Question:
Federal Court wallops Tax Office on transfer pricing
Answer:
Recent changes are outlined below:
July 1, 2022
- Loss carry back for eligible companies extended to cover 2023 income year.
- Professional firm profits diverted to the professional's spouse or other associates to be reviewed under new Tax Office guidance.
- Corporate collective investment vehicle legislative regime introduced.
- Temporary full expensing of depreciating assets extended to include 2023 income year.
- Depreciable assets of a company joining a tax consolidation group have tax costs setting rules modified for assets depreciated under temporary full expensing rules.
December 9, 2021
- Reduced Pandemic leave disaster payment of $750 per week made available through to 30 June 2022.
August 5, 2021
- COVID-19 Disaster Payments are non-assessable non-exempt income in 2021 income year and later. Payments phasing out as vaccination rates increase.
July 1, 2021
- New Investment Engagement Service launched for businesses planning significant new investments in Australia.
- Tax Office small business independent review service made permanent for businesses with turnover < $10m, for income tax, GST, exercise, luxury car tax, wine equalisation tax and fuel tax credits. Requested before amended assessment issued.
- Small business income tax offset for individuals increased to provide a reduction of 16% for a tax payable up to $1,000.
- Self-managed superannuation funds can now have six members, increased from four members previously.
July 1, 2021
- Some COVID -19 state and territory business grants received by small and medium enterprises are non-assessable, non-exempt income for 2021 and 2022 income years.
- Certain state, territory and local government financial support for individuals and businesses suffering COVID-19 impacts made exempt where businesses have turnover less than $50 million and only in eligible programs.
March 31, 2021
- JobKeeper payments scheme ended.
October 5, 2020
- Boosting apprenticeship commencements subsidy (up to 50% of apprentice's wages) is assessable income.
June 4, 2020
- Homebuilder grant for new home or substantial renovation construction is not subject to income tax.
April 1, 2020
- COVID-19 cash flow boost payments are not subject to income tax
Full-bench of the Federal Court refused a Tax Office appeal to apply transfer pricing adjustments in SNF (Australia) Pty Ltd ordering that the company’s objections be allowed in full.
The company is a subsidiary of a French holding company and part of a broader multi-national group. It resold chemicals used to cleanse water for industrial purposes.It purchased those chemicals from its French parent company.
It incurred substantial losses and the Tax Office arbitrarily increased the company’s taxable income for the years between 1998 and 2000 and also the period from 2002 to 2004. The Tax Office argued that the company had paid too high a price to buy the chemicals from its parent company deliberately reducing its profits.
The ultimate owner of the French parent company said the losses could be explained by other factors including:
+ Intense competition;
+ Poor management of the Australian subsidiary;
+ Fraud by an employee;
+ Excessive stock levels;
+ Insufficient sales per salesperson; and
+ Bad debts.
Under Tax Office guidelines for transfer pricing, there are a number of methods including the comparable uncontrolled price (comparison method) and the transaction net margin method (margin method).
The company and the Tax Office had experts testify and both experts agreed that the comparison method is superior and preferable to the margin method.
The company provided three comparison method studies that indicated the Australian subsidiary actually paid lower or comparable prices to sales of similar but not identical products in similar but not identical markets.
Appropriate adjustments were made for variations in terms and conditions such as volume discounts and responsibilities for the burden of freight.
The Tax Office expert contended that the comparison method could only be used where conditions were identical except for the trading partner not being a related party.
Thankfully, the Court threw out this nonsense Tax Office argument and applied a practical criteria confirming that a comparable is …something substantially like, rather than (as the Commissioner contended) as being effectively identical… recognises the ability to take broadly comparable data and adjust this data appropriately to give a comparable price. This seems like a great outcome for common sense, but the Tax Office and the Government obviously didn’t like it and have released a Consultation Paper and proposed to retrospectively change the law to require significant contemporaneous documents to evidence the transfer pricing decisions.
WTB 1799, Taxation in Australia Volume 46(4), Rebecca Bolton, “Broadening the concept of “comparable” for transfer pricing purposes”, Federal Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC74.
