Edition 13, March 2011 inside this edition
AAT finds that the taxpayer consulting an
accountant, and not a tax lawyer, is not
‘reasonable care’ 1
Tax Audits 2
Resettlement of a trust 3
GST: “ To be used predominantly for
residential accomodation 4
Failure to comply with Superannuation
notice requirements 5
AAT FINDS THAT THE TAXPAYER CONSULTING AN
ACCOUNTANT, AND NOT A TAX LAWYER, IS NOT
The AAT case of Sinclair v FC of T 2010 AATA 902 has before the sale the property ceased to be rented. In
been at the centre of much media and industry scrutiny. any event, Mr. Sinclair intended to develop the property.
However, in September or October 2005 he
DECISION OF THE AAT subsequently decided to use it as the family home.
In this case the AAT held that the taxpayer had not Mr. Sinclair claimed a tax deduction for the $99,000 on
exercised the requisite level of 'reasonable care' because the basis it was 'interest on a loan'.
a reasonable person would have sought legal advice
from a tax lawyer before claiming the relevant deduction, Prior to claiming this deduction he sought advice from
not just relied on the advice of their accountant. his accountant and also had engaged the services of a
solicitor in relation to the purchase and related matters.
BACKGROUND FACTS OF THE CASE However, whilst Mr Sinclair sought the advice of the
accountant in relation to tax matters- he did not seek tax
The taxpayer, Richard Sinclair, entered into a contract advice from the solicitor. Indeed, the solicitor's records
to purchase a property that was being used as a rental showed that no speciﬁc tax advice was provided and
property. Mr Sinclair was required to pay a $1,000 the Tribunal noted that there was no formal written tax
deposit on the day of sale (30 June 2005) with the advice provided by the solicitor as to the deductibility of
balance to be paid on 15 December 2005. Under the the interest.
terms of the contract, the taxpayer was to pay $99,000 to
the vendor's lender to cover the interest due and payable The Commissioner did not allow the deduction and
for this period. This amount was paid to the lender on 30 imposed a penalty for making a statement that was false
June 2005. or misleading due to failure to take reasonable care.
Mr. Sinclair was entitled to the receipt of rental income The AAT agreed with the Commissioner that the $99,000
from the date he paid the $1,000. However, in the week was not deductible to Mr. Sinclair. Further, it upheld the
continued on page 2...
M+K tax update, edition 13, March 2011 Page 2
AAT FINDS THAT THE TAXPAYER CONSULTING AN
ACCOUNTANT, AND NOT A TAX LAWYER, IS NOT
‘REASONABLE CARE’ continued...
penalty. The AAT said there is no requirement that the implications of the arrangements.
false or misleading statement be intended to be false or
misleading. It found that having regard to the size of the WHAT THIS MEANS FOR YOU AND YOUR CLIENTS
shortfall, type of item, complexity of the law and
underlying transaction and the difﬁculty or expense to Accounting bodies are seeking clariﬁcation from the ATO
avoid the risk of making an error a reasonable person and the government as to the standard of reasonable
would have sought advice from a tax lawyer prior to care in light of this decision.
claiming the deduction.
However, we suggest that in the case above, if Mr
It is interesting to note that the AAT noted Mr. Sinclair's Sinclair's accountant had sought from a tax lawyer
attributes (as a stockbroker and person in commerce) conﬁrmation of the accountant's advice, then the AAT
gave him an awareness that there may be taxation would have accepted that Mr. Sinclair had taken
implications attached to the purchase of the sort he was reasonable care. The M+K tax team is well placed to
making but that these attributed did not give any assist accountants and their clients by undertaking a
particular knowledge or awareness of the taxation laws. review of any tax advice. In addition to demonstrating
The AAT noted that a reasonable person would be on that reasonable care was taken, such conﬁrmation may
notice to obtain legal advice about those consequences also mean that the advice becomes subject to legal
and found that despite Mr. Sinclair approaching an professional privilege (which, as seen from the article in
accountant, notwithstanding this accountant was this issue titled 'Tax Audits' is something of an
someone who is a Fellow of the Tax Institute of Australia, advantage!)
did not amount to giving legal advice about the taxation
We have seen a signiﬁcant increase in audit activity that the ATO is entitled to see.
against individuals, investors and small to medium
businesses. There has been speculation as to why this Although the ATO has the power to request access to
is so, with some commentators putting it down to the just about any documents held by a taxpayer's agent,
GFC and larger companies reporting reduced incomes, there are exceptions. For example, the ATO do not have
thus placing pressure on the Commissioner to recover the right to view or copy documents that are subject to
tax from elsewhere. legal professional privilege or the so-called 'Accountants
Concession', bearing in mind that there is no formalised
Certainly, there have been numerous instances in recent privilege afforded to accountants that is akin to legal
times where we have assisted accountants and their professional privilege. As noted above, if an accountant
clients to understand their rights and obligations, and we has briefed a solicitor to settle the advice that the
have also acted for clients in relation to tax audits when accountant gives to a client, then the advice may be
the tax ofﬁce has been particularly aggressive, or subject to legal professional privilege.
targeted numerous clients from the one accounting ﬁrm
or there are complex issues involved. M+K Lawyers can assist by providing:
The Commissioner has very extensive information • Settling any advice given to clients on complex tax
gathering and access powers under sections 263 and matters;
264 of the ITAA-36 and Division 353 Schedule 1 to the • Assistance to you and your clients to know your
TAA. In most circumstances, the Commissioner will rights and obligations;
provide a written request prior to attending at a client or
• Legal expertise to ﬁght points of law during an audit
accountant's ofﬁces. However, there may be 'exceptional
(for example, issues surrounding the adducing of
circumstances' in which this will not take place.
evidence in relation to the date of signing of a
If an ATO ofﬁcer arrives at your premises, or your document or ensuring the Commissioner follows due
client's premises, unannounced it is recommended that process); and
you request written proof of authority. You may • Litigation expertise should the matter proceed to the
temporarily delay an ATO search in order seek AAT or Federal Court.
professional advice on the limits of the documentation
M+K tax update, edition 13, March 2011 Page 3
RESETTLEMENT OF A TRUST
In FC of T v Clark  FCAFC 5, the Full Federal The Court held that the existing trust was not terminated
Court dismissed (by majority) the Commissioner's appeal and that no new trust was created when the trustee
by holding that there was no resettlement of the trust. waived its rights to be indemniﬁed out of the Trust in
respect of liabilities incurred by it in properly discharging
The taxpayers, Mr and Mrs Clark, were the its powers and duties as trustee. Furthermore, as the
beneﬁciaries of a trust whose trustee indirectly held rights under the Trust Deed were not affected by the
units in a unit trust ('Trust'). In the 1993 income year, subsequent arrangements, there was no variation or
the trustee of the Trust claimed a capital loss of $2.49m. termination of the existing Trust or the creation of a new
The trustee of the Trust had also claimed capital losses trust.
in earlier years. At the time the losses were incurred,
the Trust carried on a range of commercial development The Court, referring to the judgement in in FC of T v
activities. To take advantage of tax losses available to Commercial Nominees Ltd 2001, held that the High
the Trust, the Trust was "restructured" in 1993, and used Court in that case was speaking generally in respect of
to carry on property development activities. In the 2001 trust property and membership, that is, there had to be
income year, the Trust realised a large capital gain and a continuum of property and membership which could
wanted to reduce it to nil by applying the capital losses. be identiﬁed at any time, even if different from time to
time, and without severance of one or both leading to the
The Commissioner issued amended assessments termination of the trust in question. In the current case,
disallowing the application of the losses and the the identity of the Trust property and objects of the Trust
taxpayers objected. The Commissioner argued that the changed from time to time, but not their continuum and
losses were not available as due to the restructure the so no new trust had been created.
trust estate that incurred the losses was not the same
trust estate that realised the capital gain (in other words As an aside the losses in question were capital losses
there had been a resettlement of the trust) because of and so the Trust Losses provisions in Schedule 2F ITAA
the following events: 1936 did not apply.
The M+K tax team can assist in advising whether any
• there was a change in trustee;
proposed restructures of a trust or any amendments to
• the former trustee's right to be indemniﬁed out of the the Trust Deed may result in a resettlement of the Trust,
trust's assets was extinguished; such that the existing trust is terminated and a new Trust
• a change in unitholders; is created. If there is a resettlement of a trust, CGT and
• liabilities of the trust were extinguished; and stamp duty consequences may apply.
• a new trustee was appointed.
GST: “TO BE USED PREDOMINANTLY FOR
The case of Sunchen Pty Ltd v FC of T  FCAFC not to be used predominantly for residential
138 clariﬁed that whether residential premises are "to accommodation. The developer claimed an input tax
be used predominately for residential accommodation" credit based on the belief that the sale was a taxable
should be determined objectively by reference to the supply.
physical characteristics of the property as at the date of
acquisition. However, the ATO contended that the property was input
taxed residential premises, therefore, no GST was
A property developer purchased a residential dwelling payable and no input tax credit could be claimed.
(occupied by a tenant pursuant to a residential tenancy
agreement) with the intention to develop it into units. The Full Federal Court agreed with the ATO's argument,
The sale to the developer was subject to the existing and held that the phrase "to be used predominantly for
residential tenancy agreement. residential accommodation" is not referring to use by any
particular person, but to describe the attributes of the
The developer stated that as it intended to develop the property to which its use is suited (and) the intention of
property at the end of the tenancy, the premises were the future owner…is totally irrelevant".
M+K tax update, edition 13, March 2011 Page 4
FAILURE TO COMPLY WITH SUPERANNUATION
The case of Johnston v FC of T  AATA 20 is a The lack of entitlement to the deduction resulted in a tax
timely reminder to not merely assume that clients have shortfall which led to the imposition of an administrative
complied with administrative requirements to support penalty which, per the Commissioner, was due to a
deduction claims for contributions to a superannuation failure to take reasonable care to comply with a taxation
Section 290-170 of the Income Tax Assessment Act 1997 The AAT held that the failure of the taxpayer’s accountant
requires the taxpayer to give the trustee of the taxpayer’s to make an enquiry of the taxpayer constituted a failure
superannuation fund a valid notice (by the required date), to take reasonable care to comply with taxation law, and
in the approved form, of the taxpayer’s intention to claim as a result, the administrative penalty was appropriate.
a deduction for a contribution and the trustee had to
acknowledge the receipt of that notice. However, the AAT decided to remit the administrative
shortfall penalty in full, on the basis that the deduction, if
The taxpayer did not know that for the contribution for the allowable, would have signiﬁcantly reduced the
2008 income year to be deductible, he was required to taxpayer’s taxable income, and that it was harsh to
give the trustee of his superannuation fund a valid notice impose a penalty when it was merely a shortcoming in
as discussed above and the trustee had to acknowledge the paperwork that led to the deduction being disallowed.
receipt of that notice. The taxpayer only provided the
notice to his superannuation fund in July 2010 after the Although the AAT remitted the penalty in this case, this
ATO had queried his deduction claims and indicated decision still highlights the importance of asking clients
there were some shortcomings in the paperwork. for conﬁrmation that the administrative requirements had
By then, it was too late as the time limit had been been complied with, so as to not expose clients to a risk
exceeded. of an otherwise allowable deduction being denied and
the imposition of penalties.
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regarding the issues discussed in
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