Full Federal Court allows taxpayer’s appeal in “missing trader” gold case

“Missing trader” fraud occurs where a supplier within a supply chain, upon being funded the GST by the acquirer through an increase in price, fails to pay the GST.

The issue of missing trader fraud in the gold industry was highlighted by two recent decisions of the Administrative Appeals Tribunal where the Tribunal upheld the Commissioner’s decisions to deny the applicants’ entitlement to input tax credits with respect to the acquisition of gold:  

The issue of “missing trader fraud” was a common theme. Both decisions:

  • Disclosed the involvement of “intermediaries” in the supply chain who were able to purchase and sell very large amounts of gold while having limited financial means, and who agreed to sell gold at a price that would mean selling at a loss if the GST was remitted to the Commissioner – making the transactions uncommercial unless the GST was to be retained. 
  • Raised the spectre of gold being “recycled” through the supply chain, with its taxable form being altered at some stage in the supply chain from gold bullion (non-taxable) to “scrap gold” (taxable), and one or more suppliers failing to remit GST. 

In the first case the applicant, a gold refiner, satisfied the Tribunal that the gold was acquired in taxable form, but the Tribunal affirmed the decision of the Commissioner to deny the entitlement to input tax credits on the basis that:

  • The gold was not acquired for a creditable purpose because the gold was not “refined” by the applicant within the meaning of s 38-385 of the GST Act and the sales of gold bullion by the applicant were therefore not GST-free as the first supply of “precious metal” – rather the sales were input taxed under s 40-100 as a supply of “precious metal”.
  • Alternatively, if the gold was acquired for a creditable purpose, the applicant’s entitlement to input tax credits should be denied pursuant to the operation of the anti-avoidance provisions in Division 165 of the GST Act – on the basis that there was a scheme where the dominant purpose or principal effect of acquiring the gold was to obtain the input tax credits.

The taxpayer appealed to the Full Federal Court. In ACN 154 520 199 Pty Ltd (in liquidation) v Commissioner of Taxation [2020] FCAFC 190 the Full Federal Court has unanimously allowed the taxpayer’s appeal and ordered the matter be remitted to a differently constituted Tribunal for determination according to law. The case is complex, with 34 grounds of appeal being relied on by the taxpayer and the judgment running to 232 paragraphs. I have sought to focus on the views of the Court which led to the appeal being allowed.

The construction issue – s 38-385 of the GST Act

Before the Tribunal, the Commissioner’s primary argument was that the applicant did not make creditable acquisitions because the supplies of bullion were not GST-free pursuant to s 38-385 – rather, they were input taxed supplies of precious metal pursuant to s 40-100. This was because the gold acquired was already at 99.99% fineness and the process applied by the applicant to put the gold into bullion form was not “refining” for the purposes of s 38-385 – the gold had already been refined to the requisite standard (ie, 99.5%) before it was acquired by the applicant. The supply of the gold bullion was therefore not “the first supply of that precious metal”. The Tribunal agreed with the Commissioner’s argument.

The Court agreed with the taxpayer that the Tribunal erred in its construction of s 38-385 of the GST Act. The Court found (at [137]) that neither the text nor the context of s 38-385 supports the construction adopted (or preferred) by the Tribunal, namely that “processes which are not directed towards increasing the metallic purity of the gold above the requisite standard of fineness (99.5% in the case of gold) should not be regarded as ‘refining’”. Rather, the ordinary meaning of the word “refining” and he statutory context suggest that the word “refining” in s 38-385 is referring to a process by which metal is brought to a finer state or form. Accordingly, a process that increases the metallic fineness, for example, from 99.5% to 99.99% would constitute “refining”, even though the gold was already at the level of fineness required for precious metal.

The Court concluded (at [142]) that once the Tribunal’s preferred construction of “refining” is rejected, it was clear on the findings of the Tribunal, and the unchallenged evidence before the Tribunal, that the processes of smelting and fluxing undertaken by the taxpayer (a refiner of precious metal) in relation to the scrap gold it received constituted refining. The Court agreed with the taxpayer that the supply of this refined gold, being a precious metal bar that was not previously in existence, was the “first supply of that precious metal”. The Court rejected the Commissioner’s argument that the relevant focus is on the gold that had been refined – which had here previously been supplied as gold bullion in investment form and then deliberately defaced. Accordingly, the supplies of gold bullion by the taxpayer were GST-free as the “first supply of that precious metal” and the taxpayer was entitled to recover input tax credits with respect to the acquisition of the scrap gold.

The Court found that the taxpayer was entitled to input tax credits totalling $122,112,065 in respect of its acquisitions of scrap gold from the suppliers.

The Division 165 issue

Before the Tribunal, the Commissioner’s alternative submission was that the anti-avoidance provisions in Division 165 were engaged to deny the taxpayer’s entitlement to input tax credits with respect to its gold acquisitions totalling approximately $73 million.

The successful grounds of appeal were described by the Court as “the procedural fairness issue”, being whether the Tribunal denied the taxpayer procedural fairness in making certain findings: in particular, whether the Tribunal had denied the taxpayer procedural fairness by relying on three documents which had not been the subject of cross-examination or submission.

The taxpayer’s submissions focused on adverse findings that were said to have been made by the Tribunal as to the credit of the director of the taxpayer, comments that the taxpayer did not put on any evidence to explain matters in the documents and the inference drawn by the Tribunal that the director and the taxpayer were aware that at least some of the scrap gold had been sourced from a related entity of the taxpayer. The documents at issue were two emails between employees of the related entity and the transcript of the director’s compulsory examination by the Commissioner. These documents had been included in the Hearing Book but the documents were not the subject of any cross-examination or submission.

The Court concluded that the Tribunal’s reliance on these documents constituted a denial of procedural fairness. While the the documents were included in the Hearing Book without objection, in the circumstances it could not have been reasonably expected that the Tribunal would rely on these documents to form an adverse view as the director’s credit or to make adverse knowledge findings against the taxpayer.

The Court also found that the Tribunal’s findings of the director’s credit and the knowledge of the taxpayer were integral to the Tribunal’s consideration of whether Division 165 operated. The Tribunal made various points in the reasons regarding the knowledge of the director and the taxpayer and it was  impossible to exclude the possibility (and, to the contrary, it seemed distinctly possible) that these findings were influenced by the adverse view the Tribunal had formed as to the director’s credit on the basis of the two emails and the compulsory examination transcript. The Court found that it was not possible to isolate and put to one side the Tribunal’s reliance on the two emails and the compulsory examination transcript on the basis of the objective nature of the test under Division 165.

The Court concluded that due to the procedural fairness issue, the the Tribunal’s conclusion relating to Division 165 must be set aside and the issue re-determined. The Court observed that while it had power under s 44(7) of the AAT Act to make findings of fact, in the circumstances of this case it would be going beyond the proper role of the Court to re-determine whether Division 165 operates. Among other things, in the process of re-determining the issue it would be necessary to consider afresh, and making findings about, whether (as the Commissioner contended) the taxpayer ought to have known certain matters.  An intensive fact-finding exercise of that nature went beyond the proper role of the Court in an appeal on a question of law under s 44 of the AAT Act. Accordingly, the Court considered it necessary to remit the matter to the Tribunal for determination according to law (that is, to re-determine whether Div 165 operates).

The Court ordered that the matter be remitted to a differently constituted Tribunal to determine the matter according to law.

Tribunal finds Administrators not entitled to input tax credits

Where a company becomes an “incapacitated entity” Division 58 of the GST Act seeks to shift the company’s obligation to pay GST and its entitlement to input tax credits to the “representative”, such as the administrator, receiver or liquidator. In Richard Albarran, Brent Kijurina and Cameron Shaw as Joint Administrators of Cooper & Oxley Builders Pty Ltd as trustee for the Cooper & Oxley Builders Unit Trust and Commissioner of Taxation [2020] AATA 4325 the Tribunal was required to address the difficult question of who was entitled to input tax credits where:

  • the company accounted for GST on an accruals basis and made the acquisition prior to the appointment of an Administrator; and
  • the Administrator accounted for GST on a cash basis and paid for the acquisition after its appointment.

The parties agreed that the company and the Administrator were not each entitled to the input tax credits. The Administrators contended that they were entitled to the credits. The Commissioner contended that the company was entitled to the credits. The Tribunal agreed with the Commissioner.

The nub of the dispute appears to have been whether Division 58, particularly s 58-10(1) which entitles the representative entity to input tax credits “to the extent that the making of the acquisition to which the…input tax credit…relates is within the scope of the representative’s responsibility or authority for managing the incapacitated entity’s affairs“, is only engaged where the acquisition is “made” during the period of appointment – with the effect that the entitlement to input tax credits for creditable acquisitions made prior to the appointment remaining with the company.

The Tribunal undertook a detailed consideration of the text of the provisions, policy considerations and the extrinsic materials and agreed with the Commissioner’s construction of s 58-10 of the GST Act, which confined the section to supplies and acquisitions made by the representative. The Tribunal considered that this reflected a more natural reading of the provision and was coherent with the scheme of the GST Act in relation to GST on taxable supplies and ITCs on creditable acquisitions and their attribution to tax periods. The Tribunal also considered that:

  • Nothing in the context of the surrounding provisions, nor the EM, clearly indicates otherwise.
  • The practical outcome of this construction – that representatives are only liable for GST on taxable supplies, and entitled to ITCs on creditable acquisitions, which they actually make, and not on supplies and acquisitions made before their appointment by an entity over which they had no control – was not suggestive of a manifestly absurd, unreasonable or improbable intention to attribute to Parliament.

Tribunal affirms GST liability for the sale of land by corporate taxpayer

A common, but difficult, GST issue is whether the seller of vacant lots of land is carrying on an “enterprise” and is subject to GST. There is no simple answer, and the question must always be addressed by reference to the facts. In many cases, the question arises where the land is owned by one or more individuals – for example, a holiday home on a large piece of land that has been held by a family for a long time and is to be subdivided and sold as vacant blocks. Yesterday, the Tribunal handed down its decision in San Remo Heights Pty Ltd and Commissioner of Taxation [2020] AATA 4023 where the issue arose in the context of land that had been owned by a company for a long period of time.

While the Tribunal ultimately found in favour of the Commissioner, mainly because of deficiencies in the available evidence, the decision illustrates the following matters:

  • In seeking to prove that an enterprise is not carried on, a company will generally face a more difficult task than an individual. Of course, this also means that it should generally be easier for a company to establish that it is carrying on an enterprise – for example, where there is a dispute as to the entitlement to input tax credits.
  • If a company is registered for GST on the basis that it carries on an enterprise, not every supply made by the company will necessarily be taxable as a supply made in the course or furtherance of an enterprise. Each case involves a question of fact.

The facts were not in dispute:

  • The company acquired the land in 1962. Because of the effluxion of time, no evidence was provided as to the company’s object of acquiring the land. Over time, parts of the land were subdivided and sold.
  • In April 1987, four lots were created and sold.
  • In November 1987, four lots were created. One was sold in 1989, another in 1995 and the remaining two lots in 1998.
  • In June 2000, four lots were created. One lot was sold in 2002 and another in June 2019. The two lots which were the subject of the dispute were sold in October and November 2018. The Commissioner assessed GST on the sales of the two lots in the company’s December 2018 quarterly tax period.
  • The company was registered for GST and held three commercial rental properties, four residential rental properties and land used for grazing purposes.
  • The evidence was that no income tax deductions and no input tax credits were claimed with respect to the two lots and the company had not sought previously to have the land rezoned, apply for permits or previously attempted to sell the lots. The sole purpose of the sale was said to be to facilitate the closure of the estates of deceased relatives who held shares in the company and to whom there was a debt owed by the company. There was no evidence of a business plan and the 2017 and 2018 financial accounts showed there were no employees and no wages or salary expenses.
  • The Tribunal observed that the evidence was silent as to the manner in which the sales took place, therefore no findings could be made whether that was systematic, organised or businesslike, other than to note that the lands were not treated as trading stock in the company’s 2018 financial statements.

Two issues arose:

  1. Whether the sales were made in the course or furtherance of the enterprise constituted by the rental and grazing activities of the company
  2. If not, whether the company had established that the sales were not made in the course or furtherance of an enterprise carried on by the company.

The Tribunal observed that the concept of “business” included the well-known indicia of profit making purpose, scale, repetition and regularity, the amount of capital invested, and the organisation of activities in a business-like way with books and records. The Tribunal also observed that it had been held in previous cases that:

  • where  company is incorporated for the purpose of making profits for its shareholders any gainful use to which the company puts its assets prima facie amounts to carrying on a business; and
  • it is easier to draw an inference that activities of a company constitute a business than when similar activities are carried on by an individual.

In this context, I note that the definition of enterprise in s 9-20 of the GST Act excludes activities carried on by an individual without a reasonable expectation of profit or gain, but there is no exclusion for other entities such as companies. In Davsa Forty-Ninth Pty Ltd as Trustee for the Krongold Ford Business Unit Trust and Commissioner of Taxation [2014] AATA 337 the Tribunal observed that this begs the question whether other entities are subject to this qualification, the answer to which is left uncertain by the legislation.

The Tribunal found in favour of the taxpayer on the first issue, being satisfied on the evidence that the sales of the lots had no connection with the property rental or grazing enterprises carried on by the company. In coming to this conclusion, the Tribunal made some observations on the approach taken by the Commissioner in his Objection Decision which suggested that once a company is registered or required to be registered for GST, any supply it makes will be in the course or furtherance of an enterprise. The Tribunal made the following observation on this suggestion:

That, with respect, is not correct as a matter of statutory language – s 9-5(b) of the GST Act requires determination of whether the particular supply was made in the course or furtherance of an enterprise carried on by the relevant entity, whether a company or otherwise. A company may face a particular challenge in discharging its burden of proving a supply was not made in the course or furtherance of an enterprise, but that is not say it is an impossible task – for whether any entity’s activities constitute an enterprise is ultimately a question of fact – but it requires an evidentiary foundation on which to do so.”

The Tribunal found against the taxpayer on the second issue, finding that it was not satisfied that the series of activities by the company in relation to the land did not constitute an enterprise. In coming to this view, the Tribunal noted that the taxpayer’s activities with respect to the land were carried out over an extended period of time but it could not determine that those activities were undertaken other than for commercial purposes. There was no evidence of the purpose of the controlling minds of the company in subdividing and selling blocks of land over this period. There was insufficient evidence upon which the Tribunal could determine the issue and the taxpayer had not discharged its burden of proof.

Tribunal hands down another decision on Gold and input tax credits

In Cash World Gold Buyers Pty Ltd and Commissioner of Taxation [2020] AATA 1546 the Tribunal affirmed the decision of the Commissioner to deny the applicant’s claim to input tax credits of $6,936,947.00 with respect to acquisitions of gold during the quarterly tax periods ending 31 December 2014 and 31 March 2015. The Tribunal’s decision is another in a line of cases where the decision of the Commissioner to deny input tax credits to with respect to the acquisition of gold has been affirmed by the Tribunal. In particular, ACN 154 520 199 Pty Ltd (in liq) and Commissioner of Taxation [2019] AATA 5981, noting that the Full Federal Court heard the taxpayer’s appeal of that decision last week with judgment being reserved.

The disputed claims for input tax credits involved the acquisition (or purported acquisition) of significant amounts of gold from three individuals (referred to as Intermediaries). The applicant satisfied the Tribunal that the acquisitions of gold were made and that the Intermediaries were not acting as agents of the applicant. The real issue before the Tribunal was the form of the gold when it was acquired by the applicant, given that director of the applicant accepted at the hearing that the gold supplied to the applicant by the Intermediaries was sourced from gold bullion dealers and those supplies were treated as input taxed supplies of “precious metal”. The Commissioner submitted that the applicant was not entitled to input tax credits because the applicant purchased “precious metal” from the Intermediaries, an input taxed supply. The applicant contended that all of the gold it acquired was “scrap gold” and was taxable.

The Commissioner also issued assessments to the Intermediaries for unpaid GST with respect to the sales of gold to the applicant. Objections to those assessments were made, but no decision had been made on the objections. However, some amounts were recovered from the assessments pursuant to garnishee orders. As discussed at the end of this post, the applicant contended that the actions of the Commissioner gave rise to a double recovery of GST.

Substantiation and documentation

The Tribunal’s decision ultimately came down to a question of substantiation and documentation. After reviewing the evidence, the Tribunal was not persuaded about the extent to which the gold acquired by the applicant from the Intermediaries was scrap gold. The Tribunal considered that there many inconsistencies and gaps in the evidence, and some of the evidence was inherently implausible – there were too many shortcomings in the evidence.

The Tribunal also made the following observations:

  • That the applicant was in possession of a document entitled “tax invoice” was not sufficient to prove that a supply was a taxable supply. A tax invoice does not create a taxable supply, it records one. If a taxable supply did not take place, then a tax invoice stating that it did is meaningless
  • In response to the applicant’s contention that there was no commercial reason for it to pay 105 per cent of the prevailing spot price for gold bullion unless it was required to pay GST to the Intermediaries in respect of the taxable supply of scrap gold, the Tribunal considered that the applicant would have been on notice that subtracting GST from the price paid by the applicant to the Intermediaries left them with approximately 95% of the spot price of gold. Consequently, the Intermediaries would have made a loss of at least 5% each time they supplied gold to the applicant if they were making taxable supplies and remitting GST, as they were themselves acquiring gold bullion for the spot price plus a premium. The Tribunal considered that the applicant could not provide any satisfactory explanation for this proposition.

The Tribunal also agreed with the Commissioner that the applicant was not entitled to input tax credits because it did not hold valid tax invoices.  The Tribunal found that the invoices did not comply with the requirements of s 29-70(1) of the GST Act, nor was this an appropriate case for the tax invoices to be treated as a tax invoice under s 29-70(1B). This was because many of the invoices failed to describe the quantity or weight of the gold supplied and none of the invoices identify any amount of GST payable. All the invoices issued were headed ‘TAX INVOICE*/STATEMENT* (*DELETE AS APPROPRIATE)’ but in none of them had the word ‘STATEMENT’ been crossed out to make clear the document was intended to be a tax invoice. Instead, the invoices were, in the Tribunal’s view, deliberately ambiguous.

Other matters before the Tribunal 

In the course of the decision, a number of other matters were considered by the Tribunal. These issues appear to have arisen because of the actions of the Commissioner in issuing assessments of GST to the Intermediaries with respect to the sales of gold to the applicant, while at the same time denying the applicant’s entitlement to input tax credits.

Enterprise: The Commissioner contended that the supply of gold by the Intermediaries to the applicant was not a “taxable supply” because the Intermediaries were not carrying on an enterprise as their activities were not carried on with a reasonable expectation of profit or gain – as required by s 9-20(2)(c) of the GST Act given that the Intermediaries were individuals. The Tribunal found it unnecessary to explore this submission because of the conclusion that the applicant was not entitled to input tax credits for other reasons, but the Tribunal did observe that this contention was inconsistent with the fact that the Commissioner had earlier instigated the GST registration of one of the Intermediaries and had also issued assessments to each of the Intermediaries for net amounts of GST.

Division 142: Division 142 deals with the entitlement of taxpayers to recover overpaid GST. Essentially, if a taxpayer has overpaid GST (referred to as “excess GST”), the taxpayer is not entitled to a refund of that GST if the GST has been “passed on” to the recipient and the recipient has not been reimbursed for the overpaid GST (for a detailed consideration of these provisions and the concept of “passing on”, see my paper here). If GST has been passed on, until such time that the recipient is reimbursed, the GST is deemed to have been properly payable: s 142-10.

The Tribunal observed that the Commissioner may trigger the application of Division 142 by causing an amount of “excess GST” to be included in a taxpayer’s “assessed net amount” by issuing an assessment even though the GST hasn’t actually been paid to the Commissioner. The applicant contended that by reason of the GST assessments issued to the Intermediaries, this GST was “passed on” to the applicant and even if the Intermediaries did not make taxable supplies to the applicant, the supplies were deemed to be taxable supplies pursuant to s 142-10.

The Tribunal considered that the applicant’s difficulty was that it had not demonstrated that the Intermediaries did in fact “pass on” any excess GST to it. The Tribunal found that there there was no GST passed on where the prices charged by the Intermediaries did not recover any amount on account of GST. In this regard, it was plainly uneconomic for the Intermediaries to sell gold at prices of approximately 105% of the spot price of gold having purchased the gold from bullion dealers for the spot price plus a margin, in circumstances where they were required to remit GST. Further, if there was excess GST, s 142-15(5) effectively denies the input tax credit if the applicant knew or could be expected to have known that the Intermediaries had not paid the excess GST.

Double recovery of GST: The applicant contended that the Commissioner has sought to recover GST from the applicant (by denying input tax credits) and at the same time was seeking to recover GST from the Intermediaries on the basis that they made taxable supplies to the applicant. The Commissioner had issued assessments to the Intermediaries that included the same GST. It also transpired that the Commissioner had recovered amounts owed by the Intermediaries from third parties pursuant to garnishee orders at the same time as he had sought to deny the input tax credits claimed by the applicant. The applicant submitted that the assessments were in fact cumulative assessments which were issued contrary to the Commissioner’s stated procedures regarding alternative assessments in the income tax context and impermissibly sought double recovery of GST on the same transactions. The Commissioner adopted the view that he is entitled to issue multiple assessments. Counsel for the Commissioner also submitted that the Commissioner would not seek to recover the GST twice.

While not determining the issue, the Tribunal made the following observation (at [225]):

Were the Commissioner to succeed against both Cash World and the Intermediaries, it appears that the Commissioner would be in a position to recover the GST amounts twice and, furthermore, may be required to do so without necessarily having a choice in the matter (leaving aside issues with respect to the good management rule and when it is appropriate for the Commissioner to settle tax disputes). In my view, there remains an unresolved issue as to the efficacy of the Commissioner recovering GST amounts twice. However, the double recovery of the GST is not determinative of this dispute and does not give rise to an issue for determination by the Tribunal.

The Tribunal appeared to accept that the conduct of the Commissioner could give rise to a double recovery of GST. This begs the question of what the Commissioner’s obligations now are with respect to the GST assessments issued to the Intermediaries (against which objections were lodged but no decision has been made), and the amounts recovered under those assessments pursuant to the garnishee orders.

 

GST decisions of the Federal Court and the Tribunal to see out 2019

As we come to the close of another year, the Federal Court and the Tribunal have handed down GST decisions. They are briefly discussed below.

In Melbourne Apartment Project Pty Ltd (as Trustee for Melbourne Apartment Project) v Commissioner of Taxation [2019] FCA 2118 the Federal Court found that the making of “supply of accommodation” in s 38-250(1)(b)(i) of the GST Act encompassed the supply of a freehold interest in an apartment. The proceeding was an appeal from a private ruling and the Court (at [1]) identified the question as whether the sale by a registered charity of an apartment to a person eligible to receive social housing on a non-commercial basis for consideration less than 75% of the GST inclusive market value of the property is exempt from the GST (as a GST-free supply).

Section 28.250(1) provides that a supply is GST-free if:

(a) the supplier is an endorsed charity…; and

(b) the supply is for consideration that:

(i) if the supply is a supply of accommodation – is less than 75% of the GST inclusive market value of the supply; or

(ii) if the supply is not of accommodation – is less than 50% of the GST inclusive market value of the supply.

The Commissioner contended that paragraph (b)(i) was not engaged because the expression “supply of accommodation” did not include the sale of a freehold interest in an apartment. This was because the word “accommodation” carried with it a temporal aspect that restricted the expression to a supply by way of lease or licence – it did not extend to a supply of a freehold interest. Therefore, paragraph (b)(ii) was the relevant paragraph and the sale would only be GST-free if the supply was for a consideration of less than 50% of the GST inclusive market value of the supply. The Applicant submitted that the expression “supply of accommodation” incorporated a spectrum of meaning, which includes the sale of an apartment.

The Court (at [68]) accepted the applicant’s submission that the ordinary and natural meaning of “accommodation” includes an apartment or any premises that are used by a person as their place of residence. The Court rejected the Commissioner’s submission that the ordinary and natural meaning of the word did not carry this meaning because of an inherent temporal limitation – the Court considered that in its ordinary sense, the word “accommodation” includes an apartment in which a person resides, whether their right of residency is conferred by licence, lease or ownership.

The Court found (at [78]) that there was nothing in the text of s 38-250 to support the Commissioner’s submission that the expression “supply of accommodation” was inapt to cover the supply of title to premises and instead contemplates only the supply of a right to occupy premises for the time being. The Court found (at [79]) that there was no contextual reasoning in the GST Act, read as a whole, that might suggest that this primary reading of the provision should not be applied.

In Jarvis-Lavery and Commissioner of Taxation [2019] AATA 5409 the Tribunal found that the applicant had not established that it was entitled to input tax credits for acquisitions from an associated entity and that the acquisitions were not of a private or domestic nature. The Tribunal observed (at [105]) that:

An applicant does not, by the mere production of a tax invoice issued by a supplier, prove an entitlement to an ITC for the acquisition of a supply. As already noted, there are other statutory requirements that must be satisfied including, relevantly here, that the acquisition was made in the course or furtherance of an enterprise and was not of a private or domestic nature.

The Tribunal observed that the applicant gave oral oral evidence that the acquisitions were for business and not private purposes but that evidence was uncorroborated by any contemporaneous records or by other witnesses. With respect to this statement, it is relevant to note the following observation of the Tribunal (at [107]):

All this is not to say that an applicant who produces a tax invoice and swears or affirms that the relevant supply was acquired for a creditable purpose may not by so doing prove their entitlement to an ITC without further corroborating evidence.

Accordingly, the Tribunal was not saying that a taxpayer can never discharge its onus of proof if it does not provide corroborating evidence. However, where, as here a taxpayer has a history of poor compliance with tax laws and has lodged returns and BASs in the past which he now says are inaccurate, the Tribunal considered that it was appropriate to approach his evidence with caution, In the particular circumstances of this case, where the applicant’s oral evidence was of a general nature, and without any business records relating to the acquisitions or more detailed explanation, the Tribunal was not persuaded that the acquisitions were creditable acquisitions.

I take this opportunity wish all my followers and readers the compliments of the season and I thankyou for your support.

Full Federal Court hands down decision on fuel tax credits and the four year rule in s 47-5 of the Fuel Tax Act

In Linfox Australia Pty Ltd v Commissioner of Taxation [2019] FCAFC 131 the Full Federal Court dismissed the taxpayer’s appeal against the conclusion of the Tribunal ([2019] AATA 222) that certain toll roads operated and maintained by a private operator were a “public road” for the purposes of the Fuel Tax Act. While the decision relates to fuel tax, one of the issues in the appeal was whether the taxpayer’s entitlement to claim the credits had expired due to the four year rule in s 47-5(1) of the Fuel Tax Act. This provision is analogous to s 93-5 of the GST Act.

As observed by the Full Court (at [122]), “the taxpayer made a self-assessment, deemed to be an assessment, under which it calculated (on this assumption incorrectly) its net fuel amount by assessing its total fuel tax credits by reducing the amount of its fuel tax credits ascertained under s 43-5(1) by the amount of the road user charge for the fuel pursuant to s 43-10(3). The taxpayer now contends that it should not have so reduced its fuel tax credits under s 43-10(3), with the result that the amount of its total fuel tax credits is increased and its net fuel amount is reduced.”

The Commissioner contended that the taxpayer’s entitlement to claim the fuel tax credits had expired by reason of the operation of s 47-5(1) of the Fuel Tax Act, which states as follows:

You cease to be entitled to a fuel tax credit to the extent that it has not been taken into account, in an assessment of a net fuel amount of yours, during the period of 4 years after the day on which you were required to give to the Commissioner a return for the tax period or fuel tax return period to which the fuel tax credit would be attributable under subsection 65-5(1), (2) or (3).

The Commissioner contended that the section was engaged because the taxpayer had not “taken into account” the additional fuel tax credits by claiming them in its BAS within four years. The Full Court rejected this contention and concluded as follows (at [129]:

We do not accept the respondent’s submission that the non-inclusion of amounts referable to the road user charge in the taxpayer’s BAS has the result that those amounts were not taken into account in an assessment, or what may be implicit in it, which is that the meaning of s 47-5 is controlled by what is in the integers of a taxpayer’s BAS. Nor do we accept the respondent’s submission that what is “taken into account” in an assessment of a taxpayer’s net fuel amount, for the purposes of s 47-5(1), is the specific elements of the statutory formula for net fuel amount in s 60-5, relevantly here “total fuel credits”, and does not encompass, as the Tribunal found, an (unreduced) fuel tax credit amount which is part of the calculation of the total fuel credits amount

The Full Court appeared to adopt a broad view of the meaning of the expression “taken into account, as reflected in the following observation at [131]: (emphasis added)

The statutory language is broad enough to encompass, as we would see no reason to exclude from its operation, credits the taxpayer has taken into account in working out its net fuel amount…Further, it is relevant that “assessment” is defined in s 110-5 of the Fuel Tax Act by reference to the meaning given to that term in s 995-1 of the Income Tax Assessment Act which is, in relation to an assessable amount such as a net fuel amount, the “ascertainment” of that amount. That term, as defined, describes not an outcome or an amount or a notice of assessment (or BAS), but a process the completion of which has the consequence that a specific amount becomes due…When the term “assessment” as used in s 47-5(1) is understood in this way, there is little difficulty in describing an integer representing the taxpayer’s unreduced credits as having been taken into account in an assessment by reason of it having formed part of a calculation (the process) which produced the net amount recorded in the taxpayer’s BAS that created an entitlement to a refund (the consequence) by the deemed assessment mechanism.

The decision has clear implications for the Commissioner’s draft Draft Miscellaneous Taxation Ruling MT 2018/D1 ‘Miscellaneous tax: time limits for claiming and input tax or fuel tax credit’, which was issued in November 2018 (my initial comments on the draft ruling can be accessed here). The underlying premise to the draft ruling is that fuel tax credits and input tax credits are only “taken into account” to the extent that the taxpayer actually claims the credits in its BAS.

 

Tribunal finds taxpayer not entitled to input tax credits for the purchase of vehicles and equipment from a related entity

In Byron Pty Ltd and Commissioner of Taxation [2019] AATA 2042 the Tribunal found that the applicant was not entitled to claim input tax credits with respect to the purchase of vehicles and equipment, most of which was said to have been acquired from a related entity. While the Tribunal was not satisfied that the applicant made the creditable acquisitions, in the course of its reasons the Tribunal made some observations about the breadth of  the concepts of “taxable supply” and “creditable acquisition” in the context of the GST Act. In particular, the Tribunal saw merit in the applicant’s contention that the vendor was required to own, control or possess the assets before it could make a taxable supply.

The Tribunal found that it was not persuaded that the applicant was entitled to claim the credits, essentially because of the lack of evidence put before the Tribunal. In this context, the Tribunal observed as follows (at [4]):

The factual details of the arrangements concerning the taxpayer, such as they were before the Tribunal, were sketchy and unreliable and, significantly, there was no written sale agreement nor evidence of the terms of any oral agreement about the supply and acquisition of the vehicles and equipment in question. The individuals who could have probably shed light on the agreement (if any) and what any payments made by the Company were for, did not give evidence in these proceedings. In all the circumstances, I am not persuaded that the Company is entitled to claim the ITCs as it failed to discharge the burden of proving that the assessments issued to it were excessive…

While the applicant was not able to adduce sufficient evidence to satisfy the Tribunal that it made the creditable acquisitions claimed, in the course of its reasons, the Tribunal made some observations about the broad scope of the concepts of “taxable supply” and “creditable acquisition” in the context of the GST Act.

The Commissioner contended that as the vendor was not the lawful owner of the of the vehicles and equipment, it was not able to on-sell the vehicles and equipment and thereby make a taxable supply to the Company. Consequently, the Company did not make creditable acquisitions. Additionally, the Commissioner contended that the Company did not have the capacity to pay for the vehicles and equipment and did not provide consideration nor was it liable to provide consideration.

The Tribunal referred to the following submission of the applicant (at [76]):

The Company’s counsel submitted that the requirements to establish a “taxable supply” set out in s 9-5 of the GST Act do not specify that the supplier must be the owner of the thing supplied, but that the provision relevantly focuses on whether there is a genuine agreement between the supplier and the recipient for the supply of anything for consideration. It was also submitted there is nothing in the definition of “consideration” in s 9-15 that entails ownership but that it is equally broadly defined, like the statutory definitions of “supply” and “acquisition”.

The Tribunal found there to be “considerable merit” as to the legal arguments of counsel for the Company as to the meaning of “supply”, “acquisition” and “consideration”. The Tribunal observed that:

77. Undoubtedly, the definition of “supply” in s 9-10 of the GST Act is extremely broad. Section 9-10(1) expressly states “[a] supply is any form of supply whatsoever” and s 9-10(2) then proceeds with the expression, “[w]ithout limiting subsection (1), supply includes any of these…” to list things which may not even be the subject of ownership or exclusive ownership. It specifically references in paragraph (e) of s 9-10(2) “a creation, grant, transfer, assignment or surrender of any right” and in paragraph (g) of s 9-10(2) “an entry into, or release from, an obligation: (i) to do anything: …” Section 9-10(3) further expands the boundaries of the definition of “supply” by expressly stating, “[i]t does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply”.

79. Correspondingly, the meaning of “acquisition” in s 11-10, which mirrors the definition of supply, is equally very broad and it also readily covers things where legal ownership is not required. Rather, applying the High Court’s interpretation, the acquisition could be the acquiring of anything of value received by the recipient, by any means. On the taxpayer’s submission, it was therefore, immaterial whether as a matter of fact the Byron Trust legally owned the assets that it purported to sell to the Company and all that was required was for the Byron Trust to genuinely agree to furnish the assets to the Company so that it had physical possession and or control over the assets.

The Tribunal also found that there was merit in the applicant’s submission that it had provided “consideration” for the supplies by making payment to the third party financiers – being payments “in connection with” the supply. The Tribunal observed that “consideration” in the context of the GST Act takes on a wider meaning than contractual consideration.

Government introduces Bill to combat illegal Phoenixing – including making Directors personally liable for unpaid GST

Yesterday the Government introduced the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 into the House of Representatives. The Bill implements four measures to combat illegal phoenixing activity that were announced in the 2018-19 Budget.The measures include three that impact GST:

    • extending the power of the Commissioner to make estimates of tax to include an entity’s “net amount” under the GST Act;
    • extending the Director Penalty Regime (DPR) to GST (and luxury car tax and wine equalisation tax) – making directors personally liable for the company’s unpaid tax;
    • expanding the ATO’s power to retain refunds where there are outstanding tax lodgements.

The documents can be accessed as follows:

My post discussing the Budget announcements can be accessed here.

Summary of the proposed legislation

Estimates

The Commissioner currently has the power in Division 268 of Schedule 1 to the Taxation Administration Act (TAA) to make estimates of an entity’s liability to pay PAYG withholding and superannuation guarantee charge and to recover the amount of those estimates from taxpayers. A taxpayer becomes liable to pay an estimate when the Commissioner gives notice of the estimate to the taxpayer.

The Bill proposes to extend the estimates regime to include an entity’s “net amount” under the GST Act. This will include any applicable LCT and WET. Because an entity is not under an obligation to pay a net amount until it has been assessed (either by the lodgement of an activity statement or the making of an assessment by the Commissioner), the proposed amendments will deem the estimated net amounts to be payable. Further, the net amount is deemed to be payable on the day that the entity was required to lodge its GST return.

The amendments will apply to the first tax period after the date of royal assent.

Director Penalty Notices

The director penalty regime in Division 269 of Schedule 1 to the TAA makes directors of a company personally liable for specified taxation liabilities of the company in certain circumstances of non-payment by the company. The regime presently includes PAYG withholding, superannuation guarantee charges and estimates of those amounts made by the Commissioner under Division 268.

The Bill proposes to extend the regime to include a company’s unsatisfied liabilities to pay net amounts and GST instalments, including estimates of those amounts made by the Commissioner.

It will be a defence if the director was unable to comply with the obligation due to illness or other good reason, or that the director took all reasonable steps to comply with the obligation. It will also be a defence if the company adopted a reasonably arguable position and the company took reasonable care.

The amendments will apply to the first tax period after the date of royal assent.

Retention of refunds

The Commissioner is currently authorised to retain refunds where the taxpayer has failed to provide a BAS (s 8AAZLG of Schedule 1 to the TAA) or where the Commissioner is verifying information provided by the taxpayer (s 8AAZLGA). The Bill proposes to extend the circumstances in which the Commissioner may retain refunds to include where the taxpayer has failed to lodge a return (such as an income tax return) or provide other information that may affect the amount of the refund.

The amendments will apply to refunds the Commissioner is otherwise required to pay on or after the date of royal assent.

Tribunal finds sale of real property was eligible for the margin scheme

In The Trustee for the Seabreeze Estate Unit Trust and Commissioner of Taxation [2019] AATA 1395 the tribunal found that the taxpayer was entitled to apply the margin scheme to work out the GST payable on the sale of real property because the property was eligible for the margin scheme.

The issue before the Tribunal was whether the vendor, who sold the property to the taxpayer more than 10 years previously, chose to apply the margin scheme in working out the GST on the supply of the property. While there was no direct evidence available to support this conclusion, the Tribunal was nevertheless satisfied, on the balance of probabilities, that the taxpayer did acquire the property under the margin scheme and therefore the sale of the property was eligible for the margin scheme.

The decision provides a useful example of the operation of the legislative regime in Part IVC of the Taxation Administration Act, where the onus of proof falls on the taxpayer to establish, on the balance of probabilities, that the assessments made by the Commissioner are excessive. As observed by the Tribunal (at [5]), “the taxpayer must persuade the Tribunal of its position and show the assessments issued by the Commissioner are excessive or otherwise incorrect and what the assessments should have been”.

The making of inferences – some general principles

The decision illustrates that a taxpayer  does not necessarily require direct evidence to be successful in review proceedings and that it can be successful if sufficient evidence is produced whereby the Tribunal can draw the necessary inferences to support the taxpayer’s position. In McCormack v Federal Commissioner of Taxation (1979) 13 CLR 284 Murphy J said as follows (at 323):

A taxpayer might discharge the burden of proof placed on him by s. 190 (b) in any of several ways. He may prove all relevant circumstances and from these establish that an inference should be drawn that the property (from the sale of which by the taxpayer a profit arose) was not acquired by him for the purpose of profit-making by sale. Or he may prove by direct evidence that such a purpose did not exist. The burden might also be discharged by a combination of direct evidence and inference from other circumstances. He may, of course, rely upon any evidence or any inference from evidence adduced by the Commissioner.

Where direct evidence is not available, it is open to a Tribunal to make an inference that is a reasonable deduction from the evidence (Tisdall v Weber [2011] FCAFC 76 at [129]). In this context,  the following guiding principles were identified by the Tribunal in Armithalingam and Commissioner of Taxation [2012] AATA 449 at [119]:

  • The search is always for the existence of a body of evidence which might, reasonably, sustain a relevant finding of fact or conceivably, permit a particular inference to be drawn: Tisdall v Webber [2011] FCAFC 76 at [127];
  • It is important to bear in mind also that the inferential process is not one where speculation, guesswork or mere assumption is involved: Tisdall v Webber [2011] FCAFC 76 at [128];
  • A conjecture may be plausible, but it is effectively still a mere guess. An inference is a deduction from the evidence, and if reasonable can be treated as part of the legal proof to be considered in making a factual determination in any particular proceeding: Bell IXL Investments Ltd v Life Therapeutics Ltd [2008] FCA 1457 at [14];
  • In questions where direct proof is not available, it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference – they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is one of conjecture. But if circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought, though the conclusion may fall short of certainty, it is not to be regarded as mere conjecture or surmise: Bradshaw v McEwans Pty Ltd [1951] HCA 480 quoted with approval in Luxton v Vines [1952] HCA 19; (1952) 85 CLR 352 at 358 per Dixon, Fullagar and Kitto J.

The facts

The property was acquired by the taxpayer in January 2005. The vendor had acquired the property in October 2003 for $1,200,000 and sold the property to the taxpayer in January 2005 for $1,080,000, therefore making a loss. The Activity Statement of the vendor was in evidence and it showed that no GST was reported by the vendor.

A copy of the front page of the contract was in evidence, in the form of the NSW 2000 edition of the standard contract of sale of land, but the balance of the contract was not available, despite searches being made. More than 10 years had passed and the vendor’s business records had been disposed of or could not be found. The Tribunal noted that the front page of the contract referred to a purchase price of $1,080,000 and that a note above the signature block stated “NOTE: Subject to Clause 13, the price INCLUDES goods and services tax (if any) payable by the vendor”.

The second page of the standard contract of sale included a box that could be ticked if the  margin scheme applied to the property. However, as noted by the Tribunal, that page was not available and a director of the taxpayer could not recall whether the box was ticked. The director also gave evidence that the only thing he ever looked at was “the top line”, and because GST was not payable he did not ask for a tax invoice. Evidence was also given that the taxpayer was not registered for GST until January 2006 because at that time the taxpayer started to incur expenses on the development of the property. The Tribunal found that the director was a reliable witness and was satisfied with his recollection that no GST was payable on the sale and there was no need to register the taxpayer to claim an input tax credit.

The contentions of the parties and the findings of the Tribunal

The taxpayer contended that the margin scheme must have been used by the vendor because there was no margin made on the sale, the property being sold at a loss. If GST was paid, this would have required the vendor to pay 1/11th of the sale price as GST. The taxpayer contended that this conclusion was entirely consistent with the evidence of the director. The taxpayer also relied on the fact that the vendor did not report GST in its activity statement.

The Tribunal observed that the Commissioner’s contentions centred on the onus of proof borne by the taxpayer as it was unable to adduce direct evidence of the vendor’s choice to use the margin scheme. The Commissioner also stated that, within supporting documentation, or any other evidence, it was impossible to know the basis of the vendor lodging a nil BAS.

The Tribunal noted that the unchallenged evidence was as follows:

  • the vendor sold the property to the taxpayer for less than it acquired it – in other words, it had a negative margin
  • the vendor did not report the sale in its BAS
  • the taxpayer did not register for GST at the time of the purchase of the property but did so approximately a year later

Having regards to these matters, the Tribunal concluded (at [58]) that “I was persuaded that the Trustee acquired the Land from the Partnership under the GST margin scheme on the evidence before me supported by the strong inferences able to be drawn from the conduct of the Partnership and the Trustee. Accordingly, my finding is that the Partnership chose to use the margin scheme in working out the amount of the GST on the supply”.

 

 

 

 

Tribunal denies taxpayer’s entitlement to input tax credits for the acquisition of gold

In Very Important Business Pty Ltd and Commissioner of Taxation [2019] AATA 1120 the Tribunal has affirmed the decision of the Commissioner to deny the applicant’s entitlement to input tax credits with respect to the purchase of gold.

The applicant claimed to operate a precious metal refinery during the last quarter of 2015 and during that period claimed it was entitled to input tax credits with respect to purchases of scrap gold. The basis of the claim was that it was “a refiner of precious metals”, as defined in the GST Act. The applicant also claimed that the acquisitions were made for a creditable purpose as its subsequent supplies of precious metal (that is, gold it had refined into bullion) were GST-free supplies pursuant to s 38-385 of the GST Act.

The Commissioner questioned whether many (or any) of the acquisitions of scrap gold occurred, in part due to the lack of independent evidence that the applicant had the financial capacity to pay for the gold, and the applicant’s record keeping was seriously deficient. The Commissioner also contended that the applicant was not a refiner of precious metals, and therefore was not making GST-free supplies.

The Tribunal discussed the relevant provisions of the GST Act as they related to the gold industry. The observations of the Tribunal included the following:

    • The GST Act provides that a supply of “precious metal” is:
      • a GST-free supply if it is the first sale of the refined metal after its refining by, or on behalf of, a supplier to a dealer in precious metal, provided that the entity that the refined the metal is a refiner of precious metal: s 38-385; or
      • otherwise, an input taxed supply of precious metal: s 40-100.
    • The combined effect of ss 9-5, 9-30(1), 9-30(3) and s 38-385 is that the first sale of “precious metal” by “a refiner of precious metal” to a dealer in precious metal will be GST-free. This special arrangement was established because gold refined in Australia is sold into what is effectively a world-wide market. Australia’s gold refiners would be at a commercial disadvantage if they had to pay GST to the Commissioner on the first sale of precious metal or were unable to claim input tax credits on their feedstock.

The Tribunal agreed with the Commissioner and concluded that the applicant was not a refiner of precious metals during the quarterly tax period at issue as it had not commenced carrying out sufficient refining operations to be considered “a refiner” (the Tribunal left open the question of whether the applicant was a refiner at a later point). The Tribunal further concluded that the applicant was unable to explain how it could fund the acquisitions and had failed to satisfy the Tribunal that it had provided consideration for all of the acquisitions or was liable to pay such consideration.

The Tribunal found that in making these conclusions it was unnecessary to consider whether the supplies of gold by the applicant were input taxed supplies of precious metals pursuant to s 40-100 of the GST Act or were taxable supplies. The Tribunal also expressed no view on whether the activities conducted by the applicant constituted “refining” in the sense intended by the legislation. I understand that a matter is currently reserved before the Tribunal in which these issues may be addressed.