Federal Court against a Federal Court review decision.

The review decision was that Financial Synergy could retain the pre- capital gains tax (CGT) status of units in a wholly owned unit trust (per the CGT roll-over rules in the Income Tax Assessment Act 1997), but not also obtain a market value uplift for the cost base of those units as a result of forming a consolidated group.

The Full Federal Court found in favour of the taxpayer, allowing its appeal by finding the cost base was its market value of $30 million immediately prior to 29 June 2007, rather than the underlying value of the business at the time it was deemed to have acquired the asset, which was $1.56 million.

The Commissioner has filed an application for special leave to appeal to the High Court. As at 30 June 2016, the application had not been heard.

Hua Wang Bank Berhad & ors v Commissioner of Taxation [2015] FCAFC 454

This was the taxpayer’s appeal to the Full Federal Court against the Federal Court upholding decisions of the Commissioner.

The Commissioner had disallowed five foreign corporate taxpayers’ objections to a number of assessments issued on the basis that the taxpayers were residents of Australia for tax purposes, as they were controlled by an Australian resident.

The Full Federal Court unanimously dismissed the taxpayer’s appeal.

The taxpayer has since been granted special leave to appeal to the High Court. As at 30 June 2016, the appeal had not been heard.

Commissioner of Taxation v Seven Network Limited [2016] FCAFC 70

This was the Commissioner’s appeal to the Full Federal Court against the setting aside of penalties.

The penalties were for failing to pay withholding tax for payments made to the International Olympic Committee for the right to use their international television and radio (ITVR) signal in broadcasting the games, on the basis that the payments were royalties.

The Full Federal Court dismissed the Commissioner’s appeal. The court unanimously held that the payments were not a royalty because the ITVR signal was not a ‘cinematograph film’, as only a tiny fraction of the sounds and images was recorded in the cable that transmitted the signal at any time.

The Commissioner has since applied for special leave to appeal the decision to the High Court. As at 30 June 2016, the application had not been heard.

Andrew Macoun v Commissioner of Taxation [2015] HCA 44

This was the taxpayer’s appeal to the High Court from a decision of the Full Federal Court [2014] FCAFC 162.

The issue was whether the taxpayer’s pension from the World Bank is exempt from tax under the International Organisations (Privileges and Immunities) Act 1963 (IOPI Act).

The High Court unanimously dismissed the taxpayer’s appeal.

The High Court held that the taxpayer had ceased to hold an office in the World Bank when the payments were received, the payments were received from a retirement fund rather than the bank, and the payments were not ‘salaries and emoluments’ under the IOPI Act.

Tech Mahindra v Commissioner of Taxation [2015] FCA 1082

This was the taxpayer’s Federal Court review application on whether income earned by the Indian head office (from Australian customers) was taxable as royalties.

The taxpayer argued that the property rights or services were not effectively connected with the taxpayer’s permanent establishment in Australia, and therefore not taxable in Australia.

The Federal Court held that only some of the service payments constituted royalties, and that the taxpayer was liable to tax for some of the income derived from the services provided from India.

The taxpayer has since appealed the decision to the Full Federal Court. As at 30 June 2016, the appeal had not been heard.

Vaughan Rudd Blank v Commissioner of Taxation [2015] FCAFC 154

This was the taxpayer’s appeal to the Full Federal Court against the Federal Court’s review decision.

The issue was whether payments received or dealt with 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 a finding in the first instance Federal Court decision that the taxpayer only derived two of the payments as income, when they were paid to a third party on the taxpayer’s behalf.

A majority of the Full Federal Court dismissed the taxpayer’s appeal.

The court held that the amounts in question were assessable as ordinary income and dismissed the Commissioner’s cross-appeal.

The taxpayer has since been granted special leave to appeal the decision to the High Court.

Ogden v Commissioner of Taxation [2016] AATA 32

This was the taxpayer’s application for review to the AAT.

The case related to deductions claimed as work-related expenses which the Commissioner had disallowed on the basis that they were unsubstantiated and private or domestic in nature, and the imposition of shortfall penalty at 25% on the basis of lack of reasonable care.

The taxpayer’s application was dismissed. The AAT set aside the objection decisions and remitted them to the Commissioner for further consideration, granting leave for the Commissioner to make submissions to the Tribunal to consider increasing the penalty applied.

Taxation administration cases

Commissioner of Taxation v Donoghue [2015] FCAFC 183

This was the Commissioner’s appeal to the Full Federal Court against a 39B decision.

The decision had quashed assessments on the basis that information used to prepare them, supplied to the Commissioner by a third party without the taxpayer’s permission, had been subject to legal professional privilege.

The Full Federal Court found unanimously in favour of the Commissioner.

The court held that any claim of legal professional privilege had not been substantiated and that the Commissioner is required to use information in his possession in making an assessment, even if he knows it is privileged.

The taxpayer has since unsuccessfully sought special leave to appeal the decision to the High Court.

Commissioner of Taxation v Australian Building Systems Pty Ltd (in liquidation) & ors [2015] HCA 48

This was the Commissioner’s appeal from the decision of the Full Federal that the liquidators of the taxpayer were not required to retain, from the proceeds of a sale of land, sufficient money to pay any CGT arising from the sale in the absence of an assessment.

The High Court dismissed the Commissioner’s appeal on 10 December 2015, although the Commissioner succeeded on two of the three grounds of appeal.

On the third ground, the High Court held that in the absence of an assessment, the liquidator was not required by Section 254 of the ITAA 1936 to retain from the proceeds of a sale of land sufficient money to pay any CGT arising from the sale.

Commissioner of Taxation v Oswal & Anor [2015] FCA 1439

This was the taxpayers’ judicial review application to the Federal Court.

This related to the Commissioner’s refusal to undertake not to issue a departure prohibition order, under section 14S of the Taxation Administration Act 1953 (TAA 1953), if the Oswals returned to Australia to give evidence in the Commissioner’s application to set aside mortgages registered by the taxpayers for the alleged purpose of defeating creditors.

The court dismissed the application, finding that it was not unreasonable for the Commissioner to decline to give the undertaking, in view of the Oswals’ significant tax liability, the fact that they might never return to Australia, the breadth of the Commissioner’s discretion and wide range of considerations under section 14S.

Commissioner of Taxation v Kamal Jayasinghe [2016] FCAFC 79

This was the Commissioner’s appeal from the AAT decision of [2015] AATA 456, which found that the taxpayer’s earnings from the United Nations (UN) Office of Project Services are exempt from taxation pursuant to the International Organisations (Privileges and Immunities) Act 1963 (IOPI Act), despite the taxpayer being a contractor rather than an employee.

The Full Federal Court dismissed the Commissioner’s appeal, holding that the taxpayer held ‘an office in’ the UN within the meaning of section 6 of the IOPA Act and therefore was exempt from tax. Additionally, TD 92/153 precluded the Commissioner from imposing any tax on the taxpayer.

At 30 June 2016 the Commissioner was considering whether to seek special leave to appeal to the High Court.

Bell Group N.V. (in liquidation) & ors v State of WA & ors [2016] HCA 21

This was a constitutional challenge by creditors of the Bell Group (in liquidation) against the Bell Group Companies (Finalisation of Matters and Distribution of Proceeds) Act 2015 (WA) (the Bell Act).

The Act was passed in an attempt to end litigation and distribute the liquidation funds. Attorneys-General of the Commonwealth and the States intervened, as did the Commissioner, who argued the legislation was inconsistent with the Commonwealth taxation statutes.

The High Court unanimously held that the Bell Act is invalid in its entirety because of section 109 inconsistency with Commonwealth taxation laws.

It found the inconsistency was total, and could not read down or sever provisions from the Bell Act to give it some partial operation.

John Seymour and Anor v Commissioner of Taxation [2016] FCAFC 18

This was the taxpayers’ appeal to the Full Federal Court against the decision of the Federal Court to quash an AAT Senior Member’s order.

The AAT order was that the taxpayers could give evidence by video link in their Part IVC proceedings because the Commissioner refused to undertake not to issue a departure prohibition order should they return to Australia to give evidence.

The Full Federal Court dismissed the appeal, with the majority finding that the Tribunal erred in failing to consider the effect of the orders on the administration of the TAA 1953 and the wider public interest.

The taxpayers have since made an application for special leave to appeal the decision to the High Court. As at 30 June 2016, that decision was undetermined.