Updated guidance on the GAAR (Part IVA) and the JobKeeper regime
One of the key pieces of economic relief provided by the Australian government to assist with the impact of COVID-19 on the Australian community was the JobKeeper regime.
Under the regime, which is administered by the Australian Taxation Office (ATO), employers will receive payments from the government of A$1,500 per eligible employee, per fortnight. The payments must be passed on to the employees and will be made between March 30 2020 and September 27 2020. The total estimated cost to the government is A$70 billion. Eligibility for employers is predicated on a number of factual tests, such as a percentage decline in their turnover.
On May 7, the Commissioner updated his guidance on the operation of Australia’s general anti-avoidance rule (GAAR), Part IVA, to cover the application of Part IVA to the JobKeeper regime. The ATO is concerned, among other things, about schemes that manipulate facts to enable employers to qualify for the payments. That guidance is found in PSLA 2005/24.
There is also concern about whether employers will have kept adequate and appropriate records to later substantiate their entitlement. The programme was introduced quickly, and as payments have since started, employers are reviewing whether they meet ATO requirements.
Decision in Greensill case: assets held through trusts
The April 28 2020 decision of the Federal Court in Peter Greensill Family Co Pty Ltd (trustee) v FCT [2020] FCA 559 is an important warning to investors in Australian assets, who do so through a trust, to carefully review the terms of their trust deed.
Foreign investors who directly invest in Australian assets would normally expect to avoid paying Australian capital gains tax on any profit on disposal of ‘non-TAP’ assets. Broadly, these are assets that are not real estate or interests in real estate.
In Greensill, however, the assets were held by the Australian trustee of an Australian discretionary trust. Gains made and some assets were distributed to a non-Australian beneficiary. Taxpayers generally view trusts as a disregarded entity for Australian tax purposes.
The court held, however, that the interaction of Australia’s capital gains tax rules and trust rules meant that the beneficiary did not get the benefit of the exemption in the way a directly investing non-resident would have.
Taxpayers have known the Commissioner’s views on the issue which were indicated in a draft determination, TD 2019/D6. But the law was considered unclear.
The outcome will not be the same for all trusts. In Greensill, the trust was discretionary, with the trustee being required to decide to whom the income of the trust was to be allocated. If the trust were a fixed trust, with the beneficiary’s entitlement fixed and known in advance, a different outcome is likely.
Business model response to COVID-19: Glencore appeal
Many businesses are responding to COVID-19 with necessary changes to their operating model. These are driven by commercial need, but must also take account of global tax obligations.
The decision in Glencore (Glencore Investment Pty. Ltd. v. Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432), and the appeal which is likely to be heard in August this year, point to important issues under Australia’s transfer pricing and avoidance rules that must be considered in this process.
Glencore, essentially, involved an organisation who changed their inter-company transfer pricing model, for commercial reasons. There was evidence that both the old and new models were ones that arms-length taxpayers had adopted. One of the key issues in dispute, however, was the role of Australia’s transfer pricing rules in the actual decision to make the change of model.
The Commissioner argued that the actual decision to change was one that, itself, had to be one that an arm’s-length taxpayer would have made. He said that an arm’s-length taxpayer would only have amended the old model, and not moved to a different, new model. The taxpayer argued that under the transfer pricing rules, it was enough that both the old and new models were ones that arm’s-length parties in the same circumstances could have adopted.
Like all transfer pricing decisions, the evidence is complex and imperfect, and it remains to be seen if the appeal will finally turn on this point.
What seems clear, however, is that the Commissioner was prompted to engage with the taxpayer because of his view that the new model resulted in less tax in Australia than the old model, and that he believed other taxpayers would have made less significant changes to their operations when faced with the same issues.
To further complicate matters, Glencore does not examine the full range of provisions open to the Commissioner in such a situation (including the GAAR and diverted profits tax (DPT) rules), which must also be considered when changing model.
Paul McNab
T: +61 292 868 664
