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The latest judgement to involve a view of ordinary family or commercial dealing “appears inconsistent” with the ATO’s guidance.
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BBlood decision casts doubt on 100A draft ruling
07 October 2022
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The decision in BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 on 19 September provides some further guidance on the application of s100A of the ITAA 1936, following the earlier decision in Guardian, which the Tax Commissioner has appealed.
BBlood involved a series of steps that resulted in a corporate beneficiary being liable to tax on a share of a buyback dividend in accordance with s97 of ITAA 1936 and subdivision 207-B of ITAA 1997, but for which it received no benefit.
However, given the buyback dividend was fully franked, no top-up tax was payable by the corporate beneficiary because the franking credits fully offset the tax payable on the dividend.
The court upheld the assessment that was issued to the trustee under s99A of ITAA 1936 on the basis that s100A caused that corporate beneficiary not to be presently entitled to the share buyback dividend, and so the trustee’s liability to tax was increased by the amount of the dividend and the attached franking credits.
The agreement, arrangement or understanding
The court held that a number of individual transactions or steps can be taken together as constituting an overarching “agreement” for s100A.
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Additionally, while the onus is always on the taxpayer to prove an assessment is excessive (and so that s100A does not apply), the Commissioner is required to outline what is the alleged “agreement” and which steps are said to comprise the agreement.[i]
Ordinary or family commercial dealing
Justice Thawley stated that a dealing might not be an “ordinary family or commercial dealing” if the dealing, or the agreement that arose out of the dealing, is “contrived or artificial or involved more than was required to achieve the relevant objective.” He also explained that just because a transaction is complex, does not mean that it is not ordinary.[ii]
This is to be contrasted with the Commissioner’s draft ruling, where he asserted that a “dealing is not an ordinary family or commercial dealing merely because it is commonplace or involves no artificiality”.
Must the payment be a reimbursement?
Justice Thawley confirmed that the word “reimbursement” in s100A is no more than a convenient label and its common meaning does not limit or control the application of s100A.[iii] Accordingly, it did not matter that the buyback payment retained by the trustee was not a “reimbursement” or quid pro quo for the beneficiary’s present entitlement.
Different to part IVA
The court also emphasised that the statutory scheme in s100A is different to part IVA. Therefore, adopting language such as “counterfactual” or “alternative postulate” and drawing analogies between part IVA and s100A “risks distracting attention from the text and scheme of s100A”.[iv]
Unlike with part IVA, with s100A it is not necessary to identify the specific amount of tax avoided.[v] Justice Thawley explained that, by way of example, in the case of a discretionary trust, it may not even be possible to say what would have occurred if not for the relevant agreement.
Another key difference worth reiterating is that part IVA will only apply where tax avoidance is the “dominant” purpose for entering into the scheme, whereas s100A merely requires tax avoidance to be “a” purpose.
Unlimited time period to amend an assessment under 100A?
While Justice Thawley considered it preferable not to express a concluded view, the discussion does indicate that s100A may very well have an unlimited review period for the Commissioner to amend an assessment (even in the absence of fraud and evasion). This is to be contrasted with part IVA (the general anti-avoidance provision) that now only has the standard period of review of four years.
It is also noteworthy that the Commissioner making something available that is accessed by a taxpayer on the ATO portal will not result in an “assessment” because such information is not given to or served on a taxpayer (as definitionally required for an “assessment”) but is merely made available to a taxpayer.
Takeaway
Both BBlood and Guardian appear to be inconsistent with the Commissioner’s draft guidance on the application of the exclusion for agreements entered into in the course of “ordinary family or commercial dealing”.
Should the Commissioner not succeed with his appeal to the Full Court in Guardian, absent an appeal to the High Court, we would expect him to update his draft ruling prior to finalising it, at least to remove the reference to paragraph 23 that states that a dealing is not an ordinary family or commercial dealing “merely because it is commonplace or involves no artificiality”. This may also require consequential updates to some of the examples given too.
It is also suggested that it is appropriate to introduce legislation to reduce the period of review under s100A to four years so as to align it with part IVA, or at least some fixed period rather than keeping it open-ended (or uncertain). If so, PS LA 2015/2 will need to be updated accordingly in order to reflect such a change, as otherwise the Commissioner’s practice of not issuing nil assessments to trustees would enable any statutory time limit to be circumvented.
Jeremy Makowski is special counsel in tax at law firm Cornwalls.
[i] BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 [90].
[ii] Ibid [95].
[iii] Ibid [120].
[iv] Ibid [153]
[v] Ibid [156]
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