Tax Telegraph, September Issue
Deloitte Lawyers has successfully defended the Commissioner’s appeal at the Full Federal Court against the Federal Court’s decision in Visy Industries USA Pty Ltd v Commissioner of Taxation  FCA 1065 (14 September 2011).
The case involved the claiming of a deduction for an ‘indemnity fee’ of approximately AUD27m paid by the taxpayer. This fee was paid as part of an internal hedge to indemnify it against its potential loss under a forward exchange contract to deliver to a related entity an amount of US Dollars in exchange for Australian Dollars. At first instance, the Federal Court held that the fee was deductible under section 8-1 of the ITAA 1997. In particular, the Court found that the forward exchange contract was a commercial transaction or an adventure in the nature of trade entered into for the purpose of making a profit.
On appeal, the Commissioner’s main contention was that the fee was capital in nature on the grounds that it was incurred outside the taxpayer’s ordinary course of business, it was a one-off, lump sum payment, it secured an enduring benefit, and it was not incidental or relevant to the purposes of profit-making, but to the maintenance of the internal hedge. In rejecting these grounds, the Full Court largely agreed with the Federal Court and found as follows:
- Although the forward exchange contract was not entered into, and the indemnity fee was not paid in the taxpayer’s ordinary course of business, they were in the course of its business
- The fact that the indemnity fee was not recurrent will not alone characterise an outgoing as being capital in nature
- The indemnity fee did not secure any enduring benefit of a capital nature. Although it may have enabled the taxpayer to avoid bringing to account the unrealised loss under the forward exchange contract in circumstances where the assets of the taxpayer might have been insufficient to cover that loss, such a commercial advantage does not re-characterise a revenue outgoing into one that is capital.
The AAT has found that a taxpayer was an Australian resident according to ordinary concepts for the income year ended 30 June 2009 and accordingly, the foreign source employment income he derived was assessable. The taxpayer relocated to Qatar on 16 April 2008 to commence work and returned to Australia on 1 August 2010 after his employment ended. The Commissioner issued the taxpayer with an income tax assessment for the income year ended 30 June 2009 in respect of employment income derived whilst he was employed in Qatar. The taxpayer objected to the assessment on the basis that he was not an Australian resident during the relevant period. The AAT concluded that the taxpayer was an Australian resident according to ordinary concepts in the income year ended 30 June 2009 as the evidence established that the taxpayer had maintained ‘continuity of association’ with Australia, despite his physical absence from Australia throughout most of that income year.
In particular, the AAT had regard to the fact that the taxpayer continued to maintain property in Australia, retained bank accounts in Australia (in which his employment income was paid), retained his membership in an Australian superannuation fund and only relocated to Qatar to work for a definite period of time. Further, although unnecessary, the AAT considered that the taxpayer’s domicile of origin was Australia as he had never adopted another domicile of choice, and he did not establish a permanent place of abode in Qatar, or anywhere else outside Australia. Therefore, the employment income derived by the taxpayer in Qatar in the income year ended 30 June 2009 was properly included in his assessable income for Australian tax purposes.
The AAT has held that the Commissioner had correctly amended the taxpayer’s assessments for the 2005 and 2006 income years to include the taxpayer’s fixed entitlements to the income of a unit trust as ‘special income’ under former section 273 of the ITAA 1936. The taxpayer was the trustee of a self-managed superannuation fund (SMSF) and was initially issued units in a unit trust. In the 2005 and 2006 income years, the unit holders in the unit trust were the SMSF, a director of the taxpayer and another superannuation fund. The issue for the AAT was whether the SMSF held a fixed entitlement to the income of the unit trust for the relevant income years and, if so, whether the amounts derived were ‘special income’ under former section 273(7) of the ITAA 1936.
The AAT noted the definition of ‘fixed entitlement’ in section 272-5 of Schedule F to the ITAA 1936 as being a vested and indefeasible interest in a share of the income or capital of the trust and found that the SMSF had a vested interest on the basis that at the time the SMSF acquired units in the unit trust, it had an immediate fixed right of present or future enjoyment of distributions of income as holder of those units. Furthermore, having regard to the terms of the trust deed, the AAT found that the vested interest was not defeasible. However, the AAT found that the income derived by the SMSF was subject to the special income provisions under section 273(7) of the ITAA 1936 (as it then stood) because, even though the SMSF had a fixed entitlement, that entitlement was derived under an arrangement where the parties were not dealing with each other at arm’s length, and the amount of income derived by the SMSF was greater than might have been expected had it been dealing with the unit trust at arm’s length.
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