Number Issue Summary

Sub-section 73B(1) of the ITAA 1936 — Certain expenditure on research and development activities [now repealed]

ATO ID 2012/5: Income Tax: Research and Development: Building Expenditure

Stakeholders are of the view that the ATO's prior practice, as illustrated in a letter from the ATO to a taxpayer, was that expenses incurred in the acquisition or construction of a building for research and development purposes was deductible pursuant to subsection 73B(1) of the ITAA 1936.

However, in a subsequent view set out in ATOID 2012/5, the ATO has outlined its view that such expenditure was not deductible and is excluded under subsection 73B(1) of the ITAA 1936.

Stakeholders allege that this represents a 'U-turn' from prior practice and the ATO has not had due regard to PSLA 2011/27.

The stakeholder has provided the IGT with a copy of a letter issued by the ATO to a taxpayer referred to above. The stakeholder informs the IGT that it is continuing to engage with the ATO on this issue, and will be formally requesting the matter be investigated as a potential 'U-turn' having regard to the letter.


Section 121EF of the ITAA 1936 — Definitions relating to allowable deductions of an OBU

Stakeholders consider that the ATO has performed a 'U-turn' on whether taxpayers are able to substitute alternate expense allocation methodologies in respect of general OBU expenses in place of the statutory formula in section 121EF(4) of the ITAA 1936.

Stakeholders contend that the prior ATO view was that alternate methodologies which yielded reasonable outcomes were acceptable. This was subsequently changed following advice from the ATO's Tax Counsel Network that the law did not allow for any alternative methodologies and that the statutory formula in sub-section 121EF(4) must be used.

This was the basis of the case study discussed in Chapter 2 of this report.


Subdivision 124-H of the ITAA 1997 — Exchange of units in a unit trust for shares in a company

Two successive CGT rollovers

The issues concerned whether the ATO should apply Part IVA to transactions involving two successive CGT rollovers which results in the taxpayer achieving a tax deferral.

The IGT was informed that such transactions were routine and the ATO had been aware of this fact for many years. Moreover, the IGT was referred to pointed to a number of private rulings which dealt with similar (though not identical arrangements) in which Part IVA was not applied.

As such, it was contended that the ATO's application of Part IVA to their transaction represents a U-turn from prior practice.

The IGT sought additional information from the ATO on this issue and noted that an early draft risk assessment report suggested that the ATO was aware of transactions of this kind and had been 'tacitly approved' in some instances.

The IGT notes that prior private rulings did not specifically rule on the application of Part IVA in those cases. Accordingly, while the additional information received from the ATO suggested that it may be aware of these issues, it was not determinative that the ATO had committed a 'U-turn' by seeking to apply Part IVA to certain transactions.


The application of section Part IVA of the ITAA 1997 to securities and products issued under Division 974 of the ITAA 1997

Stakeholders advised the IGT that previously the ATO had issued a series of private rulings confirming that it would not apply Part IVA to certain securities and products issued by the taxpayer pursuant to Division 974.

The stakeholder contends that in more recent transactions, the ATO had performed a 'U-turn' by attempting to apply Part IVA to similar securities and products in direct contravention to prior private rulings.

The stakeholder used this case study to highlight perceived deficiencies in the ATO's research pursuant to PSLA 2011/27 and noted that the matter had already been escalated and resolved.


ATOID 2012/31 — Income Tax Thin Capitalisation: exemption — certain special purpose entities [Withdrawn]

Draft Taxation Determination (TD) 2012/D11 — Income tax: does sub-section 820-39(3) of the Income Tax Assessment Act 1997 only apply to special purpose entities that have been established for the purpose of carrying on securitisation activity? [Withdrawn]

The ATO had previously, through a series of private binding rulings, confirmed that certain special purpose entities and insolvency-remote special purpose entities are exempt from the thin capitalisation rules in Division 820 of the ITAA 1997 by virtue of the operation of section 820-39 of the ITAA 1997.

However, stakeholders contend that the ATO's narrow interpretation that the only entities which qualify for exemption under section 820-39 of the ITAA 1997 are special purpose entities that have been established for the purpose of carrying on securitisation activity represents a 'U-turn' from prior practice and the position in earlier private rulings.

The IGT notes that both ATOID 2012/31 and draft TD 2012/D11 have been withdrawn.


Draft GSTR 2013/D2 — Goods and services tax: supplies made by an operator of a 'moveable home estate' [Withdrawn]

Stakeholders advised the IGT that the prior ATO view was that mobile home parks (or moveable home estates) were 'commercial residential' premises and therefore operators of such parks had access to GST concessions.

The ATO changed its view in draft GSTR 2013/D2 to no longer consider mobile home parks to be 'commercial residential' premises and therefore, operators would no longer have access to GST concessions previously available.

Following feedback received through community submissions, as well as comments from a number of members of Parliament, the ATO has withdrawn the draft ruling and, accordingly, the prior position remains in force.


Draft TR 2014/D1 — Income tax: employee remuneration trust (ERT) arrangements

Stakeholders allege that the ATO's position that employers may only deduct contributions made to employee remuneration trusts where the employee disposes their shares within a period of five years is a 'U-turn' where previously no such timeframe was imposed.

The draft ruling states, at paragraph 163, that 'the Commissioner has issued a large body of private rulings in the past which evidence a more favourable prior GAP in respect of the deductibility to employers of contributions made to the trustee of an ERT than some of the views contained in this draft Ruling. Accordingly, the Commissioner will not undertake compliance activities to apply the views expressed in this draft Ruling in this regard to those contributions made prior to this draft Ruling issuing that would have been accepted as being deductible under this prior practice. However, if the Commissioner is asked or required to state a view (for example in a private ruling or in submissions in a litigation matter), the Commissioner will do so consistently with the views set out in this draft Ruling.'

The ATO's recognition of a prior GAP is consistent with the intent and application of PSLA 2011/27 for the Commissioner to not take compliance action in prior years against taxpayers who have relied upon the GAP.


Section 109J of the ITAA 1936 — Payments discharging pecuniary obligations not treated as dividends

Draft TR 2013/D6 — Income tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate)

The issue is whether monies paid, or property transferred, pursuant to section 79 of the Family Law Act 1975 is exempt from the operation of Division 7A (as payments of dividends) by operation of section 109J.

The ATO considers that where such a payment or transfer is effected to the shareholder of a private company, this forms part of the shareholder's assessable income under section 44 of the ITAA 1936. Similarly, where the payment or transfer is made to an associate of the shareholder, this is considered to be a payment for the purposes of sub-section 109C(3) of the ITAA 1936.

Stakeholders allege that the ATO's view in draft TR 2013/D6 that such payments are not 'arm's length' is directly contrary to the view it had expressed previously in a series of private rulings.

The ATO recognises the prior practice. At paragraphs 37 and 38 of the draft ruling, the ATO recognises the existence of a prior general administrative practice contrary to the view stated in the draft ruling. Accordingly, it notes:

'ATO Interpretative Decision ATO ID 2004/462 correctly explains that section 109J of the ITAA 1936 will only apply to prevent a payment by a private company giving rise to a deemed dividend under section 109C of the ITAA 1936 where, amongst other things, that payment discharges an obligation of the private company. The ATO ID explains that no relevant obligation can arise as a result of an order under section 79 of the FLA 1975, where that order does not bind the private company (for example, where the private company is not a party to the relevant proceedings). The ATO ID is silent on the role of section 109J of the ITAA 1936 where orders under section 79 of the FLA 1975 do bind the private company (as can now be the case). A significant body of private rulings issued subsequent to this ATO ID have proceeded on the basis that an order made under section 79 of the FLA 1975 which does give rise to an obligation for a private company to pay money to an associate of a shareholder, will attract the protection of section 109J of the ITAA 1936.'

'The body of private rulings referred to in paragraph 37 of this draft Ruling evidence a prior general administrative practice contrary to the view, set out in paragraph 6 of this draft Ruling that orders made (directly) to a private company under section 79 of the FLA 1975, to pay money to an associate of a shareholder of that company, will result in a deemed dividend arising under Division 7A. Example 5 (at paragraphs 20 to 23 of this draft Ruling) goes on to illustrate that view. In any case where the view set out in paragraph 6 and/or Example 5 of this draft Ruling is less favourable to a taxpayer than the Commissioner's previous practice in respect of such orders against a private company, the Commissioner proposes not to undertake active compliance activities so as to apply that view in respect of any such orders made before the date the final Ruling is issued. However, if the Commissioner is asked or required to state a view in respect of such orders (for example in a private ruling or in submissions in a litigation matter), the Commissioner will do so consistent with the views set out in this draft Ruling (including paragraph 6).'

The ATO's recognition of a prior GAP and the ATO's decision not to take any active compliance activity to apply the new view to past years is consistent with the approach set out in PSLA 2011/27.


Draft TR 2014/D2 — Income tax: the application of the foreign income tax offset limit under section 770-75 of the ITAA 1997 to foreign currency hedging transactions

The Commissioner's view that the source of foreign currency hedging gains for income tax purposes is where the contract is formed represents a potential 'U-turn' from prior advice in some private rulings that the source of these gains is where essential decisions giving rise to the gain are made.

The ATO has recognised these contrary views and at paragraph 52 of the draft ruling states “in view of the fact that some private rulings expressing contrary views to those in this draft Ruling have been made in respect of the issue of the source of foreign currency hedging gains, submissions are sought on whether the final Ruling should apply only from a certain date, and, if so, what that date should be.”

The ATO's research which identified prior ATO advice with a contrary view is consistent with the intent and purpose for which PSLA 2011/27 was developed.



A number of other issues were also raised with the IGT as having the potential to become 'U-turns' but stakeholders who raised those issues noted that the ATO had not yet undertaken any action to change earlier published advice. Accordingly, the IGT did not investigate these issues. For completeness, these are set out below:

  • concern was expressed that the ATO may performing a 'U-turn' on its position as set out in TR 95/36 — Income tax: characterisation of expenditure incurred in establishing and extending a mine;
  • concern was expressed that the ATO may performing a 'U-turn' on its position as set out in TR 98/23 — Income tax: mining exploration and prospecting expenditure;
  • a stakeholder posited that the ATO could perform a 'U-turn' and apply section 99B of the ITAA 1936 more broadly beyond non-resident trusts (this example was raised by the stakeholder as a hypothetical scenario only);
  • the types of acquisitions that qualify as exploration deductions under section 40-80 of the ITAA 1997 and whether this may change in light of the decision in Mitsui & Co (Australia) Ltd v Commissioner of Taxation [2012] FCAFC 109;
  • the then proposed Division 36 to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and the now enacted Division 142 GST Act to replace section 105-65 of Schedule 1 to the Taxation Administration Act 1953 were considered by some stakeholders to be 'U-turns'. However, this issue turns on legislative change and not ATO action and therefore falls outside the scope of PSLA 2011/27; and
  • stakeholders raised concern that the ATO appeared to be seeking to re-litigate matters relating to inter-branch funds transfers, matters of which are currently dealt with by taxation ruling TR 2005/11: Income tax: branch funding for multinational banks.