Home Forums Money matters ATO BS – Commissioner of Taxation v Eichmann [2019] FCA 2155 (20 December 2019)

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  • #1000032
    James Millar
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    Ok if you are having trouble sleeping then you may want to read this case (see link below) . It will give you some insight into the wonderful world of mincing words in Australia tax judicial system. It is a remarkable demonstration of how they debate and analyse the smallest of phrases. .

    In short the ATO has successfully won a case on appeal to deny a small business access to a tax concession that they were legitimately entitled to (like many before them). The concession in this case would have saved them several hundred thousand in tax at a guess on the sale of the land. For many years it has been widely accepted that this small business would have been eligible for this concession.

    By the courts admission the small business legitimately used some land to store their business equipment. They sold the land and made a large capital gain. They were basically entitled to a tax free capital gain provided the land was used within their business. The first court (AAT) accepted the taxpayers situation and determined they were eligible for concession. The ATO appealed to Federal Court by basically mincing words. If you read the case outcome they endlessly debated whether the land was sufficiently critical to carrying on their business. There is no doubt that storing equipment and accessing it on a daily basis is critical to a construction business. The equipment has to be put somewhere right? Well on appeal the judge sided with the ATO in that yes it was part of the business but just not critical enough to the business. To be clear the law does not convey a spectrum it merely requires the asset be used “in the course of carrying on a business”. There is no other guiding material in the law that clarifies what “in the course of carrying on a business” means for this purpose. So the ATO spent resources debating in court what that means and for now they have been successful. We are hoping for an appeal which will reverse this position – at further cost to the Australian taxpayer.

    How does this effect everyone?
    1. The spirit of this concession is that taxpayers like this one are eligible in these cases. We actually think they will win on next appeal – if they can afford to. The ATO have stepped outside the intent of the law for no apparent reason.

    2. Some small business owners here may be eligible for these concessions on some of their business assets (at some point). This case tells us that the subset of assets previously accepted has narrowed until this matter is successfully appealed.

    3. 9 out of 10 taxpayers would not have sought a tax ruling – rather they would have just self assessed and claimed the concession. If they weren’t audited within 5 years then happy days several hundred thousand saved. This taxpayer did the right thing and has been penalised for it – for now.

    http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2019/2155.html

    Pretty ordinary form ATO.

    Helping build better businesses and better lives with expert financial and taxation advice. info@360partners.com.au www.360partners.com.au 03 9005 4900
    #1222398
    Paul – FS Concierge
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    it is always scary when any Government Department steps outside of the intent or spirit of legislation. Mostly, it is costly too.

    #1222399
    James Millar
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    Paul – FS Concierge, post: 268685, member: 78928 wrote:
    it is always scary when any Government Department steps outside of the intent or spirit of legislation. Mostly, it is costly too.

    I think that’s pretty much the consensus within our industry. The ATO is generally quite reasonable for general admin and debts but their advanced legal advisory team seem to ruthlessly pursue any angle to get a win. I accept their job is to apply and enforce the law but it seems these victories are becoming a sport.

    Helping build better businesses and better lives with expert financial and taxation advice. info@360partners.com.au www.360partners.com.au 03 9005 4900
    #1222400
    Paul – FS Concierge
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    Sometimes it is a single contrarian in a position of power or influence that pushes an agenda. After all, any organisation is made up of individuals.

    #1222401
    James Millar
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    JamesMillar, post: 268686, member: 5318 wrote:
    I think that’s pretty much the consensus within our industry. The ATO is generally quite reasonable for general admin and debts but their advanced legal advisory team seem to ruthlessly pursue any angle to get a win. I accept their job is to apply and enforce the law but it seems these victories are becoming a sport.

    Yep. That’s why the avenue of appeal from this single Judge in Federal court will be the Full Federal court with several Judges.

    Helping build better businesses and better lives with expert financial and taxation advice. info@360partners.com.au www.360partners.com.au 03 9005 4900
    #1222402
    Greg_M
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    I spent years in a similar situation with a yard full of ugly crap that was essential to actually providing jobs for others.

    That would potentially effect a lot of small businesses, certainly in construction.

    If there’s no perks left for taking capital risks to support a business, why would you bother?

    #1222403
    bb1
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    [USER=5318]@JamesMillar[/USER] just because many business’s have being doing it in the past it doesnt mean that it is a legitimate deduction, thankfully our laws don’t work on precedence, but more the correct interpretation.

    ”In short the ATO has successfully won a case on appeal to deny a small business access to a tax concession that they were legitimately entitled to (like many before them). ”

    This whole statement is actually wrong, if they were legitimately entitled to it, the courts would have found against the ATO, it just means that accountants and business have being misinterpreting the laws all along. We as tax payers should be glad that this individual has thought a private ruling, and as such with a bit of luck the ATO will go for all the business’s that have being claiming something they should not have, which the courts have agreed.

    #1222404
    bb1
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    Paul – FS Concierge, post: 268688, member: 78928 wrote:
    Sometimes it is a single contrarian in a position of power or influence that pushes an agenda. After all, any organisation is made up of individuals.

    Or maybe it’s just that someone has actually sat down and read the relevant laws, and is prepared to stand up for the average Australian, I think thats what we pay the ATO to do. Just because the accountants don’t like the outcome, we shouldnt be pulling them down. A victory for the law,

    #1222405
    James Millar
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    bb1, post: 268695, member: 53375 wrote:
    [USER=5318]@JamesMillar[/USER] just because many business’s have being doing it in the past it doesnt mean that it is a legitimate deduction, thankfully our laws don’t work on precedence, but more the correct interpretation.

    ”In short the ATO has successfully won a case on appeal to deny a small business access to a tax concession that they were legitimately entitled to (like many before them). ”

    This whole statement is actually wrong, if they were legitimately entitled to it, the courts would have found against the ATO, it just means that accountants and business have being misinterpreting the laws all along. We as tax payers should be glad that this individual has thought a private ruling, and as such with a bit of luck the ATO will go for all the business’s that have being claiming something they should not have, which the courts have agreed.

    Unfortunately some of these laws are open to a wide interpretation and I am optimistic on appeal this will be reversed (which does happen regularly). Keep in mind Bert that the first court of effective appeal (AAT) found against the ATO interpretation and in favour of the taxpayer and their accountant.

    The law simply says that you must be using the asset in carrying on your business. It does not say that the asset must be integral to onsite operations. It does not say that storage facilities for business equipment are not integral. For now most objective commentators within the industry are of the view that this is a flawed second appeal decision. The Judge acknowledges in his judgment that there are no explanatory materials that came with that piece of law (which means one man is interpreting based entirely on his view – is that wise for something that has far reaching implications potentially extending into general income tax deductions – see below).

    One indication to me is that the ATO probably realise they got lucky is that they do not seem to reversed income tax deductions that the business had claimed over the years for operating the storage site. The income tax deduction section 8(1)(b) contains a near identical test being

    1) You can deduct from your assessable income any loss or outgoing to the extent that:
    it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income.

    The ATO have effectively contended that this asset (and presumably therefore and associated costs) was not used as an integral asset to carrying on the business. If that was the case all of these deductions should be reversed as well. And from there many other deductions that are not integral. Is an mobile phone now considered not integral enough to carrying on business if you are a bricklayer? A bricklayer doesn’t need a phone to lay the actual bricks so by the same logic its not really integral to brick laying operations (but of course it is important for communicating).

    Bert I think I agree with your sentiment in that our justice system appoints adjudicators and their decision is “the decision” (which we must follow). However in all forms of law they often make flawed decisions (incorrect facts, incorrect interpretation, bias) which is why you will often see dissenting judgments in a full court with several judges. The regularly disagree with each other. When the law is unclear the courts are required to give effect to the intention, purpose or objects of the law. The broader purpose of that law is to allow small business entities to claim a concession. The specific intent of the subsection is to limit that concession to active assets which are those simply used in carrying on the business. There is no further explicit or implied spectrum of degree of carry on business. Reading it in plain English I fee the Judge has made an error – but as you rightly point out – for now the law stands as interpreted by that single Judge.

    Watch this space.

    Helping build better businesses and better lives with expert financial and taxation advice. info@360partners.com.au www.360partners.com.au 03 9005 4900
    #1222406
    Paul – FS Concierge
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    bb1, post: 268696, member: 53375 wrote:
    Or maybe it’s just that someone has actually sat down and read the relevant laws, and is prepared to stand up for the average Australian, I think thats what we pay the ATO to do. Just because the accountants don’t like the outcome, we shouldnt be pulling them down. A victory for the law,
    I worked for government and for a company with a contract for the government for decades.

    I make the observation that a single champion of a new view within a government department (any department, not just the ATO) can effectively change government policy.

    I find the concept fascinating. Something changed. What changed? Only sometimes it is the Minister directing a change in direction. Other times, it is public servant doing the changing.

    #1222407
    James Millar
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    Paul – FS Concierge, post: 268699, member: 78928 wrote:
    I worked for government and for a company with a contract for the government for decades.

    I make the observation that a single champion of a new view within a government department (any department, not just the ATO) can effectively change government policy.

    I find the concept fascinating. Something changed. What changed? Only sometimes it is the Minister directing a change in direction. Other times, it is public servant doing the changing.

    Completely believable. Champions are probably thin on the ground in public sector

    Helping build better businesses and better lives with expert financial and taxation advice. info@360partners.com.au www.360partners.com.au 03 9005 4900
    #1222408
    Paul – FS Concierge
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    JamesMillar, post: 268700, member: 5318 wrote:
    Completely believable. Champions are probably thin on the ground in public sector
    Actually, there are a lot of people that are driven by their mission as they see it. There are others that will do anything to climb the ladder.

    The Public Service are often amongst the first to implement new and cutting edge management techniques but they are not often implemented well as there is a hodge podge of ideas that don’t integrate with structure, culture and existing systems, processes and procedures.

    #1222409
    Greg_M
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    bb1, post: 268696, member: 53375 wrote:
    Or maybe it’s just that someone has actually sat down and read the relevant laws, and is prepared to stand up for the average Australian, I think thats what we pay the ATO to do. Just because the accountants don’t like the outcome, we shouldnt be pulling them down. A victory for the law,

    It might not sound like it, but I actually agree with both your posts. But I don’t think it’s over till ‘the fat lady sings’ and everyone’s right of appeal has been tested.

    For big corporate entities this often translates to very obscure ways to avoid tax imo…happy for the ATO, ASIC or any other statuary body to smash them on our behalf.

    When it comes to the little guy I think a more subtle approach works better.

    Perks, was not a good word…it should of read, reward for effort.

    Small and tiny businesses or even those that are ‘self employed’ lie at the heart of our economy, certainly in providing jobs for the average Australian taxpayer to even be able to do that…pay taxes.

    Most of them work pretty hard to get it right, usually put assets at risk to provide guarantees to banks and suppliers, often that asset is their own home. How many employee’s would do that? Simple, none. That’s why they’ve got, or want a job.

    It’s personal opinion obviously, but in the case at hand, paying capital gain on what seems to me a no brainer business overhead is a step too far. If it means they cop a windfall profit for taking those risks, I think the average taxpayer needs to suck it up and move on.

    #1222410
    James Millar
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    Greg_M, post: 268704, member: 38207 wrote:
    It might not sound like it, but I actually agree with both your posts. But I don’t think it’s over till ‘the fat lady sings’ and everyone’s right of appeal has been tested.

    For big corporate entities this often translates to very obscure ways to avoid tax imo…happy for the ATO, ASIC or any other statuary body to smash them on our behalf.

    When it comes to the little guy I think a more subtle approach works better.

    Perks, was not a good word…it should of read, reward for effort.

    Small and tiny businesses or even those that are ‘self employed’ lie at the heart of our economy, certainly in providing jobs for the average Australian taxpayer to even be able to do that…pay taxes.

    Most of them work pretty hard to get it right, usually put assets at risk to provide guarantees to banks and suppliers, often that asset is their own home. How many employee’s would do that? Simple, none. That’s why they’ve got, or want a job.

    It’s personal opinion obviously, but in the case at hand, paying capital gain on what seems to me a no brainer business overhead is a step too far. If it means they cop a windfall profit for taking those risks, I think the average taxpayer needs to suck it up and move on.

    For me Greg it all comes down to what the intent of the law was when it was drafted and proclaimed. This particular concession is one of several for capital gains that fall under Division 152 titled “Small Business Relief”. The clear intent of these provisions was and is to provide a concession or more favourable tax outcome for small business entities in Australia. As you say – they are a large contributor to the economy and personally I have no problem with the concept of providing such relief.

    So when the intent of the law is clear if find it somewhat disappointing to see the ATO throwing taxpayer resources at nitpicking terms with the view to reduce availability of the concessions for a genuine small business (and this particular debate on whether this asset is used in the business is really nitpicking in the extreme). I fully expect the ATO to uphold the law (and wish they would do more in some areas) but this matter is overstepping the mark.

    Anyway fingers crossed commonsense prevails.

    Helping build better businesses and better lives with expert financial and taxation advice. info@360partners.com.au www.360partners.com.au 03 9005 4900
    #1222411
    James Millar
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    Hot off the press from last friday 18th Sept at the Full Federal Court on appeal.

    This is a very important victory for small business capital gains. Had the ATO position been upheld there would have been massive implications for property assets used within business. This was a real iceberg moment that affects many small businesses that own property used within their business.

    On appeal to the full federal court, the taxpayer has won. I particularly enjoyed the court’s rebuke of the Commissioner’s submission that the CGT concessions be applied restrictively. I mean the clear intent of inserting “concessions” in the tax law was / is to provide tax relief to the taxpayer.

    “contrary to the Commissioner’s submissions, in our view the provisions conferring small business relief, being Div. 152 of Pt. 3-3 of the 1997 Act, should be construed beneficially rather than restrictively in order to promote the purpose of the concessions conferred by that Division”

    Hopefully that ATO Comissioner does not request appeal to High Court (unlikely but not out of the question).

    You can read the transcript here http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCAFC//2020/155.html

    Helping build better businesses and better lives with expert financial and taxation advice. info@360partners.com.au www.360partners.com.au 03 9005 4900
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