Trending Tax Topics: Current and Topical Issues in Income Tax - PowerPoint PPT Presentation

Trending Tax Topics: Current and Topical Issues in Income Tax Presented by: Professor Michael Dirkis University of Sydney Law School

Focus of f presentation 1. 2018-2019 Budget Measures: o Denial deductions for vacant land o Taxation of income for an individual’s fame or image  Revisiting the taxation of team sportspersons 2. 2017-2018 Budget Measure: removal the entitlement to the CGT main residence exemption for foreign residents o Individual residency revisited

1.1 .1 Denial deductions for vacant land [1 [1] • Budget Paper No 2 states that from 1 July 2019 deductions for expenses associated with holding vacant land, such as interest costs, will be disallows where the land is not genuinely held for the purpose of earning assessable income. • As well aimed at addressing concerns that deductions are being improperly claimed it is also intended to reduce tax incentives for land banking • Denied deductions will not be able to be carried forward for use in later income years, but may be included in the cost base of the asset for capital gains tax (CGT) purposes when sold (eg borrowing expenses and council rates)

1.1 .1 Denial deductions for vacant land [2 [2] • This measure will not apply to expenses associated with holding land that are incurred after: o a property has been constructed on the land, it has received approval to be occupied and is available for rent; or o the land is being used by the owner to carry on a business, including a business of primary production. • Budget Paper No 2 concludes by stating that this measure will apply to land held for residential or commercial purposes, however , the ‘carrying on a business’ test will generally exclude land held for commercial development.

1.1 .1 Scope of f change  The scope of the change is unclear • Farmers are expressly okay • Okay if a property developer as land is trading stock under s 70-10 (ie acquired & held for the purposes of sale or exchange in the ordinary course of business): FCT v St Hubert’s Island Pty Ltd (in liq) (1978) • For land owners with land used for agistment the expenses will be denied • What about land acquired as part of a ‘profit making scheme or undertaking’? If not a business in itself the expenses are denied • The target of these changes appears to be cases like Steele v DCT, where interest was incurred in a period prior to the derivation of relevant assessable income ( Commissioner’s attempts to limit Steele in Taxation Ruling TR 2004/4 appear to have failed)

1.1 .1 Recap: Steele v DFCT [1 [1999] HCA 7 Facts : Steele bought a 7 hectare racehorse training & agistment centre in 1980 for $1m to redevelop as a motel & townhouse complex to be run personally. In late 1981 a development application was refused but after selling half of her interest to a business associate, a 2nd development application was approved in early 1982. In 1986, following litigation, the Steele acquired the associate's half- interest. In 1987, she again sold half of her interest & in 1988 she sold her remaining interest. While she held the property, it was only used for agisting horses from which she derived $29,000

1.1 .1 Recap Steele v DFCT [1 [1999] HCA 7 [2 [2] Issue was whether the $909,000 of interest incurred by the taxpayer on the unpaid purchase price, on borrowings from a finance company & later a bank on the security of the property was deductible. High Court allowed the interest deduction. It noted: ‘Having regard to the original purpose for which she acquired the land, Carr J said, any profit on a resale would have constituted assessable income. He considered that from the time the appellant acquired the land she had embarked on a profit-making undertaking or scheme. In those circumstances, the appellant's operations, were, in his view, sufficiently linked to the derivation of assessable income.’

1.2 .2 Taxation of income for an individual’s fame or image [1 [1]  There appears to wider agenda of revisiting the law and the ATO’s practice in respect of profit splitting through assignments, the use of service trusts, etc .  On 19 July 2017 the ATO released a Draft Practical Compliance Guideline PCG 2017/D11: Tax treatment of payments for use and exploitation of a professional sportsperson’s ‘public fame’ or ‘image’. It offers a safe harbour where by up to 10% payments to professional sportsperson can be treated as referable to the use and exploitation of the professional sportsperson’s ‘public fame’ or ‘image’ under the associated resident third - party’s licence and are therefore can be treated as the income of the associated resident third-party.

1.2 .2 Taxation of income for an individual’s fame or image [2 [2]  This safe harbour is to be superseded by Government announcing in the 2018-2019 budget that from 1 July 2019 high profile individuals are no longer able to take advantage of lower tax rates by licencing their fame or image to another entity.  Budget paper No 2 states that the ‘measure will ensure that all remuneration (including payments and non cash benefits) provided for the commercial exploitation of a person’s fame or image will be included in the assessable income of that individual .’

1.2 .2 Recap: Personal service sports businesses [1 [1]  Traditionally sportspersons engaged in team sports were considered employees (eg, in FCT v Maddalena (1971) the High Court concluded that ‘Mr Maddalena's contract with the rugby league club was a contract of employment’).  For sportspersons engaged in non-team sports, such as swimmer or track & field athlete the question did not arise as they were generally not renumerated as they were amateurs (ie, the Courts recognised that times had changed from the days when ‘[ s]port was the antithesis of work’ and when, for a well-known amateur golfer to lend his name for reward to advertise a commercial product, would be conduct unworthy of his amateur status).  But with the growth in professional sports it was recognised that professional athletes in non-team sports were carrying on a business of sport (see FCT v Stone [2005] HCA 2)

1.2 .2 Recap: Personal service sports businesses [2 [2]  The business can arise from:  the sport becoming a sportsperson’s ‘vocation or calling’ (s 995-1 ‘business’ definition), but is not an employee  a sportsperson ‘commercial exploitation of skills developed and used in the pursuit of sporting excellence’ (TR 1999/17 & Stone ) or  a sportsperson’s ‘commercially exploiting their sporting prowess and associated celebrity’ ( Spriggs v FCT; Riddell v FCT [2009] HCA 22)  This can occur despite some of the usual indicators of a business being absent (ie a sportsperson’s ‘motives are idealistic rather than mercenary’) .

1.2 .2 Recap: Personal service sports businesses [3 [3]  In Spriggs & Riddell the High Court’s allowed two professional footballers deductions for costs associated with obtaining football club employment contracts, on the basis that obtaining & performing such employment contracts was part of the business of being a professional footballer.  Although each taxpayer had a playing contract, it was not solely a contract of employment between the taxpayers and their clubs. Rather, the contract was a tripartite contract involving their respective clubs, football leagues & their player rules, which allowed for the taxpayers to receive income from non- playing activities.

1.2 .2 Recap: Personal service sports businesses [4 [4]  The taxpayers were ‘engaged in the business of commercially exploiting their sporting prowess and associated celebrity.’  The High Court noted that it is possible to obtain & perform an employment contract as part of, & during the course of, running a business ( Cof T(Vict) v Phillips [1936] HCA 11). Neither the decision in Maddalena , nor the definition of ‘business’ in s 995-1 required the conclusion that employment activities could not form part of the carrying on of a business for the purposes of s 8-1(1)(a).  The Court did accept that a person, as in Maddalena , is not conducting a business merely because the person earns income under an employment contract

Developments in the taxation of f team sportspersons  Justice Edmonds commenting on the Spriggs & Riddell noted that: ‘What the decision of the High Court illustrates, some may say reinforces, is that outgoings by taxpayers in carrying on a business will be afforded more favourable tax treatment in terms of deductibility under the general provisions if the Assessment Acts, than the same outgoings incurred by taxpayers who are not carrying on a business. That may be a natural consequence of the operation of s 8-1 … & the proper construction of those provisions. But whether it accords with one’s notion of fairness may be open to doubt. ’

2 2 Loss of f the CGT main residence exemption for foreign residents  Treasury Laws Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2018, Schedule 1, currently before the Senate removes the entitlement to the CGT main residence exemption for foreign residents from 7.30pm on 9 May 2017 (the application time)  Individuals who are foreign residents at the time a CGT event occurs to a dwelling (or for a compulsory acquisition a part of a dwelling) in which they have an ownership interest are not entitled to the CGT main residence exemption (ss 118-110(3) & 118-245(3))