Leading independent Australian business law firm Hall & Wilcox has become Checkbox’s first Solutions Partner. This enables Hall & Wilcox to develop quick and effective solutions in the Checkbox platform for in-house legal teams to support them in delivering legal services more efficiently.
Checkbox is a multi-award-winning platform that enables the transformation of rules-based processes and services into decision trees, document automation and workflow software, all without coding. Through the new partnership, Hall & Wilcox will be able to analyse, develop and deliver solutions to their clients and other in-house teams more rapidly.
Hall & Wilcox Director of Client Solutions Peter Campbell said Hall & Wilcox was excited to sign up as the first Solutions Partner with Checkbox.
‘We began working with Checkbox two years ago and appreciate how quickly we can develop solutions in the platform. This new partnership is an endorsement of our approach and capabilities to build and deliver solutions for clients,’ he said.
‘As we grow our legal operations practice, we have come across many in-house teams with great ideas, but they need help with the technology and implementation. Solution Partner status with Checkbox gives us the opportunity to directly help more clients to solve more problems by leveraging our skills and experience, combined with the checkbox product.
‘We are passionate about making the legal sector more efficient and scaling decision-making, workflow and document processes efficiently. Our mantra at Hall & Wilcox is Smarter Law and this partnership is a great example of our Smarter Law deep client engagement approach in action.’
Checkbox CEO Evan Wong said: ‘I’m really excited about this partnership. It’s always about delivering more value to the client. The openness, pragmatism and strong commitment underpinning this relationship makes me very confident of this new offer that is now available to our clients and the broader industry.’
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Tax integrity changes and other measures
The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 (Cth) (Bill) was introduced to the House of Representatives on 24 July 2019 and proposes to make a raft of legislative changes to improve the integrity of Australia’s tax system.
Amongst other things, the Bill seeks to make changes to the CGT small business concession as it applies to ‘Everett assignments’ of partnership interests, the process of disclosing business tax debts and the availability of deductions for vacant land. These proposed changes are discussed below.
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Small business CGT concession
If passed, the Bill will result in fundamental changes to the availability of the small business CGT concession for the assignment of partnership interests known as Everett Assignments.
Under the proposed changes the small business CGT concession will remain available for genuine disposals of membership interests in a partnership. For instance, the transfer of a membership interest in a partnership to an incoming partner or the cessation of an individual’s partnership interest.
However, the small business CGT concession will no longer be available for assignments of other rights or interests that merely result in the transfer of rights to income or capital that a partner receives from the partnership without making the other entity a partner. This captures Everett Assignments where a member of a partnership assigns a portion of their right to the income of the partnership to their spouse or other entity in order to reduce their overall tax liability.
Limiting deductions for vacant land
The Bill proposes to amend Schedule 3 of the ITAA97 to deny deductions for losses or outgoings incurred in relation to holding vacant land.
The proposed amendments will not apply to deny losses or outgoings in relation to vacant land to the extent to which the land is:

used or available for use in the course of carrying on a business in order to earn assessable income by the taxpayer, an affiliate, spouse or child of the taxpayer or an entity connected with the taxpayer;
owned by a corporate tax entity, superannuation plan (but not SMSF), managed investment trust or public unit trust; or
owned by unit trusts or partnerships of which all members are entities of the above types.

Disclosure of business tax debts
Lastly, the Bill seeks to amend the Taxation Administration Act 1953 (Cth) to enable taxation officers to disclose the business tax debt information of a taxpayer to credit reporting bureaus provided that specific safeguards are satisfied, including where the entity:

has not entered into a payment arrangement with the ATO;
does not have a complaint with the Inspector-General of Taxation about the disclosure of debt information; and
has total tax debts of at least $100,000 which have been payable for more than 90 days.

This measure is intended to strengthen the incentives for businesses to pay their tax debts on time in order to prevent their tax debt information being disclosed.
The changes are also intended to contribute to more informed decision making within the business community by enabling credit providers and businesses to make a more comprehensive assessment of the creditworthiness of a business.

$10,000 cash payment limit – Draft legislation released
The Government has released exposure draft legislation and explanatory materials for the Currency (Restrictions on the Use of Cash) Bill 2019 (Cth) (Bill), relating to the proposed economy-wide $10,000 cash payment limit.
These changes arise out of the Final Report of the Black Economy Taskforce which recommended that the Federal Government introduce a $10,000 cash payment limit for transactions between businesses and individuals.
If passed, the Bill will create new offences that apply if an entity makes or accepts cash payments with a value that equals or exceeds the cash payment limit of $10,000.
The proposed offences will be strict liability offences. This means that the offence of making or accepting a cash payment that equals or is in excess of $10,000 will be committed regardless of whether the entity intended or was reckless about whether the payment or series of payments included cash that equalled or exceeded the case payment limit.
Matching hybrid mismatches
On 24 July 2019, the Australian Taxation Office (ATO) released the new Law Companion Ruling (LCR) 2019/3 which focuses on specific elements of the hybrid mismatch rules contained in Division 832 of the Income Tax Assessment Act 1997 (Cth) (ITAA97).
The hybrid mismatch rules under Division 832 of the ITAA97 are intended to neutralise the effects of hybrid mismatches so that unfair tax advantages do not accrue for multinational groups as compared with domestic groups.
Specifically, LCR 2019/3 provides guidance on the phrases ‘structured arrangement’ and ‘party to the structured arrangement’ giving rise to the hybrid mismatch under section
832-210 of the ITAA97.

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Where a payment is made under a structured arrangement, and an entity is considered a party to the structured arrangement, Division 832 of the ITAA97 will apply to neutralise the hybrid mismatch by either disallowing a deduction or by including the amount in the entity’s assessable income.
LCR 2019/3 clarifies that the test for whether an arrangement is a ‘structured arrangement’ under section 832-210(1)(a) and (b) is an objective assessment based on the facts and circumstances that would indicate to an objective observer that a hybrid mismatch was either ‘priced into the terms’ or a ‘design feature’ of the arrangement.
A taxpayer will be considered a ‘party to the structured arrangement’ unless they can satisfy all three of the condition contained in section 832-210(3) of the ITAA97.  According to LCR 2019/3, whether these criteria are satisfied is determined objectively based on the information that would reasonably be available to the taxpayer at the time they entered into the structured arrangement or when the payment is made.

ATO decision impact statement – assessing improperly paid super benefits
The ATO has released a decision impact statement following the recent Administrative Appeals Tribunal (Tribunal) decision in the case of Wainwright v Federal Commissioner of Taxation [2019] AATA 33 (Wainwright).
The Wainwright decision, which was delivered in March 2019, handed the Commissioner both a win and a loss in respect to its ability to assess the taxpayers on superannuation benefits paid out of a self-managed super fund, otherwise than in accordance with the Superannuation Industry (Supervision) Regulations 1994 (SISR).

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The taxpayers in Wainwright were a husband and wife (together the Taxpayers) who acted as trustees of their self-managed super fund (Fund). The Taxpayers purchased a property (Property 1) in their own names for $700,000 and used $700,000 in cash from the Fund’s bank account to pay for the property plus a further $24,995 from the Fund’s account to pay the stamp duty on the transaction.
At a later date, the Taxpayers, as trustees, caused the Fund to enter into a contract with the husband to purchase the husband’s farming property (Property 2) for $1.1million. The $700,000 the Taxpayers had already withdrawn from the Fund’s account was to be treated as the Fund’s deposit for Property 2. Circumstances arose that inhibited the Taxpayers from completing the contract for the sale of Property 2 but the deposit of $700,000 was never returned to the Fund.
The Commissioner sought to include both the $24,995 and the $700,000 in the Taxpayer’s assessable income under Division 304 of ITAA97 for the relevant period.
The Tribunal affirmed the Commissioner’s assessment of the $24,995 withdrawn to cover the stamp duty payable on the Property 1 transaction. This was on the basis that the $24,995 amounted to a superannuation benefit paid in breach of the legislative requirements pursuant to subsection 304-10(1) of the ITAA97. The Taxpayers had not met any of the applicable conditions of release prescribed by the SISR.
However, the Commissioner’s decision in relation to the $700,000 was, set aside by the Tribunal. It concluded the Commissioner should have exercised his discretion under subsection 304-10(4) of the ITAA97 to exclude the $700,000 from the Taxpayer’s assessable income.
The Commissioner has a general discretion to exclude improperly obtained superannuation benefits from being assessed where the Commissioner is satisfied that it is unreasonable to do so having regard to any matter it considers relevant. A Law Administration Practice Statement will be developed to provide further clarity on this discretion.

This article was written with the assistance of Charlie Renney, Law Graduate.

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Last week, the Australian Government released its exposure draft of the Currency (Restrictions on the Use of Cash) Bill 2019 (Bill) for public consultation. While the draft Bill currently captures digital currencies by default, the Government intends to provide relief from application for digital currency.
Given that the crypto-asset industry is experiencing rapid change and development, the relief is subject to repeal or modification at any time. All those who trade, or have an interest, in crypto-assets should be aware of the new law and its potential impact.
Key changes
The Final Report of the Black Economy Taskforce recommended the Government introduce a $10,000 cash payment limit for transactions between businesses and individuals.
In its response to the Report in the 2018-19 Budget, the Government announced that it would introduce a cash payment limit for such transactions with effect from 1 July 2019. This was recently extended to 1 January 2020 in the 2018-19 Mid-Year Economic and Fiscal Outlook.
The Bill will implement an economy-wide cash payment limit of $10,000, effective from 1 January 2020 for most entities, and from 1 January 2021 for certain AUSTRAC-reporting entities.
The stated purpose of the Bill is to ensure that entities cannot make unrecorded payments, reducing their ability to participate in the black economy and undertake related illicit activities such as money laundering.
However, the draft Bill is consistent with IMF blogs and papers on implementing negative interest rates in a low interest rate environment when a recession occurs. Negative interest rates are most effective in a cashless or reduced cash economy.
In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.
When cash is available, however, cutting rates significantly into negative territory becomes impossible.1
The Bill creates new offences for entities that make or accept payments that include a cash payment that totals $10,000 or more.[2] This $10,000 threshold applies to the total price of a single supply of goods and services, including where that total is split into a series of payments. Breaching the provisions can attract maximum penalties of up to $25,200, and/or two years’ imprisonment.
Carve-out for cryptocurrency
‘Cash’ is defined in section 6 of the Bill as meaning both digital and physical currency. The Bill’s Explanatory Memorandum notes that digital currency is included as:
‘some forms of electronic payment more closely mirror physical currency. In particular, cryptocurrencies and other digital currencies are generally unregulated and do not create clear records of transactions in a form that can easily be used to identify the parties to a transaction.’
However, subsections 10(5) and 11(3) of the Bill state that the offences for breaching the cash payment limit do not apply to payments of a kind or in circumstances as are specified by the Treasurer by legislative instrument. Under the draft Currency (Restrictions on the Use of Cash—Excepted Transactions) Instrument 2019 (Instrument), digital currency is marked as an exempted form of payments.
The Instrument’s Explanatory Memorandum states that the relief reflects the Government’s recognition of both the difficulties of imposing the limit on the digital currency industry in a way that will not stifle the industry, as well as the lack of clear evidence that digital currency is presently being used in Australia to facilitate black economy activity.
Conclusions
The relief for digital currencies from the Bill is welcome news, and, together with the amended INFO 225 (which you can read about here) released earlier this year, reflects the Government’s ongoing recognition that the crypto-asset space is a fast evolving industry which is particularly vulnerable to over-regulation.
However, parties trading in cryptocurrency should be aware that the relief is provided through legislative instrument only. This is effectively a ‘weak’ form of exemption that is subject to change at any time, without Parliament’s approval. If the Government’s current stance that cryptocurrency is not integral in the black economy changes, those who trade in cryptocurrency could suddenly find themselves caught by the operation of the Act, and exposed to potential criminal liability. Careful attention should be paid to the ongoing shifting regulatory climate relating to crypto-assets.
This article was written with the assistance of Harvey Duckett, Law Graduate.

1https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-negative-interest-rates-work/ See also Enabling Deep Negative Rates to Fight Recessions: A Guide
2Currency (Restrictions on the Use of Cash) Bill 2019 ss 10, 11
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The Victorian Civil and Administrative Tribunal has recently handed down the decision of Phillips v Abel [2019] VCAT 1031 which continues the trend of pushing the boundary of what had traditionally been considered ‘retail premises’ for the purposes of the Retail Leases Act 2003 (Act).
Following the comments made by the Victorian Supreme Court of Appeal in IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd [2017] VSCA 178, the Tribunal held that, when determining whether the Act applies to a particular lease, the purpose of occupation of the tenant rather than the character of the land is the primary consideration.
In finding that a lease of largely vacant land (comprising a 250 ha sand quarry) constitutes ‘retail premises’ for the purposes of the Act, the decision is a further example of the effect of the legal test which is applied in assessing if the premises are ‘retail premises’. Significantly, the decision clarifies that even effectively empty land can constitute a ‘retail premises’ provided that a tenant fundamentally conducts a retail business from the premises.
Facts
Mr Peter Abel (Landlord) owns a large rural property in Victoria. In 2007, the previous registered owners leased part of the property, comprising 249.65 hectares (Land) to Mr Grant Phillips (Tenant) for a five year term with options for five further terms of five years each.
The Land was predominantly open pasture and was used by the Tenant to extract stone for the primary purpose of selling or using the stone commercially or for construction, building, road or manufacturing works. Over the course of its occupation, the Tenant erected some buildings and other infrastructure on the Land.
In 2012, the Tenant successfully renewed his lease for a further term of five years. In August 2016, the Tenant exercised his option for a further term, however this was rejected by the Landlord on the basis that the Tenant was in default for not paying land tax and outgoings under the Lease.
The Tenant contended that he was not liable to pay land tax or any outgoings incurred prior to being given a ‘statement of outgoings’ because the lease was governed by the Act, and in particular, section 46 which had not been complied with.
The Landlord argued that the Tenant originally leased bare land, therefore the Act should not apply because the word ‘premises’ required land with a building of some sort erected on it. On this basis, the Landlord rejected that a statement of outgoings was required to be provided and that the Tenant was liable to pay the outstanding amounts.
In order to resolve these issues, the Tribunal was asked to again consider what is a ‘retail premises’ for the purposes of the Act.
Is a sand quarry considered ‘retail premises’?
Section 4 of the Act defines ‘retail premises’ as premises that are used, or are to be used, wholly or predominantly for the sale or hire of goods by retail or the retail provision of services.
As noted above, the Tenant extracted sand, clay, gravel from the Land, and then sold these directly to customers. The Tribunal applied the ‘ultimate consumer test’ from IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd to determine whether the business conducted under the lease in fact constituted the provision of retail services.
In summary, the primary question to ask under this test is ‘are the services used by the person to whom they are sold or are the services passed on by the purchaser in an unaltered state to some third person?’ In answering this question, this requires a consideration of the service that is offered, whether a fee is paid and whether it is generally available to anyone who is willing to pay the fee.
The Tribunal found that the sand and other materials quarried by the Tenant were sold to its customers who predominantly used that sand for their own purposes. The majority of customers used the sand to create other products like concrete, roof tiles and building blocks. Other customers of the tenant (which were in the minority) also used the sand in an unaltered state for various other purposes such as in the creation of equestrian arenas, replenishing beaches or as a repacked product by garden supply companies.
The Tribunal therefore concluded that the ultimate consumer test was satisfied and that the Tenant’s business constituted the retail provision of goods and services.
Meaning of ‘premises’
The term ‘premises’ is not defined in the Act; nor has it been judicially considered in the context of the Act. Given that the Act is silent on whether bare land falls within the definition of ‘retail premises’, the Tribunal found that the definition should not be narrowly construed to exclude bare or otherwise vacant land.
As we have seen in other recent decisions in this area, the Tribunal favoured a wider interpretation of ‘retail premises’ because it is theoretically possible for a retail business to be conducted on bare land, absent any building. For example, a car park without an attendant’s kiosk or a paddock for horse agistment. As such, excluding a form of retail business on the basis that it was not conducted in a building, would be contrary to Parliament’s intention and the main purposes of the Act.
The Tribunal established that the focus should be on the purpose of occupation and in this case, it was clear that the Tenant predominantly used the Land for the retail provision of goods and services. In short, this meant that the lease in question was to be governed by the Act.
Obligation under the Act
Section 46(2) of the Act requires the landlord to give the tenant a written statement of the outgoings to which the tenant is liable to pay under the lease. The tenant, however, is not liable to pay any of the outgoings until that statement has been provided.
In failing to comply with section 46(2) and provide the Tenant with a statement of outgoings, the Tribunal held that the Tenant was not liable to pay the outstanding outgoings. The Tribunal further held that the late provision of a statement of outgoings will not retrospectively revive the Tenant’s liability for outgoings previously incurred.
Key takeaways

The expanding examples from cases of what are considered ‘retail premises’ means that more leases are likely to be subject to the provisions of the Act. Because of this, there may be an increase in tenants seeking to exercise their rights under the Act.
There is a risk for landlords that tenants may also seek reimbursement of past payments which were made pursuant to the lease but not permitted to be charged under the Act. There are various potential defences which may be open to landlords depending on the circumstances.
In this case, the question of whether the provisions of the Act applied was used by the tenant to exercise an option which would otherwise not have been possible because of the Tenant’s subsisting default for failure to pay land tax and outgoings. This demonstrates that whether a lease is governed by the Act can have wide ranging implications.
The existence of buildings or other infrastructure is not a mandatory requirement for premises to be considered ‘retail premises’ under the Act. As this case demonstrates, leases of bare land can potentially fall within the scope of the Act.
Landlords should carefully scrutinise all existing and future leases if they are unclear in order to determine whether they are subject to the provisions of the Act. A failure to comply with the Act can have serve consequences for Landlords, including an inability to recover outstanding arrears and outgoings.
Landlords should start by considering the purpose of the occupation and then apply the ‘ultimate consumer test’. If the land is used wholly or predominantly for the retail provision of goods and services, unless an exception applies, the lease will be governed by the Act and the Landlord will be subject to various obligations.

This article was written with the assistance of Anne Wong, Law Graduate.
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Last week, the Federal Government introduced a revised bill into Parliament to establish the National Sports Tribunal.1 This follows an earlier draft bill introduced into Parliament in February 2019 which did not proceed due to the recent Federal election.
The creation of a National Sports Tribunal was a key recommendation of the Wood Review of Australia’s Sports Integrity Arrangements which published its final report and recommendations in August last year. We consider that the reintroduction of the National Sports Tribunal legislation is a signal of intent from the Government that it is motivated to see key recommendations of the Wood Review implemented in the short to medium term.
The revised bill
The new draft of the proposed legislation contains some minor amendments to the earlier bill, however the fundamental features of the proposed tribunal remain the same. In particular, it remains the Government’s intention that the business of the tribunal be separated into three divisions – an anti-doping division, a general division and an appeals division.
Although the wording of the proposed legislation is now known, much of the operational aspects of the tribunal which will have a particular impact for sporting organisations will be provided for in the ‘rules’ of the tribunal. These rules will be implemented by separate regulations which are yet to be publicly released.
Key considerations for sporting organisations
As the draft legislation progresses through Parliament, some key considerations for sporting organisations are likely to include:

How the rules of each sporting body will interact with the proposed new National Sports Tribunal having regard to the potential advantages the tribunal may present; and
The identification of particular disputes by each sporting body which will be referrable to the tribunal’s general division.

We have started to advise sporting organisations to assist them to understand and navigate the proposed new legislative regime and we would be glad to discuss these recent developments with you.
We will be continuing to monitor the progress of the draft bill through Parliament and we will be publishing further updates to our networks and on our website at key milestones.

1a copy of the wording of the proposed bill and the explanatory memorandum can be accessed here.
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In Australia, it’s estimated that around 15,000 people may live in conditions of modern slavery, forced labour, wage exploitation, human trafficking or debt bondage.1 The introduction of the Modern Slavery Act 2018 (Cth), which commenced on 1 January 2019, aims to minimise modern slavery practices in the Australian market by requiring large businesses to report on modern slavery risks in their operations and supply chains, and actions taken to address these risks.
New mandatory reporting requirements will be imposed on Australian entities (including Commonwealth government entities), and foreign entities carrying on business in Australia, with an annual consolidated revenue of at least $100 million. Other entities may choose to report voluntarily.
Modern Slavery Statements must detail information about:

the entity’s structure, operations and supply chains;
the potential modern slavery risks associated with the entity’s structures, operations and supply chains (plus those of any entities it owns or controls);
actions that were taken by the entity (or any entities it owns or controls) to assess and address those risks;
how the entity assesses the effectiveness of those actions; and
the process of consultation of the entity with any entities it owns or controls.

In April 2019, the Department of Home Affairs released its Draft Guidance for Reporting Entities which details the practical steps entities should follow to comply with the reporting requirement. In summary, an entity must:

Identify whether it is required to report;
Prepare a Modern Slavery Statement which responds to each mandatory criterion;
Have the Modern Slavery Statement approved by the entity’s Board or other principal governing body, and signed by a responsible member of the entity;
Provide the Modern Slavery Statement to the Department to be published online.

The first Modern Slavery Statement required under the Act must be submitted by 30 June 2020 (for calendar-year-reporting entities) or 31 December 2020 (for financial-year-reporting entities). After that, entities will be required to report annually. Modern Slavery Statements will be kept in a public online repository.
Accordingly, entities who are required to report should commence a risk analysis, and update policies, procedures and contracts with subcontractors to ensure that risks are identified and ideally eliminated. Hall & Wilcox would be pleased to assist.
NSW employers should also be aware that similar State legislation is being considered, having been sent back to the drawing board in June 2019. The Modern Slavery Bill 2018 (NSW) would apply to commercial entities with an annual turnover of at least $50 million and at least one employee in NSW who supply goods and services for profit. This represents a much lower threshold than the Act. In further contrast to the Act, the NSW Bill provides for penalties in circumstances where an entity fails to comply with its reporting obligations with penalties of up to 10,000 penalty points (currently $1.1 million). NSW employers should be keenly watching the progress of the Bill to determine what future compliance requirements may look like.
For assistance in preparing your Modern Slavery Statement, or advice on how the new Act impacts you, contact Alison Baker or David Burnton.

1https://www.globalslaveryindex.org/2018/findings/country-studies/australia/
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Debt deductions under the thin capitalisation rules
On 17 July 2019, the Commissioner of Taxation (Commissioner) released Taxation Determination (TD) 2019/12, which clarifies what types of costs are considered to be debt deductions within the scope of Australia’s thin capitalisation regime.
This is important for determining an entity’s quantum of debt funding for an income year, before comparing it to its maximum allowable debt calculated under the rules.
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Specifically, the ruling addresses section 820-40(1)(a)(iii) of the Income Tax Assessment Act 1997 (Cth) (ITAA97) which defines a ‘debt deduction’ to include a cost incurred in relation to a debt interest, to the extent to which the cost is:
‘any amount directly incurred in obtaining or maintaining the financial benefits received, or to be received, by the entity under the scheme giving rise to the debt interest.’
In TD 2019/12 the Commissioner has provided the following non-exhaustive list of costs that are considered within the scope of section 820-40(1)(a)(iii):

costs of tax advisory services giving rise to or in connection with the debt capital;
establishment fees;
fees for restructuring a transaction;
stamp duties;
regulatory filing fees (for example ASIC lodgement fees);
legal costs of preparing documentation associated with the debt capital;
costs to maintain the right to draw down funds; and
any costs considered to be borrowing expenses under section 25-25 of the ITAA97.

Pursuant to the thin capitalisation provisions contained in Division 820 of the ITAA97, all or part of a debt deduction that is claimed during an income year will be disallowed when the claiming entity’s adjusted average debt exceeds its maximum allowable debt.
Taxpayers seeking to claim debt deductions need to be conscious of the potential for expanded debt capital amounts other than interest expenses (for example ASIC lodgement fees) being included in the debt calculation.

Churning out new guidance
On 17 July 2019, the Commissioner provided final guidance on the operation of the churning provisions contained in section 716-440 of the ITAA97 by releasing the Law Companion Ruling (LCR) 2019/2.
Broadly, the consolidation churning measures have the effect of switching off entry tax cost setting rules in certain circumstances involving foreign owners ceasing to hold membership interests in a joining entity.

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Australian groups undertake a transaction that results in obtaining an uplift to the tax cost base of certain Australian assets under the tax consolidation regime, where:

the foreign vendor ceases to hold membership interests in the joining entity (or a higher level entity which holds the interest) within the specified 12 month test period;
the foreign vendor was not taxable on the capital gain pursuant to Division 855 of the ITAA97; and
there was no change in the underlying beneficial ownership of the Australian group as a result of the transaction.

Specifically, LCR 2019/2 addresses some difficulties in interpreting the eligibility criteria contained in section 716-440 and supplements the Explanatory Memorandum to the Treasury Laws Amendment (Income Tax Consolidation Integrity) Act 2018 (Cth), by providing various practical examples.
Taxpayers should be cognisant of the churning rules and updated ATO guidance when considering restructures of foreign owned Australian tax groups.

Commissioner negligent? Maybe
Justice Wigney of the Federal Court has added another instalment in the ongoing dispute against the Commissioner in Farah Custodians Pty Limited v Commissioner of Taxation [2019] FCA 1076.
In early 2017 Farah Custodians Pty Ltd (Farah) filed an originating application against the Commissioner in respect of alleged misdealing by the Commissioner who made refunds to an account controlled by Farah’s tax agent, who the ATO suspected of engaging in fraudulent activity.
In his decision, Justice Wigney found that it was at least reasonably arguable that the Commissioner owed Farah a duty of care, and breached that duty.

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From late 2012 to early 2014, Farah had engaged the services of a registered tax agent (Agent). The Agent set up a bank account that was held by a company he controlled and directed that the refunds due and payable by the Commissioner on Farah’s Running Balance Account surpluses be paid into that account. Farah however, never instructed or authorised the Agent to nominate that account.
In the originating application filed against the Commissioner in 2017, Farah alleged that several ATO officers had been investigating the activities of the Agent and were aware of the risk that the Agent may have been attempting to redirect refunds payable to clients to entities he controlled and that he had not been remitting those refunds to clients. Farah also claimed that these ATO officers had failed to inform it of this risk and continued to pay the refunds into the account controlled by the Agent despite their concerns about his potentially fraudulent activity.
Most recently, Farah sought the leave of the Court to amend its pleadings to include a claim for negligence by the Commissioner. This was on the basis that the Commissioner, the Commonwealth or its employees and agents owed Farah a duty of care in relation to the payment of the refunds that arose from their knowledge of the risks posed by the Agent’s conduct. Farah also sought to have the Commonwealth joined as a party based on the argument that the Commonwealth could be held vicariously liable for breaches by the Commissioner or the ATO officers involved.
Justice Wigney ultimately agreed and granted leave to Farah to amend its pleadings to include a claim of negligence against the Commissioner as the Commissioner was not, at this early stage, able to demonstrate that Farah’s claims were not reasonably arguable. This was the case despite Justice Wigney noting that the common law duty of care alleged by Farah was ‘undoubtedly novel’ and may ultimately be found to be unsustainable at trial. Wigney J also granted leave to add the Commonwealth as a party to the proceeding.
While this dispute is still a long way from a fully contested hearing, the Commissioner will, no doubt, be keen to put to bed the possibility of any future claims of negligence against the Commissioner or other ATO officers arising from similar circumstances. On the other hand, taxpayers with prior grievances about the Commissioner’s conduct will be watching this case with interest.

This article was written with the assistance of Charlie Renney, Law Graduate.

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In brief
A mortgage-backed loan by a non-bank lender was recently set aside by the Supreme Court of Victoria.
The borrower successfully argued that the lender engaged in unconscionable conduct. This was despite the borrower having provided a solicitor’s certificate and accountant’s certificate to the lender prior to draw down.
The lender’s solicitor had a system of using an intermediary so as to deliberately avoid obtaining any information regarding the borrower (other than a valuation of the property). This system, which attempted to ‘immunise’ the lender and its solicitor, was strongly criticised by the Court and had the opposite effect.
In detail
The judgment delivered by Justice Robson is detailed and followed a long trial (Jams 2 Pty Ltd & Ors v Stubbings (No 3) [2019] VSC 150). Key points of interests are as follows.
NCCC
A loan is not regulated by the National Consumer Credit Code if the borrower is a company.
In this matter, the borrower was a company but it had never traded and had no assets. The guarantor and mortgagor was an individual. The monies advanced were used to benefit the guarantor and not the borrower company.
Despite these facts and others, the guarantor was unsuccessful in arguing that the loan to the company was a ‘sham’ and was in fact made to the guarantor. In reaching this conclusion, the Court looked at the terms of the loan documentation and followed other decisions where guarantors were unsuccessful in making this ‘sham’ argument.
Solicitor’s and accountant’s certificates
As is common practice, the lender required the guarantor to obtain certificates of independent advice from a solicitor and accountant. The guarantor did so, but the Court gave no weight to the certificates.
This was because of a set of unusual facts.
First, the advice given by the solicitor and accountant appeared to be woeful. A negligence claim against the solicitor was settled and the claim against the accountant was successful.
Second, the solicitor and accountant were chosen by the intermediary. The court disapproved of the intermediary’s general conduct, and found that the lender’s solicitor must have suspected that the guarantor would be guided by the intermediary as to which solicitor and accountant to approach. The Court found that this conduct was part of the system adopted by the lender’s solicitors to immunise the firm from knowledge that might threaten the enforceability of the loan. For example, the Court found that the lender’s solicitor knowingly and deliberately failed to make any inquiries about the guarantor’s financial position.
Third, the lender’s solicitor knew the accountant and solicitor would only be paid if the loan was approved and that there was no incentive for them to withhold the certificates if they were not satisfied that the guarantor understood the documentation.
Unconscionable conduct
The guarantor alleged the loan was unconscionable because the lender took advantage of his special disadvantage under the principles of Commercial Bank of Australia Ltd v Amadio.
The guarantor had repeatedly failed school-level mathematics. He was unable to calculate 10% of an amount and his demeanour at trial indicated he was ‘completely lost, totally unsophisticated, incompetent and vulnerable… he behaved, much as you would expect a child to behave’.
The group of individuals which together made up the ‘lender’ had no dealings with the guarantor. It was their solicitor who sourced the opportunity to lend money via an intermediary and then took it to his clients. The lender relied upon a valuation procured by the lawyer and had no knowledge of the borrower or guarantor. However, the conduct of the lender’s lawyers was attributed to the lender as its agent.
The Court held that the lender acted unconscionably for the following reasons:

The lender’s lawyers had a deliberate system to ensure they did not ascertain any information on the guarantor’s financial circumstances and ability to service the loan, particularly in circumstances where they believed that there was a real risk he may not have had a sufficient income.
The lender’s lawyers knew that the loan they were involved in making could cause severe damage to the guarantor if he could not service the loan.
The lender’s lawyers relied on the intermediary to obtain the relationship with the guarantor and took deliberate steps to ensure they did not know what the intermediary had told the guarantor or what the guarantor understood about the loan.
The lender’s lawyers attempted to ‘immunise themselves’ from the taint of any knowledge that might expose them to a claim they acted unconscionably. For example, they chose not to meet with the guarantor or obtain information from him, and tried to use the intermediary as a ‘shield’.
The intermediary made false representations to the guarantor, or at least knew the guarantor misunderstood the loan.
The failure of the lender’s lawyers to utilise the lender’s right to obtain information from the borrower.
The system of conduct used by the lender’s lawyers to procure and make the loan.

The take-aways
The particular facts relating to the guarantor and lender’s solicitor make this an unusual case. There are, however, several important lessons for all lenders:

A deliberate strategy of wilful blindness is fraught with risk.
Asset-based lending itself is unlikely to be found to be unconscionable. However, when taken with other factors it can lead to a finding of unconscionable conduct.
A lender should avoid being involved in payment arrangements for independent solicitors and accountants. Such professionals should be engaged and paid by the guarantor and they should have no financial interest in whether the guarantor goes ahead with the loan.
Beware of intermediaries. While the court found that the intermediary was not an agent of the lender, the lender was still tainted by his conduct because the lender’s lawyer deliberately used him in a (failed) attempt to shield themselves.
A corporate borrower is effective to avoid the operation of the NCCC. While there is now a substantive amount of case law confirming this, we think this remains a potential area of risk and expect that given the ‘right’ facts a borrower will succeed in establishing the sham argument. Lenders should be very careful in how they explain and impose a requirement that borrowers must be a company.

The post Mortgage set aside by the Supreme Court of Victoria for unconscionable conduct appeared first on Hall & Wilcox.

Vague, incomplete and ambiguous valuation clauses in shareholders agreements are traps for the unwary and create unintended consequences.
Shareholders Agreements often include valuation provisions to be invoked when one party wishes to sell its shares or upon the forced transfer of shares in a breach situation. Two cases in the New South Wales Court of Appeal (one recent; the other not so) illustrate how the drafting of these provisions requires careful consideration.
In Network Ten Pty Ltd v. TX Australia Pty Ltd [2018] NSWCA 312, the Court looked at circumstances affecting Network Ten’s shareholding in TXA following the appointment of a receiver and manager to Network Ten in June 2017.
TXA was a joint venture entity into which each of Network Ten, Nine Network and Seven Network tipped transmission equipment and assets in exchange for one third of the equity each. The TXA Shareholders Agreement provided (as they often do) that, if there were a material breach, the defaulting shareholder would be taken to give a transfer notice to the other shareholders covering its entire shareholding in TXA. Needless to say, the appointment of a receiver and manager would constitute an event of default, triggering these deemed transfer provisions. The price for the defaulting shareholder’s shares was to be agreed between the defaulting shareholder and TXA, or, failing that, “a price determined by [TXA’s] auditor [acting] as an expert [and] whose decision [would] be final and binding.”
PwC was TXA’s auditor and they proceeded (with some difficulty, it must be said, bearing in mind the absence of valuation guidelines or criteria) to value Network Ten’s TXA shares. They adopted a market value approach. Their valuation report put forward a number of scenarios (including an ‘as is’ scenario, a scenario involving Network Ten entering into a long term access agreement with TXA and various scenarios assuming an arms’ length access agreement between TXA and a hypothetical third party), each resulting in a different valuation of TXA. A discounted cash flow methodology was used in each case.
In the event, no long term access agreement was entered into between TXA and Network Ten, so the ‘as is’ scenario (resulting in a net liability valuation for the whole of TXA and a ‘nil’ valuation on the Network Ten’s shares in TXA) was adopted by the non-defaulting parties. On that basis, Network Ten’s shares in TXA were deemed offered to, and taken up by, Network Seven and Nine Network for a dollar each. In fact, the spread of values given in the PwC report for the whole of TXA ranged between a net liability amount (the one adopted by TXA and the non-defaulting shareholders) and $42.9 million (the latter assuming a long term contract between TXA and Network Ten).
It is obvious why this case ended up in Court.
At first instance (TX Australia Pty Ltd v Network Ten Pty Ltd [2018] NSWSC 559), the judge, Justice Stevenson, ruled that PwC had done what was required by the contract and had determined the price payable for Network Ten’s shares (even though the report included a range of values without preferring or fixing a particular price). The judge also ruled that PwC had not erred in basing their valuation on the concept of market value even though the contract required the price to be determined.
The Court of Appeal reversed the primary judgement on the ground that the PwC report had not determined the price for Network Ten’s shares in TXA, but, rather, had put forward a series of valuation scenarios, leaving the non-defaulting parties to select the one they considered most appropriate.
However, on the issue of market value, the Court of Appeal agreed with the primary judge. The issue before the Court was how a reasonable businessperson would have understood the provision requiring the auditor to determine the price for the shares, having regard to “the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be served by the contract”.

Applying this principle, Chief Justice Bathurst put forward a number of grounds for the price to be determined on the basis of objective factors (rather than on a subjective basis giving effect to relative fairness and equity between the parties).
First, the objective of the price determination provisions was to enable a price to be determined promptly in the absence of agreement between the parties. The requirement for promptitude left little scope for the auditor to have regard to subjective issues.
Secondly, the price so determined would be the price at which the non-defaulting shareholders could either acquire the defaulting shareholder’s shares or procure their sale to a third party. The fact that the shares could end up in the hands of a third party suggested the need for an objective determination of value.
Thirdly, the fact that the parties had chosen the auditor to make the determination pointed to a determination of price by reference to ordinary valuation considerations with which the parties, as sophisticated commercial entities, would have been familiar. Such valuation considerations would have been matters that an auditor would have been well-qualified to take into account (as distinct from an enquiry based on what was just and equitable between the parties). On that basis, the price was to be determined as “the price, in cash or in kind, which would be obtained for the property in question in an arm’s-length dealing between a willing but not anxious seller and a willing but not anxious buyer”.
Practical issues when negotiating and drafting Shareholders Agreements
Courts are often reluctant to rewrite commercial contracts, but this case illustrates the willingness of the NSW Court of Appeal to interpret ambiguous or ineffective valuation provisions to achieve business effectiveness (or something resembling it).
It is rare for modern Shareholders Agreements to leave significant issues – such as share valuation at the point of the parties’ separation – to chance. Typically, these provisions call for the determination of market value (a well understood, if not always clear, concept), or fair market value (to which, see further below), or they include a level of prescription designed to make the expert’s job easier (provided the prescription is consistent and logical). However, clarity is not uniform or universal, and examples where a price or value is to be agreed between the parties, or determined by an expert (but no further guidance is provided on how that is to be achieved), are encountered relatively frequently.
This case suggests that Courts in New South Wales may fill a void by interpreting the parties’ presumed intention (based on a reasonable business person’s understanding in all the circumstances) to determine value by reference to the market (or exchange) value concept. Whilst there may be situations where leaving valuation of shares to market or exchange value will be advantageous (e.g. where prescription is likely to become irrelevant or outdated), this approach disregards special valuation considerations which may be intrinsic in a particular relationship. Leaving determination of value to judicial exegesis of the relevant provisions (which is likely to involve consideration of a range of factors and hypotheses outside the parties’ control and understanding) is akin to playing a high stakes game of cards. This may not end well for all or any concerned.
Determination of “fair market value” can be an imprecise and paradoxical exercise
Quite often, Shareholders Agreements require the fair market value of shares to be determined upon separation of the parties. Fair market value is a frequently used composite expression, so you could be forgiven for thinking that it has become a reliable and intuitive concept. But this is not the case (as the Court of Appeal decision in MMAL Rentals Pty Ltd and Others v. Bruning [2004] NSWCA 451 illustrates).
The judgment was delivered in 2004, but the reasoning of the Court still represents the law in New South Wales.
MMAL Rentals was the investment vehicle (owned as to 81.75% by Mitsubishi Motors and 18.25% by Mr Bruning) which owned 80% of Kingmill (Australia) Pty Ltd, the company which was Australian franchisee of the car rental business, Thrifty. The remaining 20% of Kingmill was owned by the franchisor, Thrifty Inc. of the USA. Kingmill had a management agreement with Mr Bruning for his services. In the previous decade (i.e. up until 1984), Mr Bruning had been an owner and manager of the Australian franchise of Thrifty. In 1990, Mitsubishi acquired the old Thrifty Australian franchise business (which was on the verge of insolvency) with a view to supplying the franchise with Mitsubishi vehicles. Mitsubishi invited Bruning to participate in the venture, and Bruning invested his own money to acquire 18.25% of the shares in the investment vehicle, MMAL Rentals.
The investment agreement between Mitsubishi and Bruning (in relation to MMAL Rentals) provided that, if the management agreement between Bruning and Kingmill terminated, then Mitsubishi could purchase Bruning’s shares in MMAL Rentals for their fair market value. Fair market value was to be agreed between the parties, or, failing that, determined through an expert process.
In 1997 (following a two year extension), the management agreement was terminated by Kingmill, and Mitsubishi exercised its option to purchase Bruning’s shares in MMAL Rentals. The parties could not agree fair market value for the shares, and, having dispensed with the expert determination process, they headed straight to the Equity Division of the NSW Supreme Court with their respective valuation experts. The expert evidence adduced by Mitsubishi was that, using a net asset valuation (bearing in mind earnings were negligible), Bruning’s shares in MMAL Rentals were worth only $59,000. The evidence adduced by Mr Bruning (relying on a more complex, industry specific methodology (which involved significant normalisation of earnings)) was that the fair market value of the shares was closer to $6 million.
The primary judge, Chief Justice Young, rejected both sets of expert evidence – see Bruning v. MMAL Rentals Pty Ltd (2004) 136 IR 124. In relation to the net assets approach adopted by Mitsubishi, the primary judge commented that this method was as useful as valuing the Sydney Harbour Bridge on the basis of its scrap metal value, a basis of valuation which would have no regard to the Bridge’s considerable value to the community. The judge observed that the available information relating to fair market was limited, but that the role of the Court was to do the best it could with the evidence before it. This should serve as a stark warning to those drafting and negotiating key provisions of shareholders agreements.
The Court of Appeal (led by Chief Justice Spigelman) affirmed Chief Justice Young’s primary judgement, but varied the orders. The following points are key:

The requirement to determine a market value (albeit one qualified by the word ‘fair’) did not involve determining what was just and equitable as between the parties (as would be the case with fair value), but, rather, pointed towards an objective standard. That said, the word ‘fair’ still had “work to do.”
It was not possible to set out in abstract terms how a fair market value should be computed.

The ‘fair’ component suggested that valuation should proceed on the assumption that there were no impediments to the process of bargaining (such as inequality of information between the parties, the existence of restraints or restrictions in the articles of association, the rights of third parties (e.g. financiers, licensees or franchisors) or otherwise). This was the case even when at odds with the facts of a particular relationship or situation. The primary judge used similar reasoning to dismiss the argument that a net asset valuation based on a hypothetical liquidation should exclude goodwill because ‘fair’ (according to the judge) demanded consideration of a theoretical liquidation which would preserve goodwill, and not an actual liquidation which would allow the franchisor to terminate the franchise and take back the all-important airport desks.
That said, in order to be included in the valuation mix, an issue would still need to inhere in the property which was the subject of the valuation. The exercise was still to determine an objective value for the relevant property – just one grounded in the actual relationship, rather than the hypothetical transaction-based relationship between a willing (but not anxious) buyer and a willing (but not anxious) seller.
The fact that MMAL Rentals had substantial accumulated losses and substantial debt owing to its parent did not detract from the special potentiality or value that the Company represented to Mitsubishi (which had no intention of winding the company up). On that basis, net asset value was irrelevant for valuation purposes. This special potentiality should be taken into account when determining the fair market value of the Bruning shares. The special potentiality (or special value) included the benefit of preserving a sales channel for vehicles. Further, the chance to avoid having to deal with a third party investor with no involvement in the underlying business operations was in itself valuable (even though the Company’s articles of association prevented transfers of shares to third parties – see third point above). This might encourage greenmailing by the minority, the Court found, but that was neither illegal nor improper.
Past discussions about value resulting in an offer to purchase shares may well be relevant evidence of value and serve to establish a floor price. The context to this was that Mitsubishi had, the previous year, told Bruning that his shares were worthless. When Bruning offered to buy Mitsubishi’s shares on that basis, Mitsubishi instead offered Bruning excess of $500,000 for his shares (an offer which was obviously not accepted at the time). In the opinion of Spigelman CJ, where the Company’s financial position and performance had been substantially the same at the time of the offer as they were presently, then it would be absurd to exclude evidence of the offer from the present proceedings.
Applying a discount factor for a minority shareholding was irrelevant where the valuation exercise involved an assessment of special potentiality or value to the purchaser. Conversely, the fact that the asset held special value for the purchaser did not mean that fair market value should have regard to future financial benefits (e.g. profits and cost savings) that the purchaser would enjoy by moving to 100% ownership. The test was what a prudent person in the purchaser’s position would be willing to pay rather than lose the relevant asset. This brought the matter back to the objectivity of the market or exchange value methodology.

Lessons when drafting Shareholders Agreements
Whilst fair market value is still a market value based concept, it nevertheless allows subjective factors to encroach. The Court of Appeal would not support this view – after all, market value is an objective standard, the determination of which does not involve an enquiry into what is just and equitable between the parties (which is a fair value test). However, there is no other reasonable explanation for seeking to put a value on factors which are personal or subjective to the purchaser (e.g. the special value in preserving core business strategy by maintaining an existing sales channel, or the imputed desire not to deal with a new minority investor not otherwise involved in the business – although Mitsubishi probably was not Robinson Crusoe on that particular island).
In any event, the fair market value concept can be difficult, unintuitive and paradoxical.
The problem with this paradox is that it is likely to result in an outcome which fails to live up to the parties’ expectations and commercial goals. As the primary judge in the proceedings said, it is the role of the Court to do the best job that it can with the evidence available to it. The scarcer the evidence, the more arbitrary and less empiric the outcome (if the matter is litigated or arbitrated). Judges are not valuers. And how, in any event, would one go about valuing special potential or value? Parties to shareholders agreements should also be careful with prior discussions and offers where the primary measure is fair market value. As we see in the last case, an offer made (but rejected) subsequently gained unforeseen relevance.
If you are negotiating a shareholders agreement, beware the (fair market) value trap and other similar concepts which are often taken for granted, but little understood (if actually considered).
We would be happy to help you avoid these and other pitfalls in your next shareholders agreement.
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Significant reputational damage is not the only issue companies should be aware of in cases of erroneously underpaying staff, as discovered by MAdE Establishment (MADE) after entering into a Court-Enforceable Undertaking (EU) with the Fair Work Ombudsman (FWO) last week.1
The beginning of the underpayment issues date back to 2015 when the FWO issued a letter of caution to MADE, the company of which George Calombaris is founding shareholder and former director (from 2008-2018), concerning the underpayment of one of its employers at the recently closed restaurant ‘Press Club’.
Two years later, MADE self-reported to the FWO after identifying a range of circumstances where it failed to correctly pay employees from 2011 – 2017.
The FWO subsequently commenced an investigation into MADE’s group of companies: Press Club and Gazi restaurants in Melbourne’s CBD and Hellenic Republic restaurants in Brunswick, Kew and Williamstown. The FWO also extended its investigation to restaurants operated by Jimmy Grants Pty Ltd, as it has common shareholders and directors with MADE.
The investigation uncovered the extent to which staff were underpaid. The amount totalled $7,832,953 for 515 former and current employees at MADE restaurants and $16,371 for nine employees at Jimmy Grants. The underpayments were a result of the restaurants either paying employees annualised salaries and failing to ensure the salaries were above minimum requirements once overtime and penalty rates were worked, or not paying employees, particularly casual employees, at the correct classification under the Restaurant Industry Award 2010.
In addition to the $7.83 million in back-payment, the EU requires MADE to pay a $200,000 contrition payment.2 MADE must self-fund external auditors to check workers’ pay and conditions. They are also required to, at their own cost, publish public written apologies on social media, their website and in prominent positions in the Weekend Australian, Saturday Age, and Saturday Herald Sun.
George Calombaris also finds himself with personal obligations. Under the EU, Calombaris must complete seven public speaking engagements to educate the restaurant industry about workplace law compliance. The speeches must be ‘communicated in a manner that is consistent with George Calombaris’ usual language and style’.3
The Fair Work Ombudsman, Sandra Parker said this EU:
‘…commits MADE to stringent measures to ensure that current and future employees across their restaurant group are paid correctly…MADE’s massive back-payment bill should serve as a warning to all employers that if they don’t get workplace compliance right from the beginning, they can spend years cleaning up the mess’.4
Ms Parker also said:
‘[t]he Fair Work Ombudsman is cracking down on underpayments in the Fast Food, Restaurant and Café sector, and we urge employers to check if they are paying their staff correctly’.5
The Fair Work Ombudsman’s approach in targeting employer non-compliance is consistent with that of the Government. Attorney-General and IR Minister Christian Porter recently commented that:
‘[t]he Government supports further measures to protect vulnerable workers and ensure law-abiding Australian employers are not undercut by unscrupulous competitors…[b]y adding criminal sanctions to the suite of penalties available to regulators for the most egregious forms of workplace conduct, the Government is sending a strong and unambiguous message to those employers who think they can get away with the exploitation of vulnerable employees’.6
Implications for employers
Accordingly, it is vital that employers (particularly in the restaurant and fast food industries) are aware of their obligations with respect to employee entitlements under applicable workplace laws. They should be aware of the myriad of ways in which a company could, even inadvertently, underpay its employees. These may include:

payment of hourly rates less than the prescribed minimum rates of pay;7
failure to pay penalty rates, overtime, allowances and any applicable loadings;
any form of deprivation of an employee’s statutory leave;
any inappropriate deductions from wages;
work being performed ‘off the books’; or
any form of ‘sham contracting’ or commission-only arrangements.

Underpayment not only places the company at financial risk (serious breaches by a company in relation to payment under a modern award could result in fines of up to $630,000 per breach) but also its directors, and in some cases, senior employees at risk if they are involved in the conduct.
Therefore, we recommend all employers adopt the following risk minimisation strategies:

ensure they have in place robust systems and processes that monitor compliance with applicable legislation and applicable statutory instruments, such as modern awards;
regularly (and at least yearly) conduct reconciliations to ensure annualised salaries are sufficient to compensate for minimum entitlements under applicable awards and make payments for any shortfalls detected;
ensure all employees with responsibilities for human resources and payroll are appropriately trained; and
seek legal advice if any non-compliance is detected.

Our Employment team would be pleased to assist your business to navigate the complexities arising from any wage-related issues.

1https://www.fairwork.gov.au/about-us/news-and-media-releases/2019-media-releases/july-2019/20190718-made-establishment-eu-media-release
2The contrition payment is to be made to the Commonwealth Government’s Consolidated Revenue Fund.
3Enforceable undertaking between The Commonwealth of Australia and MADE Establishment Pty Ltd (ACN: 132 388 857)
4https://www.fairwork.gov.au/about-us/news-and-media-releases/2019-media-releases/july-2019/20190718-made-establishment-eu-media-release
5https://www.fairwork.gov.au/about-us/news-and-media-releases/2019-media-releases/july-2019/20190718-made-establishment-eu-media-release
6Coalition seeking to criminalise bad employer conduct: PM, Workplace Express, 24 July 2019
7Fair Work Ombudsman v Ohmedia Melbourne Pty Ltd [2015] FCCA
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Funds and financial products
ASIC consults on relief for foreign providers of funds management services to Australian professional investors
On 3 July, ASIC released Consultation Paper 315 Foreign financial services providers: Further consultation (CP 315), and related material, in which ASIC is proposing to provide licensing relief for foreign financial services providers of funds management services in Australia to professional investors.
CP 315 sets out ASIC’s proposal to:

provide funds management relief by exempting foreign providers from the requirement to hold an AFSL to provide services to professional investors in Australia, subject to conditions including a proposed cap on the scale of activities that may be undertaken in Australia; and
repeal the licensing relief known as ‘limited connection’ relief, which ASIC previously proposed in Consultation Paper 301 Foreign financial services providers. ASIC states that foreign financial services providers may still access the proposed new funds management relief and the licensing exemptions in the Corporations Act and Corporations Regulations.

ASIC states that it has decided against giving relief for the situation where an Australian professional client initiates an inquiry or request to a foreign service provider operating outside Australia (reverse solicitation) due to the lack of information from industry about how it would be used and ASIC’s concerns about monitoring compliance with its conditions.
ASIC has also decided to:

extend the ‘limited connection’ relief to 31 March 2020 while ASIC continues its consultation; and
extend the ‘sufficient equivalence’ relief to 31 March 2020 to allow foreign providers to engage with the details of the guidance. The new foreign AFS licensing regime will commence on 1 April 2020. The draft updated RG 176 attached to CP 315 provides guidance on how foreign providers may apply for the foreign AFS licence.

Consultation closes on 9 August.
ASIC consults on its administration of its new product intervention powers and on its first use
On 26 June, ASIC released Consultation Paper 313 Product intervention power (CP 313). In announcing the release, ASIC stated that the product intervention power is an incredibly important addition to ASIC’s regulatory toolkit.
For an analysis of CP 313 and related material, see our article.
Following CP 313, on 9 July ASIC released Consultation Paper 316 Using the product intervention power: Short term credit (CP 316). In CP 316, ASIC is consulting on its first proposed use of its product intervention power in address significant consumer detriment in the short term credit industry. ASIC states that it is targeting a model involving a short term credit provider and its associate who charge fees under separate contracts which, when combined, these fees can add up to around 990% of the loan amount.
Consultation on CP 313 closes on 7 August and for CP 316 comments closed on 30 July.
ASIC amends fees and costs class order to align with Protecting Your Super Package laws
On 21 June, ASIC announced it amended [CO 14/1252], which deals with fees and costs disclosures, to ensure it is consistent with the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 and Regulations (PYSP), which ban exit fees from 1 July 2019.
ASIC states the amendment made:

is technical only;
applies to disclosure concerning superannuation products;
reflects the PYSP ban on exit fees for these products by eliminating the line allowing for disclosure of exit fees; and
does not otherwise make any change to the requirements set out in [CO 14/1252].

Anti-money laundering
ASIC issues guidance about protecting against share sale fraud
In June, ASIC issued Information Sheet Protecting against share sale fraud (INFO 237).
INFO 237 gives guidance to AFS licensees about how they can mitigate the risks to their clients and business of share sale fraud.
Consumer credit
APRA finalises amendments to guidance on residential mortgage lending
On 5 July, APRA announced that it will proceed with proposed changes to its guidance on the serviceability assessments that authorised deposit-taking institutions (‘ADIs’) perform on residential mortgage applications.
In a letter to ADIs issued on 5 July, APRA confirmed its updated guidance on residential mortgage lending will no longer expect them to assess home loan applications using a minimum interest rate of at least 7 per cent. Common industry practice has been to use a rate of 7.25 per cent. Instead, ADIs will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate.
Other financial services regulation
ASIC consults on proposals to ban unsolicited telephone sales of life insurance and consumer credit insurance
On 18 July, ASIC released Consultation Paper 317 Unsolicited telephone sales of direct life insurance and consumer credit insurance, in which ASIC seeks to consult on its proposal to ban unsolicited telephone sales of direct life insurance and consumer credit insurance (CCI). ASIC states that such a ban is consistent with the Financial Services Royal Commission recommendations, and that later this year it will review Regulatory Guide 38 The hawking provisions. Consultation closes on 27 August.
On 11 July, ASIC published REP 622 Consumer credit insurance: Poor value products and harmful sales practices. ASIC states that it reviewed of the sale of CCI by 11 major banks and other lenders and found that the design and sale of CCI has consistently failed consumers.
APRA Capability Review report released
On17 July, the Government released the report of the APRA Capability Review Panel, along the Governments Response to the APRA Capability Review.
The Panel made 24 recommendations, with 19 directed to APRA and the remaining five directed to the Government.
The Treasurer, Josh Frydenberg, stated that the Government has agreed to take action on all five of the recommendations directed to it, and in addition the Government will:

ensure that APRA has sufficient powers and flexibility to prevent inappropriate directors and senior executives from being appointed or re-appointed to regulated entities, as part of extending the Banking Executive Accountability Regime;
consider changes to APRA’s regulatory framework including a review of penalties, amending its private health insurance licensing powers and providing APRA with the power to appoint a person to undertake a review of a regulatory entity;
in establishing the Financial Regulator Oversight Authority, streamline and improve the effectiveness of both APRA and ASIC’s accountability arrangements;
outline its expectations for APRA on superannuation in its next Statement of Expectations; and
work with APRA and the Australian Public Service Commission to better understand and address any restrictions within the current APS Bargaining Framework in order to ensure APRA can attract and retain high skilled staff.

In its response, APRA states that:

APRA supports all of the 19 recommendations in the report directed at APRA, with work already underway on many as part of APRA’s current Corporate Plan;
APRA will continue to focus on its core mandate of safeguarding financial system stability as it expands capability in other areas; and
the Review recognises APRA’s remit has expanded, proposes an ambitious further extension and highlights the additional resourcing and Government support needed to achieve this.

APRA releases frequently asked questions on Prudential Standard SPS 515 Strategic Planning and Member Outcomes and outcomes assessment
On 11 July, APRA released three frequently asked questions (FAQs) on the development of Prudential Standard SPS 515 Strategic Planning and Member Outcomes and the introduction of an annual outcomes assessment resulting from recent legislative changes to the Superannuation Industry (Supervision) Act.
ASIC consults on whether to remake class order on departed former temporary residents’ superannuation
On 10 July, ASIC released Consultation Paper 318 Remaking ASIC class order on departed former temporary residents’ superannuation: [CO 09/437], which outlines ASIC’s rationale for proposing to remake [CO 09/437]. ASIC’s preliminary view is that this class order is operating appropriately and effectively, and it continues to form a necessary and useful part of the legislative framework.
[CO 09/437] provides conditional relief to superannuation trustees from obligations in the Corporations Act that require trustees to provide an exit statement and notice to departed former temporary resident members.
ASIC also states that it plans to repeal [CO 09/210] Intra-fund superannuation advice, because it was made in 2009 and its relief has been redundant since the repeal of section 945A of the Corporations Act.
Consultation closes on 21 August.
ASIC provides new guidance for certain AFS licence applications
On 5 July, ASIC released Information Sheet 240 AFS licensing – Requirements for certain applicants to provide further information (INFO 240), which ASIC states provides guidance to applicants on recent changes to ASIC’s AFS licensing assessment procedures.
INFO 240 requires certain AFSL applicants, including body corporate applicants APRA-regulated applicants, to provide additional information to ASIC.
ASIC approves an updated Banking Code of Practice
On 28 June, ASIC announced that it approved an updated version of the Australian Banking Association’s (ABA’s) new Banking Code of Practice.
The approval is contained in ASIC Corporations (Approval of Banking Code of Practice) Instrument 2019/663.
APRA consults on its proposed approach to product responsibility under the Banking Executive Account
On 28 June, outlined its proposed approach to implementing the Financial Services Royal Commission recommendation on product responsibility for ADIs under the Banking Executive Accountability Regime (BEAR).
APRA released a letter to ADIs detailing how it intends to achieve heightened and clarified product accountability among senior executives. Specifically, APRA proposes requiring ADIs to identify and register an accountable person to hold end-to-end product responsibility for each product the ADI offers to its customers, including retail, business and institutional customers.
The letter requests feedback on four key considerations relating to implementing the proposed product responsibility requirements: the scope of accountability; product coverage; the structure of the legal mechanism; and the application of joint accountability within ADIs and ADI groups.
Consultation closes on 23 August.
APRA releases response on changes to reporting requirements for registered financial corporations
On 28 June, released a response letter on the consultation on proposed changes to reporting requirements for registered financial corporations (RFCs).
The proposed changes to the Economic and Financial Statistics data collection relate to the consolidation for securitisation special purpose vehicles.
APRA finalises updated guidance on information security
On 25 June, released updated prudential guidance to all APRA-regulated entities on managing information security risks, including cyber-crime.
Prudential Practice Guide CPG 234 Information Security replaces CPG 234 Management of Security Risk in Information and Information Technology. APRA considers the updated guide will assist regulated entities to embed and comply with the requirements of APRA’s new cross-industry prudential standard, CPS 234 Information Security, which comes into force on 1 July.
APRA prepares for new laws granting approval powers for changes in control of super licensees
On 24 June, released for consultation a draft application form and a draft instruction guide for applications to acquire a controlling stake in a registrable superannuation entity (‘RSE’) licensee.
From 5 July, any party seeking to acquire greater than a 15 per cent stake in an RSE licensee must apply to APRA for approval. The new process stems from the passage in April of Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Act 2019, and which APRA states brings APRA’s change of ownership powers in superannuation in line with the banking and insurance sectors.
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Income protection and superannuation insurance payments: assessable or not?
In YCNM and Federal Commissioner of Taxation [2019] AATA 1592, the Administrative Appeals Tribunal (AAT), found that a lump sum payment made under an income protection insurance policy was partly assessable as income under section 6-5 of the Income Tax Assessment Act 1997 (Cth) (Act). The AAT concluded that the portion of the lump sum attributable to a superannuation contribution insurance policy was not assessable as income.
The decision is a reminder that the tax character of insurance proceeds is to be determined by the nature of those proceeds in the hands of the recipient, rather than the terms of a deed of release or settlement deed. To the extent the insurance proceeds are a replacement for what would have been income, it will be assessable as income.
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In 2003, the Taxpayer began to suffer from severe depression and anxiety that prevented him from being able to work. Fortunately, the Taxpayer was covered by Salary Continuance Insurance and Superannuation Contributions Insurance and made a claim in mid-2003.
The insurer accepted the claim and after a period of almost 10 years the Taxpayer and the insurer entered into a deed of release, under which the Taxpayer received a lump sum payment. The ATO included the full amount in the Taxpayer’s assessable income and the Taxpayer sought a review of this decision.
The Taxpayer argued that because, under a settlement deed, he had given up any rights to future claims against the insurer, the lump sum payment was capital in nature.
The Taxpayer also submitted that his receipt of the lump sum did not give rise to a capital gain because the lump sum was equal in value to the cost base of the rights that had been relinquished under the settlement deed. In the alternative, the Taxpayer argued that any capital gain was exempt from CGT pursuant to section 118-37 of the Act as the CGT event related to compensation or damages for a wrong, injury or illness suffered by the Taxpayer.
Ultimately, the AAT found largely in favour of the Commissioner, concluding that part of the lump sum payment was assessable as income. Additionally, the AAT found that the receipt of the lump sum payment did not give rise to a capital gain.
The AAT found that the settlement deed, under which the Taxpayer’s rights were released, did not dictate the character of the receipt. Rather, the AAT confirmed that the quality of the receipt in the hands of the recipient (here, the Taxpayer) is the determinative factor.
In doing so, the AAT followed the principle articulated in the decisions in McLaurin v. FC of T1 and Allsop v. FC of T2, and in the ATO’s Taxation Ruling TR 95/35,3 that a lump sum payment may be dissected into its component revenue and capital elements where the amounts of those components are calculable.
The AAT found that the amount attributable to the monthly salary continuance claim (approximately 88.2%) was assessable as ordinary income under section 6-5 of the Act. This was because the relevant lump sum amount was designed to be a replacement for the income that the Taxpayer would otherwise have received had the injury not occurred.
The AAT concluded that the amount payable under the superannuation contribution continuance claim (approximately 11.8%) was not income and therefore not assessable under section 6-5.
Finally, the AAT considered whether, to the extent that any capital gain had been made by the Taxpayer, it would be disregarded under section 118-37. This section allows taxpayers to disregard gains or losses relating to compensation or damages received for any wrong or injury suffered by the taxpayer. The AAT found that, if the lump sum were to be returned as a capital gain, it would be disregarded under section 118-37 because the capital gain arose from a CGT event relating directly to compensation or damages received by the Taxpayer for a wrong, injury or illness suffered by the Taxpayer.

A tricky business
In Hill and Federal Commissioner of Taxation [2019] AATA 1723, the Administrative Appeals Tribunal (AAT) considered whether the Taxpayer was carrying on a business of share trading, which would allow the Taxpayer to claim or carry forward a series of losses that had been incurred in the 2015, 2016 and 2017 income years.
Ultimately, the AAT affirmed the decision of the Commissioner that the Taxpayer was not carrying on a business of share trading.
This decision serves as a reminder to investors that whether or not their share trading activities constitute the ‘carrying on a business’ is not a straight forward issue. Those looking to claim deductions incurred in the course of share trading should seek professional guidance.
On the flip side, investors making gains and seeking to treat them as capital gains rather than ordinary income need to be careful that their activities don’t constitute carrying on a business.

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The Taxpayer retired in 2010 and decided to invest his superannuation in the Australian share market along with a $600,000 investment loan. The Taxpayer suffered large losses in the first two years of trading and had to recommence work in order to repay the investment loan.
The AAT accepted that the Taxpayer had made a very significant investment into the share market and that a ‘business’ may operate ‘on the side’ without needing to occupy the majority of a person’s working life. However, these factors alone did not establish that the Taxpayer was carrying on a business so as to enable him to claim a deductible loss under section 8-1(1)(b) of the Income Tax Assessment Act 1997 (Cth).
The AAT, considering the totality of the Taxpayer’s circumstances, determined that he was not carrying on a business of share trading. In so concluding, the AAT had particular regard to the following factors:

the infrequency of trading together with numerous periods of no trading;
the lack of an established system of trading and the irregularity of trading activities;
the Taxpayer’s commitment to full time work in the aviation industry for the majority of the period giving rise to the impression that share trading was a ‘side issue’;
the Taxpayer’s failure to arrange his share trading activities in a business-like manner;
the fact that the Taxpayer did not incorporate a trading vehicle or register a business name or trading name;
the Taxpayer’s decision not to engage any professionals such as stock brokers or financial planners despite having no formal qualifications himself;
the lack of record keeping that would have enabled accurate profit and loss or other financial statements to be prepared;
the research conducted was unsophisticated and relied heavily on Foxtel, Commsec and Westpac publications as well as what could be found on the internet generally; and
the fact that the Taxpayer’s business plan was unsophisticated and contained very little detail.

Aggregation of Dutiable Transactions
The NSW Chief Commissioner of State Revenue has released updated revenue ruling DUT 036v3 (Ruling) which covers the aggregation of dutiable transactions pursuant to section 25 of the Duties Act 1997 (NSW) (Act). The Ruling seeks to outline the manner in which section 25 of the Act will be applied and, whilst it refers to transactions of real property, is applicable to all forms of dutiable property.
Aggregation effectively increases the amount of duty paid – the benefit of progressive duty rates only applies once to the single aggregated transaction (rather than to each separate transaction), and the higher aggregated dutiable value may fall into higher rates of duty.

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Under section 25 of the Act, dutiable transactions are to be aggregated and treated as a single dutiable transaction if the following circumstances apply:
The dutiable transactions occur within 12 months
Pursuant to the Ruling, where there is more than one dutiable transaction occurring on different days, the 12 month period will commence from the date of the first dutiable transaction that is to be aggregated.
Transferor is the same or transferors are associated persons
‘Associated persons’ is defined in the Act and if there are more than two different transferors under the dutiable transaction then all of them must be associated persons.
Transferee is the same or transferees are associated persons
Similarly to transferors, the Ruling provides that if there are more than two different transferees under the respective dutiable transactions, then all of them must be associated persons for the aggregation rules to apply.
The dutiable transactions constitute substantially one arrangement
The Ruling provides that whether or not dutiable transactions give effect to, or arise from what is, substantially, one arrangement is determined at the time the dutiable transactions are entered into. The Chief Commissioner has also accepted that dealing with separate properties jointly but subsequently to purchase is not, of itself, sufficient to characterise the initial transaction as one arrangement.
The Chief Commissioner has also provided a helpful list of examples of transactions that would constitute ‘one arrangement’ for the purpose of section 25 of the Act.

This article was written with the assistance of Charlie Renney, Law Graduate.
1(1961) 104 CLR 381.
2(1965) 113 CLR 341.
3TR 95/35, paragraphs 190-196.

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The Australian Taxation Office (ATO) has provided useful guidance and ‘safe harbours’ for when the executors or beneficiaries of a deceased estate can access the Capital Gains Tax (CGT) main residence exemption for a property that was the deceased’s main residence at the time of their death.
Sales within 2 years of death
Ordinarily, the CGT main residence exemption is available on a disposal of the deceased’s main residence by the executors or estate beneficiaries provided they ceased to own the property within 2 years of the date of death.
Crucially, the requirement that ownership must cease within 2 years means that, in the context of a sale of the property, it is not enough for the executors or beneficiaries to have signed a contract of sale within 2 years. Instead, settlement of the contract must have occurred within 2 years. Given many purchasers, or their banks, will require a 90 day settlement period, executors and beneficiaries need to be acting in a timely manner in order to ensure the 2-year timeframe is satisfied.
Commissioner’s discretion beyond the 2-year limit
The CGT rules provide the Commissioner of Taxation with a discretion to extend the 2-year timeframe.
In recognition of this discretion, the ATO has released Practical Compliance Guideline PCG 2019/5EC outlining when they will generally allow a longer period and also providing a safe harbour compliance approach under which executors and beneficiaries can self-assess the discretion as having being exercised.
Safe harbour
Taxpayers can treat the Commissioner’s discretion as having been favourably exercised provided each of the following conditions are met:

During the 2-year post-death period, more than 12 months was spent addressing one or more of the following circumstances:

ownership of the property or the will was challenged;
a life or other equitable interest created by the will delayed disposal of the property;
delays arose in completing the administration of the estate caused by the complexity of the estate; or
settlement of the sale was delayed or fell through due to reasons outside the executor’s or beneficiary’s control.

The dwelling was listed for sale as soon as practicable after the relevant circumstances were resolved and the sale was actively managed to settlement.
The sale settled within 12 months of listing.
The following circumstances were immaterial to the delay:

waiting for the property market to improve;
delays due to refurbishment to improve the sale price;
inconvenience in arranging the sale; or
unexplained periods of inactivity by the executor in administering the estate.

The additional period for which the discretion is needed does not exceed 18 months.

Taxpayers should maintain records to support their claim that they are eligible for the safe harbour.
This safe harbour will be especially beneficial in instances where the estate is caught up in a claim for further provision under Part IV of the Administration and Probate Act, or there are concerns regarding the validity of a Will (given these Court proceedings often take more than 12 months to resolve).
When will discretion be favourably exercised?
Taxpayers who do not meet the requirements for the safe harbour may still request the Commissioner exercise his discretion in the form of a private binding ruling application.
As a general rule, the ATO will exercise the discretion to allow longer than 2 years to cease owning the property where:

it could not be sold and settled within 2 years due to reasons beyond the executor’s or beneficiary’s control; and
those reasons existed for a significant part of the 2 years.

The ATO will take into account all the surrounding facts and circumstances.
Examples of favourable facts and circumstances include those listed above at 1. Additional favourable facts may include:

the sensitivity of personal circumstances of surviving relatives; and
difficulties in locating beneficiaries to prove the will.

Unfavourable factors include those listed above at 4.
Importantly, it is the cause of the delay rather than the period of the delay that the ATO will focus on in deciding whether to exercise the discretion. For instance, even a very short delay beyond the 2-year limit will not lead to a favourable discretion decision in the absence of any of the relevant circumstances. Conversely, an extended delay will not, of itself, prevent a favourable decision.
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Leading Australian law firm Hall & Wilcox is pleased to have advised the sellers on the sale of shares in Salmar Investments and its subsidiary Salmar Holdings, trading as Beecroft Nursing Home, in Beecroft, NSW. The 95-bed facility had been owned by the same family since 1965.
The aged care sector is facing significant challenges and Hall & Wilcox is working with providers to navigate these challenges. Over the past 12 months, Hall & Wilcox’s specialist Health & Community team has advised on the sale of a number of residential aged care facilities and aged care places, including Beecroft. The team has also advised aged care providers on directors duties (including on solvency), financial structuring and mergers and acquisitions.
The sudden closure of Earle Haven Retirement village at Nerang, Queensland, on 11 July, leaving residents homeless, sent shockwaves through the industry. With the Royal Commission into Aged Care Quality and Safety, and the introduction of new Aged Care Quality Standards, many approved providers are looking to exit in the short or medium-term.
Health and community industry specialist and partner Alison Choy Flannigan and property partner Maurice Doria advised on all aspects of the Beecroft sale to Thompson Health Care.
Alison said the deal involved working collaboratively with the teams at aged care consultants Pride Living and accountants RSM to complete the sale in a tight timeframe.
‘We achieved a very good outcome for our client, who was interested in both optimising the sale price and also finding a buyer with the right culture who would look after staff and residents going forward,’ Alison said.
‘Our team are industry leaders and has a proven track record in the health and aged care sector and we understand the unique regulatory requirements for health and aged care mergers and acquisitions, providing clients with specialist expertise in corporate and commercial transactions and sector knowledge.’
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The interaction between debt and equity rules and Transfer Pricing
The Australian Taxation Office (ATO) has said that the income tax rules and transfer pricing rules ‘can be read to operate harmoniously’.
In that regard, the ATO has released Tax Determination (TD) 2019/10 to clarify that the debt and equity rules in Division 974 of the Income Tax Assessment Act 1997 (Act) do not impact the transfer pricing rules in Subdivision 815-B of the Act.
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Subdivision 815-B
Section 815-115 of the Act (substitution of arm’s length conditions between separate entities) applies to cross-border dealings in circumstances where an entity receives a transfer pricing benefit that differs from the benefit they would have received had the transaction been conducted between independent entities at arm’s length.
In those circumstances, arm’s length conditions are taken to operate, rather than the actual conditions, for the purposes of determining the entity’s taxable income, taxable loss, tax offset or withholding tax payable.
Division 974
Division 974 of the Act applies to determine whether a particular scheme or funding arrangement gives rise to a debt or equity interest. This is important in determining whether a dividend has been paid, whether withholding tax applies (and at what rate) and if the payments relating to the relevant interest are deductible as interest repayments or frankable as dividends.
Interaction
Section 815-110(1) of the Act provides that nothing in the Act limits the operation of Subdivision 815-B (including section 815-115).
Accordingly, Division 974 of the Act does not impact upon the operation of Subdivision 815-B and has no application when determining whether cross-border transactions are conducted at arm’s length. Instead, in determining whether or not there is a transfer pricing benefit from the funding arrangment, Division 974 applies to classify interests that arise under a scheme as either debt or equity by reference to arm’s length conditions, and not to the actual conditions prevailing at the time.

Effective life of depreciating assets: new Income Tax ruling
Taxation Ruling (TR) 2019/5 came into effect on 1 July 2019 and has replaced the former ruling on depreciating assets, ‘TR 2018/4’. The ruling explains the methodology used by the Commissioner of Taxation when calculating the effective life of depreciating assets and assists taxpayers when making their own estimates.

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Most notable, compared to the previous ruling, TR 2019/5 provides new effective life determinations for assets used in the following industries and industry activities:

banking, building society and credit union operations;
creative and performing arts – performing dogs;
residential property operators;
retirement village and accommodation for the aged operation;
scientific testing and analysis services – mineral processing and metallurgical laboratory; and
wholesale trade.

Rewrite of South Australia’s Stamp Duty legislation: open for consultation
RevenueSA has announced that the Stamp Duties Act 1923 (SA) will be rewritten and is seeking feedback on how South Australia’s duty legislation could be improved.
The main purposes of the rewrite are to reduce complexity and compliance costs for taxpayers, abolish parts of the legislation that are counterproductive, and facilitate the efficient administration of the legislation. The rewrite is intended to be revenue-neutral and is not intended to amend existing government policy.
With the exception of Northern Territory, all other Australian States and Territories have introduced a new ‘Duties Act’ since 1997, giving South Australia the benefit of basing their rewrite on what has and has not been effective in other jurisdictions. South Australia will also have the benefit of being able to ‘tidy up’ their legislation by leaving out heads of duty that no longer apply.
Those looking to contribute feedback to the rewrite may do so through the following link. Consultations will close on 26 July 2019.
NSW Amendment Act receives Royal Assent
The State Revenue and Other Legislation Amendment Bill 2019 (NSW), which implements the state tax changes announced in the NSW 2019-20 Budget, received royal assent on 1 July 2019 and took effect from that date.
The new legislation has resulted in a raft of changes to duty, land tax and payroll tax in NSW. Our comments on these changes can be found at the following link.
This article was written with the assistance of Charlie Renney, Law Graduate.

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On 19 June 2019, the High Court delivered its judgment in one of the most hotly anticipated insolvency judgments this year, the Amerind appeal: Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth.1
The High Court unanimously dismissed the appeal, upholding the Victorian Court of Appeal’s decision and confirming (although for differing reasons) that:

A trustee’s right of indemnity or exoneration falls within the broad definition of ‘property of the company’ for the purpose of section 433 of the Corporations Act 2001 (Cth) (Act).
To the extent that trust assets realised by the insolvent corporate trustee are ‘circulating assets’, those proceeds must be distributed in accordance with the statutory priorities under sections 433, 556 and 560 of the Act.
The proceeds of trust assets realised under a trustee’s right of exoneration may only be applied in satisfaction of trust liabilities to which the right of indemnity relates. Trust assets cannot be applied to non-trust debts.

The decision provides much-needed clarity, and a practical approach, regarding distribution of trust assets in the insolvency context (particularly in light of conflicting state authorities).
However, insolvency practitioners must remain vigilant when assessing their distribution obligations under the Act. This is particularly so for insolvent administrations involving complex trading trusts, fund managers, or corporate trustees who simultaneously conduct business in their own capacity.
Facts
Amerind Pty Ltd (Amerind) carried on a business solely in its capacity as trustee of the Panel Veneer Processes Trading Trust. To finance the trust’s business activities, Amerind maintained credit facilities with the Bendigo and Adelaide Bank (Bank), which took security (including a general security agreement (Security Deed)) over Amerind’s assets. Amerind defaulted, and the Bank subsequently terminated the facilities and appointed receivers and managers (Receivers) to recover the debt owed to the Bank. The Bank’s debt was satisfied from asset realisations, leaving a receivership surplus of $1,619,108 (Surplus).
In assessing distribution of the surplus, the Receivers were confronted with competing claims in relation to the Surplus. Relevantly:

Carter Holt Harvey, the appellant, which claimed to be a secured creditor ranking behind the Bank; and
the Commonwealth of Australia (via the Fair Entitlements Guarantee Scheme) (FEG), the first respondent, which had paid $3.8 million in accrued wages and entitlements to former employees of the Amerind.

The Receivers applied to the Court for directions on how to distribute the Surplus.
Decision at First instance
At first instance, Justice Robson in the Supreme Court of Victoria held that the trustee’s right of indemnity is not personal property, but rather held on trust for the benefit of the trust creditors. Therefore, it is not ‘property of the company’ within the meaning of the Act. In the alternative, Justice Robson reasoned that, even if the trustee’s right of indemnity was ‘property of the company’ for the purpose of section 433 of the Act, it was not ‘comprised in or subject to a circulating security interest’ created by the Security Deed. Accordingly, the statutory priorities of distribution under the Act (including the priority for employees) did not apply. The result of Justice Robson’s judgment was that FEG would lose its statutory priority and rank pari passu with other unsecured creditors, behind the secured creditors.
Decision on Appeal
The Court of Appeal overturned the decision of Justice Robson and re-established the application of the Act’s statutory priorities to trust assets. Considering the reasoning of the High Court’s decision in Octavo,2 as well as the superior court decisions in Re Suco Gold3 and Re Enhill4, the Court accepted that a trustee’s right of exoneration created a proprietary interest in the trust asset which passed to the liquidator. In those circumstances, the statutory priorities of distribution under the Act must be followed when distributing the proceeds of those realised trust assets.
Decision by the High Court
While the Court was unanimous in dismissing the appeal, three separate judgments were delivered. The divergence in the Court’s reasoning provides an insightful exposition of the history, nature and application of a trustee’s right to indemnity. However, from a practical perspective, each judgment arrives at the same conclusion.
Key Issue 1: Is the trustee’s right of indemnity, and the proceeds of the trust assets realised, ‘property of the company’ for the purpose of section 433 of the Act?
The High Court found that the right of indemnity and exoneration was ‘property of the company’ and therefore that the statutory priorities under the Act applied. The divergence lay in what precisely the Court considered constituted the ‘property of the company’ for the purposes of section 433 of the Act.
In the joint judgment of Chief Justice Kiefel, Justice Keane and Justice Edelman, it was reasoned that the trustee’s right of exoneration itself was a circulating asset and therefore was ‘property of the company’ coming into the hands of the Receiver for the purposes of section 443 of the Act.
In a second joint judgment, Justice Bell, Justice Gageler and Justice Nettle disagreed that the trustee’s right of indemnity itself was a circulating asset. Instead, they held that the trust assets themselves (of which the trustee had a beneficial interest in through it rights of exoneration) determined the nature of the asset which was the relevant ‘property of the company’. Because the relevant trust assets were circulating, they remained circulating assets in the trustee company’s hands. This reasoning was endorsed by Justice Gordon, who similarly concluded that the trustee’s right of indemnity created a proprietary interest in the trust assets, and it was that interest that was the relevant ‘property of the company’.
Key issue 2: Does the statutory priority in section 556 of the Act apply?
Yes. Justice Bell, Justice Gageler, Justice Nettle and Justice Gordon held the statutory order of priority for the payment of unsecured creditors in section 556 of the Act applies to the distribution of the proceeds of realisation of a trustee’s right of indemnity. By doing so, they accepted that the reasoning in Re Suco Gold should be preferred over Re Enhill. Whilst the judgment of Chief Justice Kiefel, Justice Keane, and Justice Edelman did not expressly state this, their reasoning also leads to that natural conclusion.
It likely follows that court approval is not required for a liquidator of a trading trust to pay properly approved remuneration and costs from the trust fund that were properly incurred in acting as liquidator.
It remains to be seen how confident liquidators will be to rely upon this and the extent to which court approval may still be sought. Liquidators also still need a power of sale in respect of trust assets if there are insufficient trust funds to draw their remuneration and costs from.
Key Issue 3: Can the trust assets of an insolvent corporate trustee be used to satisfy non-trust (or general) liabilities of the corporate trustee?
Although it was not strictly required for determination, the Court considered whether the proceeds of realised trust assets (through the right of indemnity) could be distributed in satisfaction of the corporate trustee’s non-trust liabilities.5
The Court unanimously held that proceeds realised from trust assets could only be used to satisfy trust liabilities which gave rise to the trustee’s right of indemnity. The Court held that the Victorian decision in Re Enhill6 (which in effect permitted trust assets to be applied to creditors generally in a liquidation) was wrong. Instead, the approach adopted in the South Australian decision of Re Suco Gold7 was correct; a trustee’s right of exoneration could only be applied in satisfaction of the trust liabilities to which the right of exoneration relates.
Conclusions
The decision will be welcomed by the insolvency profession, as it provides practitioners with a clear and practical way forward when dealing with trust assets. From a public policy perspective, the decision is consistent with the principle that employees of an insolvent company ought to enjoy a priority to other creditors for their unpaid salary and leave entitlements.
Although not relevant in the present appeal, the Court recognised the difficulties faced by practitioners administering an insolvent corporate trustee which is the trustee of multiple trusts. The Court indicated that practitioners ought to follow the approach set out by Cheif Justice King in Re Suco Gold, by keeping separate funds. If there remains uncertainly, the insolvency practitioner should apply to the Court for directions.
Finally, the Court noted that its decision did not resolve all issues in the insolvent corporate trustee context, including competing priorities between trust creditors (after payment of the statutory priorities), and the application of the doctrine of marshalling (which is where a trust creditor has access to more than one pool of assets). Given the proliferation of the corporate trading trust as vehicle for undertaking commerce, it is only a matter of time before these issues are considered by a superior court.
This article was written with the assistance of Norberto Rodriguez, Law Graduate.

1[2019] HCA 20
2Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360
3Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99
4Re Enhill Pty Ltd [1983] 1 VR 561.
5In the present appeal, all creditors were ‘trust creditors’ including the appellant, and the Commonwealth through its right of subrogation of employee entitlements under section 556 of the Act.
6Re Enhill Pty Ltd [1983] 1 VR 561.
7Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99
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After a backflip from Labor, the Government has found the numbers in the Senate to push through all three stages of its personal income tax cuts.
The Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 (Bill) was approved by the Senate on 5 July 2019, and has passed through Parliament without any amendments. The Bill is currently awaiting royal assent from Australia’s new Governor General, David Hurley AC DSC.
The Bill is set to deliver $158 billion in personal income tax cuts to low and middle-income earners over the next ten years. Almost 10 million Australians are expected to receive at least a partial benefit from these measures.
Set out below are some of the important changes that will take effect the day after the Bill receives royal assent.
Bringing forward personal income tax cuts
Summary of the changes
The Bill makes several changes to the income tax brackets as well as to the marginal income tax rates.
Previously, from 1 July 2022, the 19% personal income tax bracket was to apply to a taxpayer’s income between $18,201 and $41,000. The upper end of that top threshold will now be raised to $45,000.
Similarly, from 1 July 2024, the 32.5% personal income tax bracket was to apply to a taxpayer’s income between $41,001 and $200,000. This rate will now be lowered to 30% for income between $45,001 and $200,000. Additionally, as part of the original measures under the Personal Income Tax Plan that was announced (and legislated) in 2018, the 37% tax bracket will be abolished from this date.
The tables below summarise the changes over the next 6 years.

Years ending 30 June 2023 to 30 June 2024

Taxable income
Tax on this income

$1–$18,200
Nil

$18,201–$37,000
19 cents for each $1 over $18,200

$37,001–$90,000
$3,572 plus 32.5 cents for each $1 over $37,000

$90,001–$180,000
$20,797 plus 37 cents for each $1 over $90,000

$180,001 and over
$54,097 plus 45 cents for each $1 over $180,000

 

Years ending 30 June 2019 to 30 June 2022

Taxable income
Tax on this income

$1–$18,200
Nil

$18,201–$45,000
19 cents for each $1 over $18,200

$45,001–$120,000
$5,092 plus 32.5 cents for each $1 over $45,000

$120,001–$180,000
$29,467 plus 37 cents for each $1 over $120,000

$180,001 and over
$51,667 plus 45 cents for each $1 over $180,000

 

Income years ending 30 June 2025 onward

Taxable income
Tax on this income

$1–$18,200
Nil

$18,201–$45,000
19 cents for each $1 over $18,200

$45,001–$200,000
$5,092 plus 30 cents for each $1 over $45,000

$200,001 and over
$51,592 plus 45 cents for each $1 over $200,000

Low and middle-income tax offsets raised
The low and middle-income tax offset (LMITO) will now be increased.
The previous maximum LMITO available will be increased from $530 to $1,080 per annum, with the base amount increasing from $200 to $255 per annum.
The increased LMITO will be available for returns lodged for the income year ending 30 June 2019. The LMITO will remain available for the income years ending 30 June 2020 to 30 June 2022, after which it will be removed.
Subsequently, from 1 July 2022, the low-income tax offset (LITO) will be increased.
The LITO will be increased from $645 to $700. The full LITO will be available to people with taxable income of less than $37,500. It will progressively be phased out for those with income between $37,500 and $66,667.
The tables below summarise the changes.

Low and Middle Income Tax Offset (LMITO)
(available in the 2018-19, 2019-20, 2020-21, and 2021-22 income years)

Taxable Income
Revised LMITO

$0-$37,000
$255

$37,001-$48,000
$255 plus 7.5 cents for each $1 over $37,000

$48,001-$90,000
$1,080

$90,001-$126,000
$1,080 less 3 cents for each $1 over $90,000

 

Low Income Tax Offset (LITO)
(available from 1 July 2022)

Taxable Income
Revised LITO

$0-$37,500
$700

$37,501-$45,000
$700 less 5 cents for each $1 over $37,500

$45,001-$66,667
$325 less 1.5 cents for every $1 over $45,000

Reflections
While there is no doubt that taxpayers will be excited by the cuts to income tax rates and the raised low and middle-income tax offset, it should be kept in mind that the projected $158 billion in income tax cuts are to be delivered over the course of the next decade. In that time, Australia will experience two full election cycles and it is possible that the changes may be rolled back by subsequent governments.
Regardless, the flattening of the progressive marginal tax rate scale is a win for simplicity. With the reduction of the 32.5% rate to 30%, and the removal of the 37% tax bracket by 2024-25, 94% of Australian taxpayers are projected to have a tax rate of 30% or less.
Unlike the marginal tax rate cuts, the change to the LMITO will be more immediate, with Australian taxpayers benefitting when they lodge their returns from 1 July 2019. However, the increase in the LITO is not scheduled to take effect until 1 July 2022, after the completion of another election cycle.
This article was written with the assistance of Charlie Renney, Law Graduate.
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Leading independent business law firm Hall & Wilcox has expanded its national Litigation and dispute resolution and Insolvency practices with the appointment of new partner Hector West, who joined the firm on 8 July.
Hector will be based in the Perth office and adds further depth to our national growth in the commercial dispute resolution and insolvency areas. Hector has extensive experience in insolvency and bankruptcy and he also works in general commercial litigation involving PPSA advice and disputes, contractual disputes, tax disputes and shareholder disputes.
Hector’s industry sector specialisation is in the financial services and professional services sectors, acting for a range of clients including insolvency firms, accounting firms, financiers and corporate/commercial clients.
Managing partner Tony Macvean said Hector’s experience would add significantly to the firm’s national capabilities, particularly in the insolvency area.
‘Hector’s skills and knowledge will benefit our clients in navigating any challenges ahead and help them thrive,’ he said.
Partner Graydon Dowd said Hector was a great addition to the national team.
‘Hector brings a wealth of experience with him that will assist our clients around the country. We are looking forward to Hector helping with the continued growth of our national commercial dispute resolution and insolvency practices,’ Graydon said.
Hector said: ‘It is an absolute delight for me to join the energetic and very dynamic Hall & Wilcox team. It will be a pleasure to assist expanding the firm’s national and Western Australian footprint in the dispute resolution and insolvency space, to offer the firm’s extended capabilities to our clients’ benefit.’
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Having covered the experiences of the graduates in more litigious teams last week, it’s now time for those of us in transactional teams to share our insights.
In law school, transactional work was the subject of a lot of stereotypes. The main one that stuck with a lot of us graduates was that transactional work is an inherently combative, ‘winner takes all’ scenario. For those of us who have spent four months in transactional teams, this has been revealed as a misconception.
While there is always going to be spirited negotiation over a deal as both sides try to best represent their client’s interests, deals are not as zero-sum as legal TV dramas would have you believe. Deals are approached as a ‘growing the pie’ venture as opposed to a ‘try to get the biggest piece’ venture. When you actually stop to think about it, a deal has to have value to both parties otherwise there’s little utility in entering into it to begin with.
Transactional work is exciting and fast-paced, and we have the following insights to share about our experience.
What are the key skills a transactional lawyer needs?
Attention to detail is an absolute must. Showing attention to detail, including something as rudimentary as spelling and grammar, builds credibility and gains the trust of senior lawyers in the team.
It sounds basic, but we’ve found that taking the time to carefully review documents we’ve drafted (even when working under tight timelines) before sending them onto a senior lawyer makes the world of difference. One tip we’ve learnt is that printing final draft documents and reviewing the paper copy can make typo’s easier to spot – and helps avoid the embarrassment of silly errors.
An example of a transactional document is a share sale deed. A share sale deed is often a lengthy and dense document with a multitude of interlinked clause references and defined terms. Being able to pick up on an incorrect clause reference or undefined term is key to ensuring that the deed is able to give effect to your client’s intentions – and helps ensure against hiccups later down the track.
A transactional lawyer also needs to have a keen sense of commercial awareness. It is all well and good to know how to do a litigation search on a target company of a transaction. It is another thing entirely to know how to draft warranties in a share sale deed to best protect your client from the results. This knowledge develops over time and with practice, however thinking beyond the immediate issue and considering how this will impact your client’s business is necessary to get the best result for your client.
What role do graduate lawyers play in transactions?
A graduate lawyer won’t be going toe-to-toe with the other side on the contentious points of a transaction during their rotation. We haven’t built up the requisite experience to do this yet.
What we will be doing is drafting and reviewing documents and adding value by dotting our T’s and crossing our I’s. This means ensuring every document we touch has the correct party names, ACNs and clause references. We need to ensure that definitions are used consistently throughout the document and that the clauses flow logically and encapsulate what the client wants to get out of the deal. Our teams often impress upon us the difference an extra pair of eyes can make in delivering superior documents for clients. Adding value in this way means more time can be spent on the substantive issues.
What are some of the challenges with this type of work?
It is any client’s base level expectation that their transaction will be completed within the timeframe they determine is best for their business. This often means that work needs to be completed quickly, but still to a high standard. As graduates, we play a critical role in helping our team deliver on this expectation by ensuring we get our ducks lined up in a row and closing the loop on tasks we’re given quickly. Striking the right balance between getting work done quickly and not rushing and making sloppy mistakes is at times challenging. We have found that not taking on too much in the busy periods has meant that we can get this balance right.
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The Taxpayer by a nose: the extended definition of ‘employer’ under the SGGA
In Scone Race Club Limited v Commissioner of Taxation [2019] FCA 967, Justice Logan of the Federal Court of Australia, allowing the appeal, concluded that Scone Race Club Limited (Taxpayer) was not deemed to be an employer under section 12(8)(a) and (b) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (Act). Consequently, the Taxpayer was not liable to make superannuation contributions to jockeys in respect of fees for riding in horse races and barrier trials.
While this result may have been unsurprising to some, it demonstrates the Commissioner’s willingness to pursue taxpayers for unpaid superannuation contributions. Moreover, it is a reminder of the extended definition of employer and employee for the purpose of the Act in determining whether an obligation to pay superannuation contributions exists.
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The Taxpayer was a horse racing club in country New South Wales (NSW). Pursuant to the regulations that govern racing in NSW, the Taxpayer paid fees to jockeys for riding horses in races and barrier trials (riding fees).
The Commissioner of Taxation (Commissioner) determined that the Taxpayer ought to have been making superannuation contributions in relation to the riding fees that were paid to jockeys.
The Commissioner relied on the extended definition of employee/employer within section 12(8)(a) and (b) of the Act. The definition of ‘employee’ includes:
“…a person who is paid to perform or present, or to participate in the performance or presentation of, any music, play, dance, entertainment, sport, display or promotional activity or any similar activity involving the exercise of intellectual, artistic, musical, physical or other personal skills is an employee of the person liable to make the payment.”
In light of sections 12(8)(a) and (b), Justice Logan acknowledged how the Commissioner might reasonably have formed the view that the Taxpayer was liable to make superannuation contributions. However, having regard to the industry regulations and customs, Justice Logan found that no race club, especially the Taxpayer, engaged a jockey to ride in a race. In fact, Justice Logan found that this would be contrary to the evidence led as to the established and ongoing practice in the NSW thoroughbred racing industry.

Further guidance on general purpose financial statements
The Australian Taxation Office (ATO) has recently released an updated guide to general purpose financial statements (GPFS).
For each income year, a company that is a corporate tax entity and which is also a significant global entity with an Australian presence must give the ATO a GPFS unless it has already been provided to ASIC. This GPFS will be placed on the ASIC register where it will be accessible to the public.

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The decision to release an update is in response to feedback from external stakeholders, and includes information on the following areas:

clarification about how to prepare a GPFS and meet the relevant reporting requirements under the Corporations Act 2001 (Cth);
information on what accounting principles the ATO considers to be commercially accepted accounting principles (CAAP) including a list of standards that the ATO will accept in circumstances where the Australian Accounting Standards do not apply;
an explanation of the phrase ‘effective consolidation or aggregation of the operations of your entire multiple entry consolidated (MEC) group’ together with guidance on the correct consolidation principles to apply when preparing financial statements for MEC groups; and
examples that demonstrate the meaning of the phrase ‘financial year most closely corresponding to the income year.’

New Law Companion Ruling (LCR) 2019/D2 for foreign investors
On 26 June 2019, the ATO released the extensive LCR 2019/D2 (Draft Ruling) regarding non-concessional managed investment trust (MIT) income. The Draft Ruling was released to address, and provide guidance in relation to, Schedules 1 and 5 of the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (the Act).
The Act is designed to improve the integrity of the income tax law for arrangements involving stapled structures, and to limit tax concessions for foreign investors in MITs. Importantly, to the extent that fund payments are attributable to non-concessional MIT income (NCMI), the amendments in the Act increase the MIT withholding to 30%.
The Draft Ruling focuses on MIT cross staple arrangement income and provides guidance on:

determining when an amount derived, received or made by a MIT is attributable to NCMI;
the meaning of ‘cross staple arrangement’ for the purposes of determining MIT cross staple arrangement income;
the scope and application of exceptions to MIT cross staple arrangement income;
the interpretation of the terms ‘facility’ and ‘economic infrastructure facility’;
integrity rules, particularly in respect of economic infrastructure facilities where the income is attributable to rent from land investment;
the meaning of MIT trading trust income, MIT residential housing income and MIT agricultural income; and
transitional provisions, which allow pre-existing MIT withholding rates to apply for certain periods of time.

While this ruling is currently in draft, the ATO has expressed that it will be effective from 1 July 2019.
This article was written with the assistance of Charlie Renney, Law Graduate.

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