Tax developments for private groups to watch in 2023

Section 99B

Over the past year, we have noticed an increase in audit activity concerning the application of section 99B. Section 99B is an integrity measure that applies where trust property is paid to, or applied for the benefit of, an Australian resident beneficiary. Traditionally, section 99B is a provision that often goes unnoticed but it has been on the ATO’s radar in recent years. Like section 100A, there are very few cases on section 99B, very little guidance, and many concerns regarding the scope of its potential application. We expect to see further guidance on the issue in late 2023.

Increased audit activity and debt recovery

We expect the ATO to continue its compliance related activity across private groups. As the Federal Government looks for ways to service and pay down its debt that was accumulated during the pandemic, our expectation is that the ATO will vigorously pursue private group taxpayers. To improve the ATO’s capabilities in this area, the Federal Government announced in the October 2022 budget a funding boost of $200 million a year for the ATO Tax Avoidance Taskforce to pursue new priority areas of observed business tax risks.

At the Tax Institute’s Tax Summit in October 2022, Second Commissioner Jeremy Hirschhorn provided an update on the ATO’s tax performance program, noting that the Australian tax system is operating at approximately 93%, or a tax gap of about $33 billion. The Second Commissioner called out individuals, large businesses, and in particular small businesses as a key area of focus for the ATO as it seeks to improve the overall tax performance rate. Private groups operating one or multiple small or large businesses will remain the ATO’s focus and increases in audit activity should be expected as the ATO’s position shifts from its supportive posture during the pandemic, and begins applying a more sophisticated and data driven approach to its compliance assurance programs.

Simplifying CGT rollovers

The Board of Taxation (Board) was due to submit its final report on the capital gains tax (CGT) roll-over rules to the Federal Government in April 2022. The final report will cap off a process which began in December 2019 when the Federal Government announced that the Board would undertake a review of the CGT roll-over rules. The Board provided its interim written advice to the government in March 2021.

The final report is expected to identify and evaluate opportunities to simplify the existing CGT rollovers into a set of rules that have substantially the same practical effect but are easier to interpret and apply. While there has been no update on the status of the Board’s final report, it is expected that the final report will offer the Government clear recommendations that will hopefully simplify the process of giving advice on rollovers and reduce the regulatory burden on affected businesses.

Section 100A to remain in focus

Towards the end of last year, two Federal Court decisions were released concerning the operation of section 100A. Section 100A is an integrity measure concerning reimbursement agreements which operates to deem a beneficiary to have never been presently entitled to the income of the trust for a particular year, resulting in the trustee being assessed at the top marginal tax rate.

The cases in question (Guardian AIT Pty Ltd ATF Australian Investment Trust v FCT (Guardian); BBlood Enterprises Pty Ltd v FCT (BBlood)) have both been appealed, with the Full Federal Court handing down its decision in the Guardian case on 24 January 2023 and the BBlood appeal expected to be heard early this year.

Guardian concerned a corporate beneficiary being made presently entitled to trust income, following which the beneficiary paid the trust fully franked dividends, which were in turn streamed to a non-resident beneficiary. In the first instance, the Federal Court found in favour of the taxpayer and held that section 100A did not apply to the relevant income years. The Full Federal Court denied the Commissioner’s appeal, finding that there was no agreement involving the payment of a dividend and therefore, no reimbursement agreement. The Court also rejected the Commissioner’s submissions that the intention of the group’s advisors should be attributed to the parties to the agreement.

The Commissioner was successful in applying Part IVA in one of the relevant income years. The Full Court found that the scheme carried out in 2012 was done under evolving circumstances and was not one in which any party could, objectively, be seen to have entered into for the dominant purpose of obtaining a tax benefit. The scheme carried out in 2013 was an implementation of a strategy that had been developed following the 2012 scheme and it was entered into for the dominant purpose of obtaining a tax benefit. You can read a more detailed summary of the Guardian appeal here.

Unfortunately, neither Guardian nor BBlood provided substantial guidance on the application of the ‘ordinary family or commercial dealing’ exception to section 100A. It was however observed in the Guardian appeal that the mere inclusion of, and distribution to, a corporate beneficiary is insufficient to demonstrate that a dealing was not ‘an ordinary family or commercial dealing’.

The result of the BBlood appeal will hopefully provide additional guidance on the application of section 100A. As at the date of publication, the ATO had not made comments on how the Guardian appeal may affect its recent guidance on section 100A which was released last year.

Taxpayers and their advisers should continue to consider their section 100A risk in light of the section’s recent attention.

Employer/Contractor shakeup

On 9 February 2022, the High Court handed down its highly anticipated decisions in Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd (2022) 398 ALR 404 (Personnel Contracting) and ZG Operations Pty Ltd v Jamsek (2022) 398 ALR 603 (Jamsek). Broadly, these decisions held that the terms of the written contracts in each case, and rights and obligations of the parties, govern the nature of the relationship.

The characterisation of a worker was traditionally determined by examining the totality of the working relationship rather than being limited to the contractual terms governing the relationship. These decisions have upended the process for characterising a worker as an employee or independent contractor and reinforced the need for businesses to have formal and comprehensive written contract in place.

In response to the decisions, the ATO has released its draft guidance in Draft Taxation Ruling TR 2022/D3 and Draft Practical Compliance Guidelines PCG 2022/D5. The ATO will now consider that whether a person is an employee of an entity within the ordinary meaning is a question of fact determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship.

Draft PCG 2022/D5 sets out the ATO’s compliance approach to classifying workers as employees or independent contractors and is designed to help taxpayers self-assess the risk of ATO compliance action. The risk zones identified reflect the degree to which the parties agreed on a classification, understood the tax and superannuation consequences of that classification, performed the arrangement consistently with the contractual rights and obligations they agreed to, obtained professional advice confirming their classification was correct, and are meeting the correct tax, super and reporting obligations for that classification.

The result of the cases will have an impact on the personal services income (PSI) rules contained in Part 2-42 of the Income Tax Assessment Act 1997. The Commissioner’s view, as set out in TR 2022/3, is that the PSI rules will not apply to an individual who provides their services to a service acquirer as an employee, but may apply where the individual is not an employee.

For more information, we attach a paper prepared by our tax and employment teams which considers the employee/contractor developments in detail here.

Board of Tax report into Crypto

Digital assets look set to remain in the spotlight as we await release of key reports into the taxation and regulation of the digital economy.

The application of the existing tax law framework to digital asset transactions continues to present significant challenges. This includes areas such as the identification of a taxpayer’s residence, the source of income and the characterisation of the relevant assets and transactions. In our experience, the taxation of digital assets and transactions is not well understood by taxpayers or advisers alike, and the Australian Taxation Office (ATO) has, for the most parts only provided general website guidance.

On 8 December 2021, the former Treasurer announced as part of a broader response to a review on Australia’s payments system and the regulation of digital assets, that the Government would task the Board with undertaking a review into the appropriate policy framework for the taxation of digital transactions and assets in Australia. A consultation guide was published by the Board in August 2022 and we are still waiting on the Board’s final report back to the Government which was expected on 31 December 2022.

On 3 February 2023, the current Treasurer announced a multi-stage approach to developing the regulation of crypto assets to ensure it protects consumers and positions the economy to take advantage of new digital products and services. The approach will consist of the following elements:

• strengthening enforcement and focus on crypto assets at ASIC and ACCC;
• bolstering consumer protection; and
• establishing a framework for reform.

As part of the same announcement, Treasury released its ‘Token Mapping’ consultation paper. The program seeks to build a shared understanding of the crypto assets in the Australian financial services regulatory context and will explore how existing regulation applies to the crypto sector to inform future policy decisions. Responses may be submitted up until 3 March 2023. A copy of the consultation paper can be found here.

Any significant change to the existing framework regarding the taxation of digital assets will require time to implement.

If you have any questions about the information in this article, please contact one of our team members below.