Tax Telegraph, December 2012
Deduction for general interest charge (GIC) allowed in the year to which it is referable
The Administrative Appeals Tribunal (AAT) has held that a taxpayer was entitled to deductions for GIC accrued amounts in each year to which the GIC was referable. This case was a result of a culmination of a number of years of legal dispute between the taxpayer and the ATO, with the only matter left for determination being the question of timing of the deduction for the payment of GIC which was imposed under former section 204(3) of the Income Tax Assessment Act 1936. The GIC notices were issued in the first six months of the 2008 calendar year, but related to the income years 2003 to 2008.
The issue was whether the total amount of GIC accrued was a deduction only in the 2008 income year (the year in which the GIC notices were issued) or whether each amount of GIC in respect of each of the income years from 2003 to 2008 gave rise to a deduction in the year to which the GIC was referable. In concluding that the GIC was incurred and therefore deductible in the year to which it was referable, the AAT held that, according to the statutory framework, GIC expense is incurred at the time at which the GIC became due and payable by the operation of the relevant tax legislation.
According to the AAT, “from that point, the liability is real and existing and is not merely impending, threatened or expected” and this conclusion was reinforced by the fact that “the liability to GIC is not imposed by the making of an assessment, but simply arises on a day-by-day basis when tax remains unpaid”. The AAT referred to Commissioner of Taxation v H  FCAFC 128 and Layala Enterprises (in liquidation) v Federal Commissioner of Taxation  FCA 1075 in support of this view. Further, the AAT concluded that the Commissioner’s ability to remit GIC under section 8AAG of the Taxation Administration Act 1953 did not prevent the GIC from being a present legal obligation.
We note that, to the extent that the underlying income tax arose from amended assessments, the decision of the AAT appears to contradict the ATO view in Taxation Determination TD 2012/2. In that Tax Determination, the ATO expresses the view that the shortfall interest charge (SIC) is incurred for the purposes of section 25-5(1)(c) of the ITAA 1997 in the income year in which the Commissioner gives a taxpayer a notice of amended assessment. For years of income preceding the application of the SIC, the ATO indicated that it takes the same view concerning when the GIC is incurred by a taxpayer under an amended assessment. It may be expected, therefore, that the Commissioner will consider an appeal against the AAT’s decision or release a decision impact statement.
Financial hardship stemming from personal difficulties did not amount to ‘special circumstances’
The Administrative Appeals Tribunal (AAT) has held that the taxpayer’s financial difficulties were not ‘special circumstances’ which justified the exercise of the Commissioner’s discretion under section 292-465 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard excess non-concessional contributions made by the taxpayer in the 2010 income year.
The taxpayer contended that ‘special circumstances’ existed on the basis of the financial hardship that he was experiencing from supporting his family, the impact of the global financial crisis, and a failed investment, as well as the fact that his accountant had failed to caution him against exceeding the non-concessional contributions cap. In rejecting this contention, the AAT found that the taxpayer’s personal challenges are not what the legislation contemplates when it refers to ‘special circumstances’. According to the AAT, the legislation contemplates “circumstances which are inconsistent with a natural and foreseeable sequence of events”.
Taxpayer not carrying on an enterprise – not entitled to input tax credits
The Administrative Appeals Tribunal (AAT) has finalised its decision in a goods and services tax (GST) dispute about the Commissioner’s entitlement to recover an amount previously allowed to the taxpayer as an input tax credit (ITC) relating to the taxpayer’s purchase of a retirement village. The taxpayer purchased the property as nominee and bare trustee on behalf of several investors (‘joint venturers’).
The AAT’s decision in relation to two preliminary issues (i.e. was the Commissioner out of time to recover the ITC; was the taxpayer protected by a ruling the Commissioner was alleged to have made) was decided in the Commissioner’s favour (Wynnum Holdings No. 1 Pty Ltd and Commissioner of Taxation  AATA 296). As a result, the AAT has gone on to decide two further issues relevant to whether the taxpayer was entitled to the ITC: was the taxpayer carrying on an “enterprise” when the property was purchased, and can the property be properly characterised as “commercial residential premises”?
In relation to the ‘enterprise’ issue, the AAT rejected arguments put on behalf of the taxpayer that it was carrying on an enterprise, including the enterprise of managing the retirement village. The documentary evidence identified the taxpayer as nominee and “bare trustee”. The AAT found that identification of the taxpayer using that term was consistent with the taxpayer and the joint venturers acknowledging that the taxpayer did not have any duty, or further duty, to perform in relation to the property, and that such other powers or duties that were given to it were duties only to be performed at the direction of the joint venturers.
As the taxpayer was not carrying on an enterprise when it purchased the property, it was not entitled to claim the ITC. For completeness however, the AAT went on to consider the GST character of the property. Having regard to its physical features, the basis on which accommodation was provided, etc, the AAT concluded that it was not “commercial residential premises” as defined in the GST law (i.e. a hotel, motel, inn, hostel or boarding house or premises similar to any of those).
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