Bills Digest no. 126 2007–08
Tax Laws Amendment (2008 Measures No. 3) Bill 2008
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage history
Purpose
Schedule 1 – Shareholder and unitholder rights
Schedule 2 – Restriction on GST refunds and time
limits for recovery and refund of indirect tax
Concluding comments
Contact officer & copyright details
Passage history
Tax Laws
Amendment (2008 Measures No. 3) Bill 2008
Date introduced: 29
May 2008
House: House
of Representatives
Portfolio: Treasury
Commencement: Schedules
1, Royal Assent. Schedule 1 has a retrospective effect from 1 July
2001. Schedule 2, 1 July 2008
Links: The relevant
links to the Bill, Explanatory Memorandum and second reading speech
can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/. When Bills
have been passed they can be found at ComLaw, which is at http://www.comlaw.gov.au/.
This Bill makes several amendments to the following
Acts:
- Income Tax Assessment Act 1997 (ITAA97), and
- Taxation Administration Act 1953 (TAA).
This Bill makes a number of changes to taxation legislation. As each
Schedule contains a separate set of amendments they will be outlined in
separate following sections.
Schedule 1 amends taxation law to overcome the impact of the High
Court of Australia’s decision in the Commissioner of Taxation v McNeil
2007 (the McNeil case).[1]
Attachment 1 contains a summary of the McNeil case. Briefly, this particular
case revolved around the correct assessment of a payment received by a
shareholder in respect of share sell-back rights that were not exercised.
The question was whether the payment received for these unexercised rights
was ordinary tax assessable income or assessable as a capital amount and
therefore subject to the Capital Gain Tax (CGT) provisions.
On appeal to the High Court, a majority ruled that the value of the sell-back
rights was assessable income of the taxpayer according to ordinary concepts,
and the amount was derived by the taxpayer on the listing date of those
rights.
The McNeil decision has caused considerable uncertainty
as to the future tax assessability of company distributions. It has particular
relevance for companies and their shareholders, especially in regard to
the tax treatment of rights issued to shareholders as a result of their
existing shareholdings. Under the influence of the McNeil case the rights
issued would be assessable income on the date those rights were issued.
The long standing approach is that shareholders issued with rights by
companies seeking to raise capital will not have an income tax liability
at the time of issue. Instead, rights issues are treated as issues on
capital account and subject to the CGT provisions.
Further, subject to certain exceptions, a dividend paid out of a companies’
share premium account is not a dividend, and hence not income for taxation
purposes. The High Court’s decision in McNeil also cast doubt on
that long-standing approach, and raised considerable uncertainty as to
the characterisation of rights and distributions arising from or related
to an asset (such as shares) held by a taxpayer.
This had significant implications for the taxation of derivative securities,
in particular share options. Briefly, a derivative security is one that
derives its value from the financial performance of another security or
group of securities.
An option is a derivative security. Briefly, an option is the right,
but not the obligation, to either buy or sell a security (such as a share).
The right to buy a security is called a ‘call’ option. That is the person
holding the option has the right to call the security away from another
party for a pre determined price. The other party must sell the security
to the holder of the option for that price.
The right to sell a security is called a ‘put’ option. That is the holder
of a put option has the right to put (or sell) the security to another
party at a pre determined price. The other party is obligated to buy the
security put to them at that price.
Companies routinely issue options to their shareholders or other parties
to either reward and retain staff or raise capital.
A right is a type of call option to purchase a security. A rights issue
is an offer made to a holder of an existing security (say a share) to
purchase additional securities issued by the same company. The offer is
usually at a discount price to the existing publicly quoted market price
for these securities.
The government’s intention to amend the law to overcome the effect of
the McNeil case was announced in the Treasurer’s media release of 8 April
2008.[2]
The former government had also intended to take similar legislative action.[3]
Both the government and the opposition support referring this Bill to
the Senate Standing Committee on Economics.[4]
The implications of the High Court’s decision in McNeil’s case generally
alarmed business and taxpayer groups. The announcements in 2007 and 2008
that the government would change legislation to overcome these implications
were widely and warmly received.[5]
The proposed amendments restore certainty to the tax treatment of the
issue of rights and options to individual shareholders and institutions.
However, the receipt of income from this source is deferred until the
security arising from the issue of this right or option is sold. This
may not occur for some years.
The Explanatory Memoranda notes that this particular measure will not
have a financial impact.[6]
The key issues behind this particular measure is maintaining the consistency
to the tax treatment of the issue of rights and options by a company.
Item 2 of Schedule 1 inserts new section 59-40
into the Income Tax Assessment Act 1997 (ITAA97). The effect of
this new section is that the issue of a right, or a call option, by a
company is not assessable income and is not exempt income for taxation
purposes, provided that:
- at the time of issue the taxpayer must already own shares in a company
or units in a trust and the issues rights derive from these units or
shares
- the shares or units owned cannot be ‘trading stock’; that is they
cannot be shares or units owned for the purposes of gaining an income
through trading on a stock exchange or other securities market
- they are not shares or units acquired through an employee share scheme,
and
- the shares or units cannot be a convertible interest. That is the
shares or units are not securities that can be converted into another
class of security, say a bond.
The classification of income arising from such transactions
as non-assessable, non-exempt income does not mean that receiving a ‘right’
or a call option is tax free. Rather, the income arising from the eventual
sale of this security is not taxed as ordinary personal income.
Item 7 inserts new section 112-37 into
the ITAA97. The effect of this new section is to prevent double taxation
from occurring where a company issues a put option.
Under the proposed law the market value of any put option
issued is included in the taxpayers assessable income at the time the
put option is issued.
To prevent this amount from being subject to further taxation
under the CGT regime, under the proposed amendments in Item 7 the
market value of the put option is also included in the cost base of the
put option for CGT purposes. It is only the difference between the cost
base and the eventual selling price of the security that is subject to
CGT.
Item 9 applies these amendments to rights or call options issues
on or after 1 July 2001. This retrospective date was the start of the
financial year immediately after the original Administrative Appeals Tribunal
review of McNeil’s case was concluded. This retrospective effect was sought
by representative stakeholders in the interests of, and for, the benefit
of taxpayers and is explained in the Explanatory Memoranda.[7]
Schedule 2 amends the Taxation Administration Act 1953
(TAA) so that:
- problems with the scope of Goods and Services Tax (GST) refunds caused
by the decision in KAP Motors v The Commissioner of Taxation[8] are overcome, and
- problems with the four year time limit on the refund of indirect
taxes are dealt with
- briefly, the changes to time limits ensure that the four-year
time limit on recovery applies where a GST refund is overpaid to
a taxpayer. In addition it ensures that the four-year time limit
applies where a refund is payable by the Commissioner due to a reduction
in the GST liability of a taxpayer.
Briefly, GST is levied when a supply of goods and services
is made. For example, if a vehicle retail operation sells a motor vehicle
to a taxpayer a supply of that motor vehicle is made. The sale price of
that motor vehicle will include the GST payable. The vehicle retailer
will claim an input tax credit for the GST paid as a result of the supply
of that motor vehicle.
KAP Motors v The Commissioner
of Taxation
A summary of this case is at Attachment 2. This case centred on whether
the Commissioner of Taxation had to refund GST mistakenly paid to him
by two car dealerships, before they had reimbursed the end customers for
the mistakenly paid tax. These car dealerships (the taxpayers) had mistakenly
paid the GST in respect of a number of transactions where the goods and
services were not actually supplied to the end customers by them.
Briefly, the decision in this case held that two taxpayers
were entitled to a refund of GST mistakenly remitted to the Commissioner
before they had reimbursed the end customer. The Court decided that, in
this particular case, as no actual goods or services had been supplied
to the end customers that no GST was payable. The particular wording of
section 105-65 of Schedule 1 of the TAA allows a refund
of mistakenly paid GST to be made, where no actual supply of goods or
services to a customer has occurred, before a refund of an equal amount
of the GST paid is made to the end customer.
The general approach to refunds of overpaid GST is that that the benefit
of the refund goes to the person who has borne the tax. Generally those
who have borne the tax are the persons who purchased the goods (in this
case motor vehicles) from the taxpayers. Hence, a business that has overpaid
GST to the Commissioner must refund that amount to the customer before
obtaining a refund.[9] Obviously,
that was not the outcome of the KAP Motors case.
This approach is intended to prevent a windfall gain to businesses that
have not borne the GST, but have passed that impost on the customer. In
these circumstances a windfall could occur if the business obtained the
GST refund without immediately refunding that amount to the end customer.
The measures in Schedule 2 of this Bill were announced in the
Treasurer’s media release of 6 May 2008.[10]
There has been comparatively little comment on the proposed change to
the refund of GST provisions. However, it has been noted that business
that would claim a refund of overpaid GST would first have to make a payment
to affected customers.
In respect to the time limits issue it has been noted that the proposed
changes puts the Australian Taxation Office (ATO) and the taxpayer on
an equal footing. The ATO can only go back 4 years while many taxpayers
can claim refunds from 8 years ago (i.e. 2000 and the commencement of
the GST regime).[11]
The proposed changes seek to reinforce the original intention of the
GST refunds policy – namely that a refund of overpaid GST will only be
made where the customer is first reimbursed.
However, the refund of GST is likely to be slow in coming and businesses
who first refunded the overpaid GST to their customers may be out of pocket
for some time before the ATO pays the relevant refund.
It is possible that if these particular amendments are not passed then
the GST system would provide an avenue for business to claim an undue
refund of GST already paid.
The Explanatory Memoranda notes that this measure will have a small but
unquantifiable impact on GST, the wine equalisation tax, luxury car tax
revenue and fuel tax credit entitlements.[12]
The key issue in relation to this amendment is the maintenance the integrity
of the GST system. There are some indications that companies may be rapidly
moving to take advantage of the KAP Motors decision to seek a refund of
GST from the ATO where they would not previously been entitled to do so.[13]
The possible impact on revenue has been reported to be between $300 and
$500 million.[14]
Item 5 inserts new subsection 105-50(2) in Schedule
1 of the TAA. The effect of this amendment is to limit the period
during which the Commission of Taxation may recover any refunds of indirect
tax (including fuel tax) to which the taxpayer was not entitled to, to
four years from the date that refund first become payable.
This amendment does not apply if during that four year period the Commissioner
has given notice that he or she requires a repayment of an excess refund,
or that fraud or evasion was involved in the initial payment of the refund
or granting of an indirect tax credit.
Items 7 to 15 amend section 105-55 in Schedule
1 of the TAA so that the four year limit for claiming refunds and
credits in relation of overpaid indirect tax of fuel tax apples. This
means that a taxpayer generally has only four years in which to claim
a refund of overpaid GST, fuel tax or other indirect tax.
Item 16 apples these amendment to amounts that remain to be paid,
by either the taxpayer, or the Commissioner, before or after the commencement
of Schedule 2 of this Bill (1 July 2008), unless the Commissioner
has notified the taxpayer in writing that amounts were payable before
that date, or the taxpayer or Commissioner had notified the other of an
entitlement to a refund etc before that date.
In effect, although these amendments, if passed, will come into effect
on 1 July 2008, they will still apply to obligations and entitlements
created prior to that date.
Item 17 repeals section 105-65 of Schedule 1 of
the TAA and replaces it with a new section. The impact of the new section
is that the Commissioner need not refund an overpaid GST amount where
no supply of goods occurred and either:
- the Commissioner is not satisfied that the taxpayer has first reimbursed
the person to whom the supply was made, or
- the recipient of the goods or services was registered for GST purposes
or required to be registered for GST purposes.
Item 18 requires the amendment made by Item 17 above applies
on or after 1 July 2008.
Schedules 3 and 4 of the original Bill have been removed
by government amendment and will be re-presented in a new Bill to allow
for speedy passage. This is due to the likelihood that Schedules 1
and 2 in this Bill will be referred to the Senate Standing Committee
on Economics for consideration.[15]
Attachment 1
FC of T v McNEIL
2007 ATC 4223
High Court citation: [2007] HCA 5
High Court of Australia,
22 February 2007
Income tax — Assessable income — Taxpayer held shares in bank — Taxpayer
acquired an interest in sell back rights entitling her to sell shares
back to bank — Sell back rights listed for trading on ASX — Taxpayer did
not exercise her entitlement to trade in her sell back rights on ASX —
Taxpayer subsequently received an amount for her sell back rights according
to a pre-determined formula — Whether sell back rights or proceeds from
disposal of sell back rights income according to ordinary concepts — Whether
a return of capital to taxpayer — Whether sell back rights severed or
detached from shareholder's shares — Whether provisions dealing with dividends
a code restricting general taxing provision — Income Tax Assessment Act
1997, s 6-5 — Income Tax Assessment Act 1936, s 44.
This was an appeal from a decision of the Full Federal Court reported
at 2005 ATC 4658.
The taxpayer was a retiree who had a portfolio of shares in listed public
companies. She held 5,450 shares in St George Bank Limited ("SGL")
for the purpose of deriving dividend income on which she relied for part
of her living expenses. The taxpayer acquired the shares between 1987
and 1997 and had never traded in shares or securities.
In January 2001 SGL announced its intention to buy back about 5% of its
issued share capital. The buy back price was fixed at $16.50 per share,
which represented a premium of 18.9% over the price of SGL shares on the
Stock Exchange ("ASX") at that time.
A number of documents ("the transaction documents") were executed
by SGL, a corporate trustee ("Custodial") and a merchant bank
("CSFB") to give effect to the share buy back. In accordance
with those documents, SGL granted Custodial, for the absolute benefit
of the taxpayer, 272 sell back rights, being one sell back right for each
parcel of 20 shares she held in SGL. Each sell back right obliged SGL
to purchase one of its shares out of each such parcel.
At the same time, the sell back rights themselves were listed for trading
on the ASX and their value at that time was $1.89 each. The taxpayer did
not give a direction to realise her sell back rights by that time so she
became a "remaining shareholder". In accordance with the transaction
documents, Custodial transferred the taxpayer's sell back rights to CSFB.
It then sold them to SGL for an amount calculated in accordance with a
formula stipulated in the transaction documents. CSFB then paid the taxpayer
$2.12 for each sell back right so that she received a total of $576.64.
The Commissioner assessed the taxpayer to tax for the year of income
ended 30 June 2001 ("the relevant year") on the basis of the
tax return lodged by her. The return included an amount of $576, comprised
of $514 of ordinary income in respect of the value of the sell back rights
granted to Custodial plus a capital gain of $62. The capital gain was
calculated by subtracting the value of each sell back right granted to
Custodial ($1.89) from the amount the taxpayer received for each sell
back right from CSFB ($2.12).
The taxpayer objected to the inclusion in her assessable income of the
$514 on the basis that it was not assessable either as ordinary income
or as a capital gain. The taxpayer's objection was disallowed and, as
part of the test case program, she appealed.
The Commissioner argued before the trial judge that the sum of $514,
representing the market value of the sell back rights when they were granted,
was income according to ordinary concepts. Alternatively, the sum of $576.64
received by the taxpayer from CSFB was the same kind of income. The Commissioner
also submitted that the grant of the sell back rights was an "act,
transaction or event" that occurred in relation to the SGL shares
already owned by the taxpayer. As a result, the taxpayer made a capital
gain pursuant to s 104-155 of the Income Tax Assessment Act 1997 ("the
Act") of not less than $514 on the day the sell back rights were
listed on the ASX.
The taxpayer contended that amounts received by a shareholder from a
company in which he or she held shares did not constitute income unless
it was a dividend or the product of employment or other services rendered
by the shareholder. She also argued that there was no relevant connection
that permitted the Commissioner to rely on s 104-155 to establish a capital
gain. By the time the sell back rights were listed for trading on the
ASX, the taxpayer's ownership of SGL shares was irrelevant to any subsequent
realisation of her sell back rights.
The Federal Court allowed the taxpayer's appeal. It held that the derivation
by the taxpayer of the sum of either $514 or $576 was referable entirely
to the taxpayer's existing shareholding in SGL and, as there was no fund
or source of profits in SGL out of which either sum originated, neither
amount was ordinary income. The court also held that it was commercially
unrealistic to describe the imputed figure of $514 as "capital proceeds"
within s 104-155. That sum was only based on the initial trading day's
average trading transactions in the sell back rights on the ASX. The taxpayer
was merely a shareholder who had not exercised her entitlement to trade
in the sell back rights. Therefore, there was no justification for saying
that trading in sell back rights on the ASX on the first listing day was
an act, transaction or event occurring in relation to the taxpayer's sell
back rights within s 104-155.
The Commissioner's appeal to the Full Federal Court was dismissed by
majority. It held that neither the entitlement created in favour of the
taxpayer under the buy back scheme nor the proceeds of that entitlement
was income according to ordinary concepts. The sell back rights and the
moneys received from their sale were not derived from the taxpayer's shares
but from the scheme that varied the entitlements attached to those shares.
The Full Federal Court also held that no taxable capital gain was derived
by the taxpayer. French J held the relevant entitlement and the proceeds
did not occur in relation to a CGT asset owned by the taxpayer. Dowsett
J held that no relevant capital proceeds were derived from the "act,
transaction or event" identified by the Commissioner, namely the
issue of the sell back rights.
In dissent, Emmett J held that the payment of $576.54 was something that
proceeded from the taxpayer's shares in SGL because the benefit of the
sell back rights was derived from the taxpayer's shares. It was therefore
income according to ordinary concepts.
The Commissioner appealed, primarily contending that the grant of the
272 sell back rights in respect of the taxpayer's shareholding and held
for absolute benefit by Custodial was the derivation of income by her
in an amount of $514.
The taxpayer contended that the Commissioner's primary contention erred
by treating the sell back rights as being severed or detached from the
taxpayer's shares. The taxpayer had a "general right" to returns
of capital, this being part of the variety of rights making up each share,
and the grant by SGL of the sell back rights in effectuation of the foregoing
general right. Secondly, the provisions in the ITAA 1997 and where relevant
the Income Tax Assessment Act 1936 dealing with dividends constituted
a complete "code" that restricted the operation of the general
taxing provision (s 6-5) in the circumstances under consideration.
Held: appeal allowed (Callinan J dissenting).
1. The majority of the Full Court erred in application of the principles
respecting the derivation of income according to ordinary concepts. The
Commissioner's primary submission should be accepted.
2. It was insufficient to say that SGL issued the sell back rights to
Custodial on behalf of shareholders "in partial satisfaction of the
shareholders' right to participate in reductions of capital", this
being "within the congeries of rights comprising the shares".
It was the character of the grant of rights to the shareholders that was
decisive. It was not the reduction of capital effected by SGL pursuant
to the new statutory processes provided by the Corporations Law. The gain
made by the taxpayer upon grant of the sell back rights and the subsequent
receipt of the proceeds of sale on her behalf was not the receipt of a
distribution of any form of the assets of SGL. Nor was the sell back scheme
provided "in satisfaction" of the rights of shareholders under
the constitution of SGL. The scheme took its life from the deeds poll
executed on the record date.
3. Both sides agreed that the taxpayer's sell back rights were not "dividends"
in the statutory sense. It might be assumed for present purposes that
the rights otherwise would give rise to income according to ordinary concepts.
Nevertheless, if the "code" argument was correct, they could
not do so. It would be a heroic exercise, and certainly not one previously
undertaken in the cases to which the taxpayer referred, to construe the
dividend provisions, which bring in gains, some of which would otherwise
be of a capital nature, as implicitly excluding from the general income
provision what otherwise would fall within it. The exercise must fail.
[Headnote by Anthony Smyth]
Source: CCH Australian Tax Cases 2008
Attachment 2
KAP Motors Vs Commissioner for Taxation
KAP MOTORS PTY LTD & ANOR v FC of T
2008 ATC Media neutral citation: [2008] FCA 159
Federal Court, Sydney,
28 February 2008
Goods and services tax (GST) — Refund of GST — GST remitted to Commissioner
by mistake — Whether s 105-65 of Sch 1 of Taxation Administration Act
applied to preclude taxpayers' entitlement to refund — Whether s 105-65
applied to transactions involving no supply — Whether taxpayers required
under general law to have reimbursed persons who made the payments to
them — A New Tax System (Goods and Services Tax) Act 1999, s 7-1, 9-5,
9-10, 9-15, 11-5, 11-15 — Taxation Administration Act 1953, Sch 1, s 105-65.
The two taxpayers were retail dealers of new motor vehicles. During the
relevant period, there were arrangements in place between the taxpayers
and various motor vehicle distributors under which the distributor would
pay a rebate, known as a holdback payment, to the appropriate taxpayer
in relation to each new motor vehicle ordered from the distributor and
acquired and sold pursuant to a floor plan arrangement. These arrangements,
however, did not form part of the dealership agreements between the distributors
and the taxpayers.
Once a motor vehicle had been dispatched pursuant to the floor plan arrangements,
the distributor would issue a Recipient Created Tax Invoice to the taxpayer,
which included details of the holdback payment relating to that particular
motor vehicle. During the period 1 July 2000 to 30 April 2005, the taxpayers
collectively remitted GST totalling $407,187 to the Commissioner in respect
of the holdback payments.
The present proceeding was conducted on the basis that it was common
ground between the parties that the holdback payments received by the
taxpayers were not consideration for any goods or services supplied by
the taxpayers to the distributors. Therefore, there was no taxable supply
by the taxpayers and the taxpayers were not liable to pay GST in respect
of the holdback payments that they had received.
The taxpayers claimed that they acted under the mistaken belief that
the holdback payments were taxable supplies and that they were liable
to GST in respect of them. The taxpayers had neither reimbursed the distributors
for amounts corresponding to the GST they had remitted to the Commissioner
nor had they agreed to do so.
The Commissioner claimed that s 105-65 of Sch 1 of the Taxation Administration
Act 1953 applied and that he was not required to refund the remitted
GST to the taxpayers. The Commissioner contended that s 105-65(1) should
be construed as though the word "supply" included a purported
supply or a putative supply such that it referred non-technically to any
transaction that was incorrectly treated as a taxable supply. Alternatively,
the Commissioner contended that he was not required to refund the GST
because the taxpayers had not reimbursed, or agreed to reimburse, the
amount of the remitted GST to the distributors.
Held: taxpayers entitled to refund of overpaid GST.
1. Section 105-65 did not operate to preclude the entitlement of the
taxpayers to a refund of the GST remitted by them in respect of the holdback
payments.
2. In its terms, s 105-65 was limited to circumstances where there was
a supply that was not a taxable supply. It did not in its terms extend
to some transaction that did not involve a supply within the meaning of
the GST Act.
3. It was not difficult to postulate examples of a supply within the
meaning of that word when used in the GST Act that was not a taxable supply.
Thus, there was considerable scope for the operation of the provision
construed literally as referring only to a supply as defined and not extending
to cover a purported or putative supply.
4. The taxpayers' entitlement to a refund was not precluded by the general
law in the absence of their refunding or undertaking to refund a corresponding
amount to the distributors.
5. It was difficult to understand why, as between the taxpayers, on the
one hand, and the Commissioner, on the other, the failure to pass on refunded
GST to the relevant distributors should constitute conduct that would
disentitle the taxpayers from recovering from the Commissioner moneys
that should never have been paid to the Commissioner.
6. The concept of impoverishment as a co-relative of enrichment was foreign
to Australian law. Even if there were any equity in favour of the distributors
attaching to the fruits of any judgment that taxpayers might recover against
the Commissioner, that circumstance was quite irrelevant to this proceeding.
Headnote by Bill Page
Before: Emmett J.
Source: CCH Australian Tax Cases 2008
Leslie Nielson
10 June 2008
Bills Digest Service
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