Full Federal Court clarifies tax obligations for Australian’s living and working abroad
When is a person living overseas no longer a resident for tax purposes? A recent decision of the Full Federal Court provides an interesting perspective but will the Tax Office accept the determination or apply for special leave to appeal the High Court for reconsideration – Watch this space.
In Harding v Commissioner of Taxation [2019] FCAFC 29, the Full Federal Court allowed an appeal by a taxpayer after he disputed the Court’s earlier determination that he was an Australian tax resident.
Mr Harding was an Australian citizen who had worked in the Middle East for over 15 years. In 2006, he returned to Australia to live with his wife and children, but later relocated to Bahrain in 2009 to pursue a work opportunity in Saudi Arabia.
The ATO sought to have Mr Harding pay Australian income tax in respect of the salary paid to him for the 2011 financial year. In doing so, the ATO asserted that despite being employed in Saudi Arabia, Mr Harding was an Australian tax resident pursuant to section 6 of the Income Tax Assessment Act 1936 (Cth).
Relevantly, section 6 provides that a ‘resident of Australia’ is a person who ‘resides in Australia’ (the resides test) and includes persons ‘whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside of Australia’ (the permanent place test).
In assessing his taxpayer status, the court heard that in Bahrain, Mr Harding leased a fully furnished 2-bedroom apartment. During that time Mr Harding’s wife and children remained in Australia and he regularly returned to visit them. It was his intention that his family would later relocate to join him, upon which he would purchase a larger property to serve as the family home. However, in 2011 his marriage broke down and so Mr Harding instead moved to a smaller apartment in the same building.
The resides test
At both instances the court was satisfied that Mr Harding did not reside in Australia, noting that Mr Harding did not intend to return to Australia after his departure in 2009 and that despite having a place to stay in Australia, Mr Harding did not treat this place as his home.
In doing so, the court rejected the Commissioner’s contention that Mr Harding’s Australian citizenship, bank accounts and his family’s retention of his Australian property, were sufficient to establish a finding that he considered Australia to be his home.
The permanent place test
At first instance the primary judge found in favour of the ATO, ruling that Mr Harding did not satisfy the ‘permanent place of abode test’ as the rented Bahrain apartment was only temporary.
However, on appeal the full court was satisfied that the primary judge had applied a ‘too narrow conception’ of what constituted a ‘permanent place of abode outside of Australia’.
In doing so, the court held that the temporary nature of the accommodation did not render it incapable of proving ‘permanent’. That is, the court held that this test should not be determined by reference to whether a person is permanently located at a specific house, flat or dwelling, but rather ‘permanent place’ requires the identification of a country or state in which the person is living permanently.
Here, Justice Logan noted that “… to focus on whether a particular tree (temporary accommodation) is present runs the risk of losing sight of the fact that this tree forms part of a wider wood (permanent place of abode outside of Australia).”
Ultimately, the court was satisfied that Mr Harding lived in Bahrain in 2011, because, among other factors, he had:
- Enrolled his youngest son in a Bahrain school for the 2011 year;
- Purchased a second car for his wife to drive upon relocating to Bahrain;
- Attempted on several occasions to convince his wife to join him in Bahrain as originally planned; and
- Expressed no intention of leaving his Saudi Arabian based employment.
This decision comes in the wake of the Government’s impending consideration of the Board of Taxation’s review of Australian residency rules for individuals. It signals a positive outcome for all Australian’s living and working abroad, namely that they will not automatically be treated as Australian tax residents. However, it will be interesting to see if the ATO seeks special leave to appeal this decision to the High Court.
ASIC charges director and pre-insolvency advisers with dealing with proceeds of crime
Following an investigation into the affairs of Cap Coast Telecoms Pty Ltd, ASIC has charged a company director and two pre-insolvency advisers with dealing with proceeds of crime, alleging the trio were complicit in the removal of almost $750 000 in company funds.
On 1 March 2019, the trio appeared in the Brisbane Magistrates Court which heard that Richard Ludwig, former Director of Cap Coast Telecoms, had garnered advice from Stephen O’Neill and John Narramore of SME’s R Us following a dispute with a creditor.
ASIC alleged that between October 2014 and January 2015, the duo aided Ludwig in the removal of $743,050 of company funds to accounts in their control before the company was wound up in liquidation.
The majority of the money was then forwarded to Ludwig, with duo retaining a portion.
Mr Ludwig has subsequently been charged with ten counts of breaching his director duties pursuant to the Corporations Act 2001 (Cth) and faces a maximum penalty of 2000 penalty units and/or five years imprisonment.
All three men are charged with one count of dealing in the proceeds of crime worth $100,000 or more under to the Criminal Code 1995 (Cth), for which they face up to 1,200 penalty units and/or 20 years imprisonment.
The trio were bailed and the matter is now due to return to the Brisbane Magistrates Court on 3 May 2019.
Jail time for employers who fail to pay superannuation guarantees – A step too far?
On 12 February 2019, the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 was passed in Parliament, introducing a number of laws designed to improve the integrity of the Superannuation Guarantee system and pay as you go (PAYG) withholding tax compliance. Of the changes, the most significant include new penalties for employers who fail to comply with their superannuation obligations.
The new bill will enable the ATO to direct employers to pay Superannuation Guarantee and will make failure to comply a crime punishable by a fine or up to 12 months jail time.
Assistant Treasurer Stuart Robert has labelled the legislation the “most comprehensive action any Government has taken to address non-compliance with superannuation guarantee law since its introduction in 1992.” He warned that “employers should know that the ATO will be able to closely monitor superannuation compliance and employers will face severe consequences for ripping off their workers.”
However, the bill has not been without criticism, with the Tax Institute declaring the measure unviable and instead asserting that changes to Super Guarantee rules should be prioritised over the imposition of jail sentences. It is submitted that seeking to punish offenders with jail time for not paying a tax debt is an unnecessary overreach and sets a dangerous precedent for further changes to tax collection that will no doubt include jail time for other failures to pay tax debt. Where will it end? Will jail or the prospect of jail act as a deterrent? Do we want to fill jails with employees who struggle or fail to pay certain bills?
This Bill seems to stand in stark contrast to the Government’s recent proposal designed to encourage entrepreneurs to start new businesses, such as the proposal to reduce the standard personal bankruptcy term from 3 years to 1 year.
The proposed jail time for failure to pay the Superannuation Guarantee is a step too far and may well discourage investment in new businesses.
FCA: Provisional liquidators appointed for companies failing to honour tax liabilities
In the recent decision of Deputy Commissioner of Taxation v Ausmart Services Pty Ltd [2018] FCA 1912, the Australian Taxation Office (ATO) has been successful in their application to have provisional liquidators appointed for eight labour hire businesses after they entered liquidation or were deregistered without paying their outstanding tax liabilities.
Scott Shi was the head of a large labour hire business which supplied the majority of workers to a number of abattoirs through 8 associated companies. In 2015, an ATO taskforce began an audit of the companies in this group, and of all persons associated with it. In doing so, it was revealed that although Mr Shi was not listed as the Director on ASIC’s register, he assumed control of each of the companies.
Following the investigation, it was determined that the companies had incurred a number of unpaid primary tax liabilities, estimated to exceed $121 million. The taskforce revealed that the companies treated many workers as contractors rather than employees in order to reap the consequential tax implications. Ultimately, the ATO concluded that the companies’ liabilities included:
- Failure to remit PAYG withholding amounts to the ATO, despite withholding PAYG withholding amounts;
- Failure to comply with their obligation as employers pursuant to the Superannuation Guarantee (Administration) Act 1992 (Cth) and failure to pay the subsequent superannuation guarantee charge shortfalls;
- The lodgement of Business Activity Statements (BAS) in which they claimed GST input credits equivalent to 1/11 of the wages they paid to the employees, despite none of the employees being registered for GST and no GST being invoiced to the companies by the employees or paid by the employees to the ATO, resulting in the companies receiving refunds for the GST they never paid.
- Underpaying, or failing to pay GST on all of the fees they received from abattoirs, meaning that the money entering many of the companies’ bank accounts far exceeded any income declared in tax returns, even after deductions were allowed for expenses such as wages;
- Failure to lodge tax returns for any or all income years;
- Failure to appropriately lodge BAS; and
- Understating the income and GST payable on tax returns and activity statements, while over-claiming GST input credits.
Furthermore, the ATO investigations revealed that a number of companies in Mr Shi’s control had already been wound up and deregistered. Relevantly, these companies had all had their assets stripped prior to liquidation or deregistration, with the funds not used for business expenses either transferred to other companies in the group or transferred offshore for the benefit of Mr Shi, his relatives and associates. It was estimated that in the six years from 30 June 2010, more than $43.1 million had been remitted overseas by companies at Mr Shi’s direction.
The matter was heard before the Federal Court last November, where the ATO sought an order that the eight companies be wound up. In doing so, the Commissioner asserted that the companies fraud, phoenix activity and tax evasion enlivened the court’s discretion to wind up the company under section 461(1)(k) of the Corporations Act 2001.
Accordingly, Yates J was required to consider whether there was a reasonable prospect that a winding up order would be made and if so, whether pursuant to section 472, there was a valid reason for placing the affairs of the company under external control prior to the hearing of the winding up application.
Given the flow of the companies’ liquid assets to Mr Shi and associated parties, the court concluded that the conduct and management of the companies’ affairs was inconsistent with lawful and proper compliance with their taxation responsibilities and obligations.
Ultimately, Yates J was satisfied that the companies had engaged in ‘systemic and deliberate non-compliance with their taxation obligations to the tune of many millions of dollars’, and that the flow of funds through the companies was ‘haphazard and ad hoc’. His Honour was satisfied that there was a real and substantial likelihood that winding up orders would be made against the companies as final relief.
Accordingly, Justice Yates was persuaded that provisional liquidators should be appointed to preserve the companies’ assets and to protect them from fraudulent dissipation to the detriment of the Commonwealth and other creditors. His Honour concluded that ex parte relief was warranted given the risk that giving notice of the application may have defeated the purpose for which the provisional liquidators were to be appointed.
HCA allows appeal in Chorley Exception case
In the matter of Bell Lawyers Pty Ltd v Pentelow & Anor [2018] HCATrans 264, the High Court has granted special leave to appeal an earlier decision of the New South Wales Supreme Court, after it held that the Chorley exception may extend to barristers.
The case follows a lengthy legal battle between Sydney barrister Janet Penetelow and Bell Lawyers, after the firm failed to pay Ms Pentelow $25,988.55 for work she performed on a family law case in 2008.
Ms Pentelow subsequently initiated proceedings and was successful in her claim. However Bell Lawyers refused to pay when Ms Pentelow claimed almost $45,000 for work she did as a self-represented litigant on that case.
In August 2018, a 2-1 majority of the New South Wales Supreme Court held that the Chorley rule that allowed solicitors to recover costs when acting as self-represented litigants also applied to barristers. Bell Lawyers subsequently applied to the High Court for special leave to appeal that decision.
The matter was heard before Chief Justice Kiefel and Justice Gordon in December, where counsel acting for Ms Pentelow contended that special leave ought to be refused as the costs in question were no more than $44,000 and the costs of running an appeal would far exceed that amount for both parties. In doing so, they submitted that granting special leave would be inappropriate on the basis that 'it would be inimical to the interests of justice and ... the established requirement that litigation be just, cheap and quick.'
However Bell Lawyers argued that 'cost shifting is a crucial part of the administration of justice' and subsequently that Ms Pentelow's contention about the amount of costs being relatively modest 'ought not to be seen as a disqualification from special leave.'
Ultimately the court granted special leave, concluding that the matter should be remitted to the full court. In doing so, Gordon J submitted that regard should be had to three questions:
- Is the Chorley exception still good law?
- Does it extend to barristers?
- Does it extend to barristers who have retained a solicitor and counsel to appear for them?
The case is likely to be heard in the first half of this year, with both parties agreeing it should only take one day. It highlights a highly contentious area of Australian law and it will be interesting to note the outcome and its implications for future cases.
AAT remits claim for advance under FEG Act after finding applicant was an employee
In the recent decision of Roberts and Secretary of Jobs and Small Business [2019] AATA 64, the Administrative Appeals Tribunal (AAT) reviewed a decision made by the Secretary of the Department of Jobs and Small Business that the Applicant was not eligible to claim an advance under the Fair Entitlements Guarantee Act 2012 (Cth) ('FEG Act').
The FEG Act establishes a scheme which enables employees who have lost their job as a result of the insolvency of their employer to make a claim for unpaid entitlements (an advance) through the Commonwealth. If the claim is accepted the Commonwealth then assumes the place of the employee as a creditor in the winding up and is then entitled to claim repayment of the entitlements paid in priority to other creditors pursuant to section 556 of the Corporations Act 2001 (Cth).
However, not every worker is eligible to claim under FEG Act as the term “employee” has been deemed to exclude contractors and subcontractors. This was the basis of the review as the department Secretary deemed that the Applicant (Mr Roberts) was a contractor and not an employee within the meaning of the term in the FEG Act. Mr Roberts had sought review of this decision asserting his status should have been classed as an employee within the meaning of the FEG Act.
In determining whether Mr Roberts was an employee or contractor, the Tribunal discussed a series of factors beginning at paragraph 51. Following deliberation of the evidence, Mr Roberts was deemed to be an employee within the meaning of the FEG Act and the claim was returned to the Secretary to be assessed in accordance with the Tribunals findings.
Whilst the law is clear that when determining what kind of employment relationship exists “the totality of the relevant relationship needs to be examined …”,the factors discussed do provide a useful general “checklist” that could be used to determine if a worker is an employee or not. The factors discussed are summarised in the following table:
As can be seen, generally what will indicate a contractor relationship is a significant degree of separation between the worker and employer. It is not sufficient to simply label the worker a contractor in an agreement.
ASIC vows to crack down on corporate misbehaviour by prioritising litigation
Following criticism in the wake of the Hayne Royal Commission, ASIC has vowed to crack down on increasing business misconduct by implementing a new 'litigate-first' strategy. In doing so, the corporate regulator has committed to placing a greater emphasis on litigation, warning that it will 'move more quickly to, and accordingly conduct more, civil and criminal court actions against larger financial institutions.'
The move follows the alarming findings of the Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, at which the regulator was denounced for being too soft on misbehaviour and for 'rarely' going to court.
Consequently, ASIC has admitted that it must change its approach, seeking to place greater emphasis on litigation and warning that it will first ask, 'why not litigate?' when assessing how to address misconduct.
However, ASICs strategy is already under scrutiny, after litigation efforts against Westpac saw the Federal Court impose a paltry $3.3 million fine for unconscionable conduct - a mere fraction of ASIC's $58 million request.
This outcome has revealed that reform is necessary if further misconduct is be prevented, with Justice Beach declaring that although he wished to impose a much greater fine to deter others, this 'seriously inadequate' penalty was the most he could impose under law.
Despite this, ASIC commissioner Sean Hughes has warned that 'it is inevitable that there will be more litigation and more people out there in the market who will have to be prepared for a much firmer, much stronger regulator, who is far less likely to compromise. Whether such an approach is appropriate will have to be determined but the writer is sceptical that a firmer approach is warranted. In the writer’s view, targeted litigation with genuine outcome ought to be the focus and as part of that process compromise must be balanced against the outcome sought.
The importance of claiming privilege in s19 examinations
Have you been served with a Compulsory Examination Notice under section 19 of the Australian Securities and Investments Commissions Act? Here's a short guide through the process and the reasons why claiming privilege against self-incrimination is important.
Compulsory Examination
A compulsory examination, or a section 19 examination, grants ASIC the power to ask questions about a matter which they are investigating. If you have been served with a compulsory examination it is imperative that you attend, as failure to participate or answer the questions asked is an offence punishable by both heavy fines and imprisonment.
Before
If you have been served with notice to attend an examination, the law requires that you are afforded ample time to prepare. In doing so, it is recommended that you elect to have a lawyer present to help you navigate the process and to ensure your rights are protected.
The examination will be conducted in a private location, and will be highly confidential in nature. As such, your lawyer is the only person who you are entitled to have present in the room.
Before commencing, the ASIC officer should inform you of your rights and obligations, including that you must not discuss the meeting with anyone, for a specified period of time. The exception to this is that you may discuss the interview with your lawyer if they are in attendance. If your lawyer does not accompany you, you should first seek permission from ASIC to discuss the meeting with your lawyer afterward.
During
Throughout the interview you will be obliged to answer all questions directed at you, even if doing so exposes you to self-incrimination.
There is no inherent privilege against self-incrimination. In order to prevent self-incriminating evidence being admitted at trial, two conditions must be satisfied:
- you must claim privilege in respect of your answer before answering a question; and
- at trial, the court must find that the answer would in fact incriminate the examinee.
Having a lawyer present can assist in alleviating the stress associated with the examination process. Not only can a lawyer instruct you as to when you should claim privilege, but they can also assist in holding the examiners to account, by ensuring that their questions remain lawful and do not unnecessarily incriminate you.
After
Following the examination you will be sent a transcript of the meeting and asked to review it. Once you have checked it for errors, you must sign it.
As the transcript may ultimately be used as evidence against you in a civil or criminal trial, it is crucial that you review it carefully. In doing so, you should ensure that the answers you claimed privilege over have been excluded. If you believe an error has been recorded on the transcript, you should ask your legal team to notify ASIC in writing.
We are here to help
We understand that being served with a section 19 notice can be a stressful and overwhelming time. We have assisted numerous clients through the process . If you want to ensure that ASIC do not exceed their lawful authority in the questions they ask, and to ensure that you properly claim privilege, please do not hesitate to call us.
VSC approves remuneration after liquidator incurs $7k fee justifying $34k
In the recent decision of Custometal Engineering Pty Ltd (in liquidation) [2018] VSC 726, two liquidators incurred almost $7,000 in fees whilst seeking to justify their $34,000 remuneration.
The case ensued after Custometal Engineering Pty Ltd entered voluntary administration on 21 September 2017, with Sam Kaso and Daniel Juratowitch appointed as administrators.
On 11 October 2017, the Supreme Court of Victoria ordered that the administration be terminated, that the Company be wound up and that Kaso and Juratowitch be appointed as joint and several liquidators.
Subsequently, in September 2018 the liquidators sought approval of their remuneration as the Company’s administrators pursuant to s60-10(1)(c) of the Insolvency Practice Schedule for the amount of $33,872.50. They also sought that the costs of the application be costs in the Company’s liquidation, hence bringing the total claim to $40,860.
Accordingly, the court was required to consider whether liquidators had prima facie established a case for remuneration and subsequently whether that remuneration should be approved under r9.2 Supreme Court (Corporations) Rules 2013 (Vic). In doing so, the court was required to consider whether the remuneration being claimed was reasonable.
In determining the reasonableness of the remuneration, Matthews JR considered the following factors:
- Whether there was an appropriate delegation of the work performed;
- Whether the tasks conducted were necessary to have been performed;
- Whether the time taken to complete those tasks, and therefore the amounts charged for them, was reasonable; and
- Whether there was any evidence of unnecessary duplication of work.
Ultimately the court was satisfied to approve the remuneration sought by the liquidators, holding that the liquidator’s costs of application be costs in the Company’s liquidation.
In an era where issues of proportionality are high on the agenda, particularly with the judiciary, this case presents an interesting example of a situation where the costs of making such an application seem disproportionate to the costs being sought and presents yet a further example of why approval of these costs should be facilitated in a different manner, possibly by legislative change as the current law sees many liquidators spending significant resources to justify their remuneration at additional cost to creditors.
HCA allows ASIC v Lewski appeal
In the matter of Australian Securities & Investments Commission v Lewski & Anor, the High Court has partly allowed an appeal by the corporate regulator, after it alleged the directors of Australian Property Custodian Holdings Pty Ltd (APCHL) breached their duties by amending the constitution of a failed aged care and retirement trust.
In December 2000, Australian Property Custodian Holdings Pty Ltd (APCHL) created a unit trust called the Prime Retirement and Aged Care Property Trust, of which it was the responsible entity. The trust was subsequently registered by ASIC as a managed investment scheme in July 2001, and the consolidated trust deed became the constitution of the managed investment scheme.
In July 2006, after struggling to sell the units, the directors of APCHL amended the constitution by introducing substantial new fees payable to APCHL. In doing so, the directors introduced a 'listing fee’, which was payable once the scheme's units were listed on the Australian Securities Exchange.
The amended constitution was lodged in 2006, and the following year the directors determined that the listing fee would be paid to companies associated with William Lewski, one of APCHL's directors who controlled the trust's responsible entity.
Subsequently, the case ensued after ASIC alleged that Mr Lewski was improperly granted $33 million from the company for consulting on its ASX listing, and a further $60 million for the purchase of the management rights for the portfolio of villages owned by the company.
At first instance the trial judge held that the fees were invalid, and that the directors had subsequently breached their duties.
However, the directors subsequently appealed to the Full Federal Court, where it was held that the trial judge erred in its finding. In doing so, the court held that the certain amendments had 'interim validity' unless and until they were set aside, and that the directors were thus entitled to act in accordance with their honest belief that the amendments were valid.
ASIC then appealed to the High Court, which ultimately held that the Full Federal Court had erred in this decision. In doing so, the court concluded that the directors had breached various provisions of the Corporations Act 2001 (Cth), having failed to take reasonable care, to be loyal to members of the trust, to not use their position improperly and to comply with the legal requirements for amendment.
Despite this, the court held that the Full Federal Court was correct in finding that the directors had not been complicit in a breach of s 208. The case has now been remitted to the Full Federal Court for determination of penalty and disqualification orders, costs and ASIC's cross-appeal to that court.
