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Tax Telegraph, May 2013

CasesTaxpayer’s permanent place of abode found to be outside Australia

Mayhew and Commissioner of Taxation [2013] AATA 130

The AAT has held that a taxpayer was a non-resident of Australia for tax purposes during the 2008 income year and was, therefore, not assessable on foreign employment income derived.  

In December 2007, the taxpayer relocated to Abu Dhabi to take up a senior management position. The Commissioner issued an amended assessment for the 2008 income year which included the amount of foreign employment income derived from the taxpayer’s employment in Abu Dhabi on the basis that the taxpayer was a resident of Australia for the 2008 income year.

The AAT found that, from December 2007, the applicant did not “reside” in Australia for the purposes of the definition of ‘resident’ of Australia in section 6(1)(a) of the ITAA 1936.  

However, as the taxpayer had conceded that his domicile was in Australia, it was necessary to consider for the purposes of the definition of ‘resident’ in section 6(1)(a)(ii)  of the ITAA 1936 whether the taxpayer had a permanent place of abode outside of Australia.  In light of all the evidence before the AAT, it was found that the taxpayer had established a permanent place of abode in Abu Dhabi. In particular, the AAT found that upon accepting his employment contract for a permanent position in the Middle East, the taxpayer had established a home as soon as practicable and furnished it in a manner consistent with an intention to remain in Abu Dhabi indefinitely. Accordingly, the AAT set aside the decision under review and substituted a finding that the taxpayer was a non-resident for the 2008 income year.

Small scale tutoring activity amounted to an ‘enterprise’

The Private Tutor and Commissioner of Taxation [2013] AATA 136

The AAT has decided that the Commissioner was wrong to have concluded that a taxpayer, who was operating as a private tutor, was not carrying on an ‘enterprise’ and to have cancelled the taxpayer’s goods and services tax (GST) registration as a consequence.

For the purposes of the definition of ‘enterprise’ in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the AAT found that the taxpayer’s tutoring activities had been done ‘in the form of a business’ (per section 9-20(1)(a)), but also that they were not excluded by section 9-20(2)(c) as having been done by an individual ‘without a reasonable expectation of profit or gain’.

Although the tutoring activity was done on a small scale over the 16 quarterly tax periods in question, the AAT found that it was “recurrent, regular, systematic and organised, and engaged in for a commercial purpose; …[was] of a reasonable scale, given the constraints within which those kinds of activities must be undertaken;…the taxpayer had his name put on the books of…various coaching colleges, and…did so for the purpose of broadening his reach into the available market, and so increasing his income;…the taxpayer kept records of his activities, and…that his recording of…the value of his supplies…during the relevant period was reliable; and objectively viewed, he undertook the activities with a view to making a profit from them”.

The AAT disagreed with the Commissioner’s conclusion that the tutoring had been done with no expectation of profit, based as it was on the taxpayer having attributed far more of his expenses to the tutoring activities than was justified (i.e. such that they exceeded the tutoring fees received). The AAT emphasised the importance of examining the income against the truly attributable expenditure, which resulted in a profit being achieved. The AAT also criticised the manner in which the Commissioner had made the GST assessment for the 16 tax periods, which included treating the taxpayer as having incurred GST liabilities when, on the Commissioner’s view of the facts, the taxpayer was not carrying on an .  

Liability was not “related to” CGT assets of the trust – small business asset test failed

Bell v Commissioner of Taxation [2013] FCAFC 32

The Full Federal Court has dismissed the taxpayer’s appeal against the decision of the Federal Court in Bell v Commissioner of Taxation [2012] FCA 1042.  At first instance, the Administrative Appeals Tribunal (AAT) held that a family trust (of which the taxpayer was a beneficiary) failed the maximum net asset value (MNAV) test in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore, was not entitled to the CGT small business concessions for a capital gain of over $6m made by the trust on the sale of units in a related trust. The AAT found that a liability of approximately $2m owed by the family trust could not be included in the MNAV calculation as it did not ‘relate to’ any particular asset of the trust as required under section 152-20 of the ITAA 1997.

On appeal to the Federal Court, the Court found that the debt was necessary to meet the trust’s obligation to distribute capital and thereby protect or maintain the CGT assets of the trust. The resolution and distribution of capital by the trust gave rise to a direct relationship between the CGT assets of the trust and the debt which was real and substantial. Accordingly, it was held that the debt should to be taken into account for the purposes of the MNAV calculation.

On appeal against that decision, the Full Court disagreed with the Federal Court that a liability would forever relate to asset of the trust by reason only of having been undertaken to preserve the existing assets of the trust. The Full Court found that the Federal Court had erred in regarding the trust’s purpose of preserving its existing assets as dispositive of the question arising under section 152-20 of the ITAA 1997. The Full Court considered that, in a situation in which the trustee had resolved to make a distribution of capital, his decision to borrow funds rather than to use the existing resources of the trust gave rise to a relation between the liability arising from the borrowing and the borrowed funds in the hands of the trust. However, that purpose having been effected by disposing of the cash which represented the borrowing, there was no relevant ongoing relation between the liability and the trust assets for no other reason than that the decision to borrow was made in the alternative to using existing resources. This conclusion was not affected by the trustee’s purpose of protecting or maintaining the existing CGT assets of the trust. Accordingly, the debt did not relate to the CGT assets of the trust within the meaning of section 152-20(1)(a) of the ITAA 1997 and therefore should not be taken into account for the purposes of the MNAV calculation.

A second issue concerned the AAT’s finding (with which the Federal Court agreed) that an amount of approximately $1.2m in the bank account of the taxpayer’s wife (who was assumed to be a ‘connected entity’ of the trust) could not be reduced by the debit balance in an account which reflected a loan liability related to the acquisition of a main residence.   The Full Court held that the AAT’s conclusion was open to it on the available evidence and, accordingly, did not raise a question of law.

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