Learning from the Addy and Auctus Resources decisions in Australia

From economic recovery plans to judicial decisions, DLA Piper summarises the tax-related developments from mid-2020 in Australia. 

Australian tax audits to restart

On July 30 2020, Jeremy Hirschhorn (Second Commissioner, Client Engagement Group, Australian Taxation Office) told the Australian Senate Standing Committee on COVID-19 that the ATO had taken staff away from audit activity in order to implement the government’s economic support measures. In fact, Hirschhorn had said that the ATO had redirected 3,000 staff from initiating audits.

He said, however, that “in our current planning – those audits, our general work streams, are recommencing in October”.

Limits on the power of the ATO: Auctus Resources decision

In Auctus Resources Pty Ltd v Commissioner of Taxation [2020] FCA 1096, Steward J of the Federal Court of Australia held that the Commissioner of Taxation (Commissioner) was not authorised to use s.8AAZN of the Tax Administration Act 1953 as a means to recover a tax refund relating to a research and development (R&D) tax offset refund in the 2013 income tax year.

This case is important on two points. First, in the view of Steward J, s. 8AAZN should not be applied broadly to enable the Commissioner to recover a tax refund that he alleges the taxpayer is not entitled to, by labelling a payment to the taxpayer as an ‘administrative overpayment’ or asserting that he made a ‘mistake’. Thus, it seems that the Commissioner cannot overcome the assessment and amended assessment provisions (where he is out of time or did not have power to use those provisions) to seek and recover tax using s. 8AAZN.

Secondly, parties are generally not entitled to raise new contentions after a hearing has been concluded. The hearing is an opportunity for both parties to raise their contentions and following the conclusion of a hearing, the court will generally not allow new issues to be raised just because an issue has been missed. Subject only to an appeal, parties are entitled to finality on matters.

Taxpayers and tax practitioners should be mindful of these two points. 

The ‘backpacker tax’, personal tax, treaty discrimination: Addy decision

The Full Federal Court of Appeal has found in favour of the Commissioner in the matter of Addy v. Commissioner of Taxation [2020] FCAFC 135.

From January 1 2017, individuals who were in Australia on a ‘working holiday’ visa were subjected to a higher rate of tax than other taxpayers (the so-called ‘backpacker tax’). 

Addy was a British national who worked in Australia from August 20 2015 to May 1 2017, on two separate working holiday visas. The ATO taxed her income at the higher rate under the ‘backpacker tax’ rules.

The question before the court was essentially whether she was an Australian tax resident, and if so whether the anti-discrimination language in Article 25 of the UK/Australian double tax agreement operated to prevent Australia taxing her at the higher rate. The Full Court essentially found that she was not a resident in the ordinary meaning of that term, she was however a resident under the ‘183 days’ test, and that the treaty discrimination provision did not apply in this case.

The matter is interesting for a number of reasons.

1. The taxpayer appealed to the Federal Court, and won at first instance before a single judge. The ATO then appealed to the Full Federal Court and the majority of the three members of that court found in favour of the ATO. The result, however, is that two members of the Federal Court have found in Addy’s favour (the judge at first instance, and Davies J in the Full Court), while two have found against her. 
2. On appeal, the Court has dealt extensively with the question of what is ‘a resident’ in the ordinary meaning of that term in Australian law. Derrington J’s judgment on this point was agreed with by the rest of the Court and is an excellent overview of this area of the law.
3. The question of the meaning of an anti-discrimination clause in one of Australia’s treaties is rarely heard. In view of the novelty of the question, the split of decisions by members of the Federal Court, and the wide application of the issue it is possible the High Court may grant leave (if asked) to hear an appeal.
4. The matter has been funded as a ‘test case’. Taxpayers often overlook the ATO ‘test case funding programme’. Through it, the ATO may pay part of a taxpayers court costs in order to enable an issue of importance to the put before a court. This is an important service to the taxpaying community as a whole. However, this also enables taxpayers with important issues of principle, and where the amount of tax at stake may ordinarily make a court appeal unattractive, to be heard by a court. The decision to apply for, and even to accept, test case funding is a complex one because of the conditions that may be involved. 

This article was originally published in the International Tax Review