Case summary
Tax Consultants
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Dear Reader
With respect to our recent conversation and meetings we are requesting you to kindly see below our advice in regard to the three important cases that was wished by you.
The ultimate scope of this letter is to provide you advice regarding the decision unfolded in three below stated cases. These are as follows;
- Weeks v. Federal Commissioner of Taxation – (25 January 2013)
- Sanctuary Lakes Pty Ltd v. Federal Commissioner of Taxation – (24 May 2013)
- Walker v. Federal Commissioner of Taxation – (14 March 2017)
The reader must note that the letter simply ignores any kind of tax consequences that would happen given that there is any kind of surplus in assets of taxpayers. The pertinent evidences as well as assumption on which the information is based is simply attached in the summary of advice. On finding that any of the facts or assumption is not in accordance with the understanding of readers, please feel free to reach us directly for the reason that this may make an impact on the assistance that is given. The current letter of advice is simply based on the essential tax laws, case law references and rulings because we understand its use in the decided cases.
We have also summarized below our view in regard to every one of the cases that is drawn above. We have attached a comprehensive conversation regarding the issues related to our guidance for your examination. We are recommending you strongly to read the conversation in respect with the assistance given.
The case involved an executive level employee named Ms Weeks that worked in ATO. After the negotiations between Ms Weeks and senior office of ATO, she was given an offer of redundancy. The redundancy offer was accepted by Ms Weeks and subsequently her employment with ATO got terminated based on the grounds that she was in excess of requirements of ATO under “sec 29 (3) (a) of Public Service Act 1999”.
After the employment termination, MS weeks got a termination payment and noticed that ATO had deducted a tax of 16.5% from her payment based on the fact that it was an Employment Termination Payment. As per Ms Weeks she deemed her termination payment as “genuine redundancy payment” within “sec 83-175 of ITAA 1997” and should be treated as tax free (Ato.gov.au 2022). Ms Weeks consequently sought a private ruling from commissioner and when the ruling failed to meet her satisfaction level, an objection against the commissioner was lodged. The objection against commissioner lodged by Ms Weeks was not successful and later sought merits review of that decision in AAT which eventually became unsuccessful.
The main subject matter is that the appellant considers that overall amount of tax which is property owed on significant part of her “redundancy payment” stands nil whereas the defendant officer considers that the tax which is payable properly stands $7,825. According to the primary judge advocate the main problem of law is if a worker that gets dismissed within “sec 29 (3) (a) of Public Service Act 1999” or “Clause 97.1 of Agency Agreement” based on the surroundings that as an excess worker to the ATO’s requirement, with respect to the sense that her service is not anymore needed (Iknow.cch.com.au 2022). Whether any sum of payment that is made with regard to termination, fall inside the word “genuine redundancy payment” within the “sec 83-175 (1) of ITAA 1997”? The main judge however replied that question negatively.
Ms. Weeks and the Genuine Redundancy Payment
The law court noticed that the plaintiff has simply failed to inaugurate that the court of law got it wrong in law or the primary judge has made a mistake as it failed to find that the Tribunal had made a mistake in law (Woellner et al. 2016). The reason for judgement noted an observation that the noteworthy query for current purpose is whether Ms Weeks was genuinely made redundant.
The members of Tribunal had referred to provisions of “sec 83-175 of ITA Act 1997” and found that payment made under genuine redundancy is considered “tax free” in the hands of previous employee. The members of tribunal noted that the distinction that was contained in clause 97 which was reflected in numerous authorities on issues involving “Dibb v Commissioner of Taxation (2004)” made very clear that redundancy happens when an employer not anymore needs the job done by anyone (Taxinstitute.com.au 2022). The circumstances where an employment disappears effectively should be differentiated from the circumstances where the employer not anymore needs a job done by the worker in question.
According to the findings of court, the employment of Ms Weeks did not disappear even though the position number had changed (Sadiq 2020). The full court in its unanimous decision dismissed the appeal of taxpayer with cost by stating that the reason that the payment which was made to taxpayer regarding termination of her employment cannot be considered as tax-free genuine redundancy payment within “subsec 83-175 (1) of ITAA 1997”. Furthermore, there was no inconsistency amid the taxpayer as an excess employee based on the requirements of “paragraph 29 (3) (a) of Public Service Act 1999” and Ms Weeks position was not genuinely redundant within “sec 83-175 of ITAA 1997”.
On a conclusive note, it is understood that a genuine redundancy happens upon the dismissal of identical classified employees. The taxpayers must understand that voluntary and involuntary payments that is made to redundant and retrenched employees normally qualify if the payment is made in respect of notice or paid as severance payment on the basis of period served and lump sum amount of gratuitous payments.
The analysis involves the outline of ATO’s response to case that concerned whether or not the taxpayer was considered eligible to numerous deductions and whether the penalties related were imposed correctly and remitted. The taxpayer was engaged in development of sanctuary lakes resort, which is a residential development located in Point Cook, Victoria. Several related entities along with the taxpayer also were considered accountable for different functions of development and while doing so the taxpayer entered in several agreements (Ato.gov.au 2022). While filing tax return for income year of 2003, the taxpayer had claimed deductions regarding losses and outgoings which was incurred under numerous agreements.
The commissioner found that the “federal court” in the case of “Sanctuary Lakes Pty Ltd v FCT (2013)” put forward that the right question at the time of remitting the penalty for a false statement cannot be expressed under the terms of harshness. Instead it involved whether the decision maker is content, with regard to the circumstances of taxpayer that it was appropriate to remit the penalty.
Sanctuary Lakes Development
Following the audit by ATO regarding the involvement of taxpayer in development, the tax commissioner issued an amended assessment where it disallowed certain number of deductions claimed. The commissioner further held the taxpayer assessable for tax with 25% administrative penalty on the alternative basis in respect of three issues based on the fact that taxpayer or its agent were failure in taking appropriate care while filing its 2003 tax return (Iknow.cch.com.au 2022). The commissioner also assessed the taxpayer based on two issues with respect to the fact that the taxpayer did not had any reasonable arguable position (RAP).
Upon review, the AAT agreed with commissioner that the taxpayer was not considered eligible to any sum of deductions that was in dispute. The AAT further decided that the numerous shortfalls in tax arose out of disappointment by taxpayer or its agent to take sensible amount of care (Kenny and Devos 2018). Nevertheless, the AAT took the decision of completely remitting the penalty that was payable in respect of single issue in dispute based on the fact that the taxpayer had RAP on that issue.
Later both the parties appealed to the “federal court” regarding the decision of AAT. In his appeal, it was argued by commissioner that the basis of AAT’s judgement to remit the penalty outstanding was not consistent with that decision of court in “FCT v Traviati (2012)”. The appeals of both parties were dismissed by full federal court (Taylor et al. 2017). The federal court also rejected special leave to taxpayer to launch an appeal to “High Court” against the judgement of “full court”. The commissioner did not seek any special leave to make an appeal in High Court.
Accordingly, the full federal court dismissed the appeal of taxpayer. The court noted that both claimed losses were of capital or capital in type and it was agreed with AAT the expenses claimed as deduction did not arise by taxpayer during the 2003 income year (Www2.deloitte 2022). In respect to the issue of penalty, the federal court agreed with judgement given in “FCT v Traviati (2012)” and dismissed the argument of taxpayer where it follows that taxpayer along with its agent should have considered any reasonable care given that it had RAP.
The federal court further rejected the appeal of commissioner. The court disagreed with views stated in “FCT v Traviati (2012)” and stated that the AAT didn’t took into account any inappropriate deliberation in using its discretion to remit penalty within “sec 298-20 of Schedule 1 of Tax Administration Act 1953” (Taxinstitute.com.au 2022). As per court it considered the fact that the taxpayer had RAP regarding the deduction issue under dispute.
The court by majority noted that the AAT did not failed to apply incorrect test within “sec 298-20”. The AAT further acknowledged that there is also a need of circumstances which can mitigate the failure of taxpayer to take reasonable amount of care and also appreciated that the specific circumstances of taxpayer was relevant to the decision.
On a conclusive note, it is not usual for taxpayer to have RAP within the income tax law, but having found to be not taking any reasonable care while making statement to commissioner, the full court noticed that having a RAP and undertaking reasonable care represents an self-governing statutory standard for applying administrative penalties. The taxpayer and its agent should have taken reasonable care while making statement given that the taxpayer had RAP within the law.
Related-Party Transactions
The taxpayer here Mr Walker has applied for review involving an objection of decision. The decision is associated to deductions claims while filing his tax return regarding the income years ending 30th June 2013 and 30th June 2014 (Ato.gov.au 2022). The taxpayer here Mr Walker claimed deductions concerning meals, groceries, accommodation, motor vehicle, caravan, internet services and mobile phone.
Upon auditing the tax affairs of Mr Walker, the tax commissioner did not allowed deductions, issued an amendment and also imposed penalties as a failure to take reasonable care (Krever 2016). An objection was rejected in regard to deduction and the taxpayer was informed that the penalties were being dealt in a separate manner and have been remitted.
The AAT confirmed the decision of commissioner to disallow the deductions for more than $25,000 concerning groceries, meals, accommodation, caravan, motor vehicle, internet and mobile that was incurred in the year 2014 and 2015 income years. Usually, travel made by taxpayer between their home and usual workplace is considered as private travel and it is not allowed as deduction. This authority was established in “Lunney v FCT (1958)”. Nevertheless, there are certain exceptions where deductions for travel is allowed to itinerant workers (Morgan 2022). The taxpayer in his argument stated that he was an “itinerant worker” and he should be considered eligible for claiming deduction which would otherwise be considered as a private cost on this basis.
The taxpayer had the lifetime experience of working on farms that also included having his own farm house. The taxpayer gathered bulk knowledge while working on strawberry fields. The taxpayer wanted to expand his knowledge further than the strawberry farms and started working at “Gaynday” in 2012 which was around 300 km from northwest of sunshine coast. The taxpayer moved to a farm in Bowen and obtained work at Stanthrope that was around 500 km from Sunshine Coast (Barkoczy 2022). All three employments were exercised by taxpayer in a successive manner during the course of same fiscal year and it went about in that order for around three years.
The AAT noted that the taxpayer cannot be considered as “itinerant worker and cited reason that the taxpayer consecutive engagements at three employer’s farm widely in accordance with three seasons of crop grown at every farm. Every single engagement was considered good for some period of months and the taxpayer lived at each place prior to moving another place.
The AAT further rejected the alternative of argument of taxpayer that he was eligible for claiming deductions on meals and lodging while staying away from home for temporary work purpose (Morgan and Castelyn 2018). The argument of taxpayer was rejected based on the grounds that his situations was distinguishable clearly from the employees that are in the course of work are obliged by their employer. Comparatively, the taxpayer travelled based on his choice.
The AAT simply rejected the claim of taxpayer that he was considered eligible for claiming deduction for travel expense amid numerous locations of work within sec 25-100 of ITAA 1997 (Maley and Maley 2018). The section permits tax deduction concerning travel made directly amongst two income producing places of work, but only if it forms the part of same employment does not go through home. In the current case, one employment of taxpayer had already stopped before the taxpayer decided to move to next place. Consequently, this provision is not applicable.
The taxpayers are required to denote that travel that is made by them amid home and their usual work place is not usually permitted for deduction within the legislative provision of “sec 8-1 ITAA 1997”. This is because, travel made between home and work place of taxpayer is treated as private travel. Any expense that is incurred while travelling to work from home must be simply ignored and the taxpayers are not entitled to get deduction. Travel expense is only permitted for deduction to taxpayer within “sec 8-1 ITAA 1997” when it is incurred between two related places of work or the nature of employment of taxpayer is of “itinerant” in type.
We hope that the current letter of advice has helped you in understanding about the tax consequences originating from the aforementioned cases. If you wish to discuss the aforementioned cases in more detail, kindly do not hesitate to reach our office.
Yours sincerely
Associate – Taxation
Smith Tax Consultants
References:
Ato.gov.au. 2022. Ato.gov.au. [online] Available at: <https://www.ato.gov.au/law/view/document?docid=%22LIT%2FICD%2FB12of2013%3BQUD210of2012%2F00001%22> [Accessed 21 January 2022].
Ato.gov.au. 2022. Ato.gov.au. [online] Available at: <https://www.ato.gov.au/law/view/document?DocID=LIT/ICD/VID520of2012andVID521of2012/00001> [Accessed 21 January 2022].
Ato.gov.au. 2022. Ato.gov.au. [online] Available at: <https://www.ato.gov.au/law/view/pdf/misc-case/rdr_2017aata324.pdf> [Accessed 21 January 2022].
Barkoczy, S., 2022. Foundations of Taxation Law 2022. Cambridge University Press.
Iknow.cch.com.au. 2022. CCH iKnow | Australian Tax & Accounting. [online] Available at: <https://iknow.cch.com.au/document/atagUio1998855sl344924145/weeks-v-fc-of-t> [Accessed 21 January 2022].
Iknow.cch.com.au. 2022. CCH iKnow | Australian Tax & Accounting. [online] Available at: <https://iknow.cch.com.au/document/atagUio2213091sl416748920/sanctuary-lakes-pty-ltd-v-fc-of-t-federal-court-of-australia-full-court-24-may-2013> [Accessed 21 January 2022].
Kenny, P. and Devos, K., 2018. Australian Small Business Taxation. LexisNexis.
Krever, R., 2016. Australian Taxation Law Cases 2016. Thomson Reuters (Prous Science).
Maley, M.N. and Maley, D.M., 2018. Australian Taxation Office Guidance on the Diverted Profits Tax.
Morgan, A. and Castelyn, D., 2018. Taxation education in secondary schools. J. Australasian Tax Tchrs. Ass’n, 13, p.307.
Morgan, J., 2022. Re Walker and FCT – Deductions for travel, accommodation, food not allowed as taxpayer not an itinerant worker – Tax Technical. [online] Tax Technical. Available at: <https://taxtechnical.com.au/re-walker-and-fct-deductions-for-travel-accommodation-food-not-allowed-as-taxpayer-not-an-itinerant-worker/> [Accessed 21 January 2022].
Sadiq, K., 2020. Australian Taxation Law Cases 2020. Thomson Lawbook Co.
Taxinstitute.com.au. 2022. Decision Impact Statement – Sanctuary Lakes Pty Ltd – The Tax Institute. [online] Available at: <https://www.taxinstitute.com.au/news/decision-impact-statement-sanctuary-lakes-pty-ltd> [Accessed 21 January 2022].
Taxinstitute.com.au. 2022. Golf course losses and expenditure not deductible – Sanctuary Lakes – The Tax Institute. [online] Available at: <https://www.taxinstitute.com.au/news/golf-course-losses-and-expenditure-not-deductible-sanctuary-lakes> [Accessed 21 January 2022].
Taylor, J., Walpole, M., Burton, M., Ciro, T. and Murray, I., 2017. Understanding Taxation Law 2018. LexisNexis Butterworths.
Timebase.com.au. 2022. Case Law: Weeks v Commissioner of Taxation [2013] FCAFC 2 (Taxation) – TimeBase. [online] Available at: <https://www.timebase.com.au/news/2013/AT035-article.html> [Accessed 21 January 2022].
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.
Www2.deloitte.com. 2022. Www2.deloitte.com. [online] Available at: <https://www2.deloitte.com/content/dam/Deloitte/au/Documents/tax/deloitte-au-tax-highlights-131014.pdf> [Accessed 21 January 2022].
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