Commissioner publishes GST ruling on supplies of goods connected with the indirect tax zone

Yesterday the Commissioner published GSTR 2018/2 ‘Goods and services tax: supplies of goods connected with the indirect tax zone’. The ruling outlines the Commissioner’s views on when supplies of goods are connected with Australia under s 9-25(1), (2) and 3 of the GST Act.

The ruling is the second of a suite of rulings  that are to replace GSTR 2000/31 ‘Goods and services tax: supplies connected with Australia’. The first ruling was GSTR 2018/1 ‘Goods and Services tax: supplies of real property connected with the indirect tax zone (Australia)‘ which outlines the Commissioner’s views on when a supply of real property is connected with the indirect tax zone under s 9-25(4) of the GST Act. My post on that ruling can be accessed here. I understand that a third ruling will follow that addresses the supply of “anything else” under s 9-25(5) – which includes intangible property and services.

The provisions involve a number of “connection tests”, which connect supplies of goods to Australia. Various “disconnection tests” in s 9-26 may then apply to remove that connection, which removes the transaction from the GST net. Also, some supplies of goods will remain connected with Australia but will be GST-free – such as exports.

The ruling illustrates that the provisions are to operate in the following way.

Connection tests – s 9-25(1), (2) and (3)

A broad test is applied to determine whether supplies of goods are connected with Australia. The place the supplier or recipient carries on business is not relevant to this test (although it may be relevant to the disconnection test discussed below) – rather, the focus is on the three following circumstances:

  • Supplies of goods wholly within Australia – s 9-25(1)

This test applies if the goods are physically delivered or made available for collection in Australia. This can occur where the supplier delivers the goods from a place in Australia to the recipient’s nominated place in Australia. Or alternatively where the supplier has the goods imported into Australia, shipped to themselves, and then delivered or made available to the recipient in Australia.

Where the recipient imports the goods into Australia, the supply is not connected under this test. However this may be a taxable importation by the recipient.

  • Supplies of goods from Australia – s 9-25(2)

This test applies to a supply involving the removal of goods from Australia. However, the supply may be GST-free as an export.

This test also applies to the lease of goods where the goods may be removed from Australia. However, the supply will be GST-free to the extent that the goods are used overseas.

  • Supplies of goods to Australia – s 9-25(3)

A supply of goods is connected with Australia if the supply involves the goods being brought to Australia and the supplier imports the goods into Australia. This may involve both a taxable supply under s 9-5 and a taxable importation under s 13-15 – however, if the supplier makes a creditable importation the supplier will be entitled to an input tax credit for the importation.

If the supply of goods involves the goods being brought into Australia and the supplier installs or assembles the goods in Australia (for example, a large piece of mining equipment), the supply is treated as the supply goods and a separate supply of the installation. However, where the supplier is a non-resident the services component may be disconnected under Item 1 of the table under s 9-26.

Disconnection tests – s 9-26

The ruling observes that ordinarily, a supply of goods that is delivered or made in Australia is connected with Australia – even where the supply is between two non-residents, neither of which makes the supply or acquisition in the course of an enterprise carried on in Australia.

Two exemptions can operate to disconnect certain supplies between non-residents for supplies that involve the transfer of ownership of goods that the subject to a lease – for example the sale of aircraft with an underlying lease:

  • Supply between non-residents of leased goods – Item 3 of the table under s 9-26

This exemption applies to a supply of goods subject to a lease involving a transfer of ownership from one non-resident lessor to a new non-resident lessor where: the supplier does not make the supply through an enterprise they carry on in Australia, the recipient does not acquire the goods to any extent for the purpose, and the goods will continue to be leased on substantially similar terms.

  • Supply by way of continued lease of goods – Item 4 of the table under s 9-26

This exemption applies to new lease arrangements entered into between the non-resident that acquired the goods and the entity that continued to lease the goods. The lease must be on substantially similar terms or conditions. The ruling accepts that the terms need not be identical, some variations are permissible.

Commissioner publishes public ruling on supplies of real property connected with the indirect tax zone (Australia)

Yesterday the Commissioner published GSTR 2018/1 ‘Goods and Services tax: supplies of real property connected with the indirect tax zone (Australia)‘. The ruling outlines the Commissioner’s views on when a supply of real property is connected with the indirect tax zone under s 9-25(4) of the GST Act. The ruling replaces the Commissioner’s views set out in GSTR 2000/31 ‘Goods and Services tax: supplies connected with Australia” and GSTD 2004/3 ‘Goods and services tax: is a supply of rights to accommodation a supply of real property for the purposes of the A New Tax System (Goods and Services Tax) Act 1999. 

Section 9-25(4) as follows:

A supply of *real property is connected with the indirect tax zone if the real property, or the land to which the real property relates, is in the indirect tax zone.

The ruling states that the reference in s 9-25(4) to “land which the real property relates” means that an interest in, or a right over land, is connected with Australia if the physical land to which the interest or right over it relates, is in Australia. The test is the location of the land and not the location of the right.

The ruling also states that the supply of rights to accommodation will be a supply of real property connected with Australia when the accommodation is in Australia. This is irrespective of whether the supply of rights to accommodation provides any actual accommodation to the guest. For example, the supplier could be a tour operator which grants a traveler the right to stay at a hotel in Australia, where the hotel is operated by a different entity. The tour operator is making a supply of rights to accommodation in Australia which is a supply of real property connected with Australia.

The ruling applies from 22 August 2018. 

Inspector General of Taxation publishes report on GST Refunds

Today the report from the Inspector General of Taxation (IGOT) on GST refunds was released to the public. The report was provided to the Minister in March 2018.

The IGOT reviewed the end-to-end process involved in refund verification including from initial case selection through to the review and audit activities. Overall, the IGOT found that the ATO’s administration of GST refunds operated efficiently with the vast majority of refunds released without being stopped for verification. Some opportunities for improvement were identified and the IGOT identified that the ATO can streamline its instructions and guidance to staff when interacting with taxpayers, taking into account their circumstances and the adverse financial impacts that delayed refunds can have on their cash flow.

The IGOT made 5 recommendations (comprising 16 parts) to the ATO which were aimed at:

  • developing a framework for continuous improvement of its automated risk assessment tools;
  • streamlining its guidance to staff and implementing tools to assist them in complying with their obligations under section 8AAZLGA of the Taxation Administration Act 1953;
  • enhancing its information requests to taxpayers and providing a channel for pre-emptive provision of such information;
  • improving its notification of when taxpayers’ objection rights to the retention of refunds has been triggered and assisting them to lodge such objections effectively; and
  • raising awareness of staff and taxpayers about financial hardship issues, appropriately considering them and enabling automated partial release of refunds.

The ATO has agreed in full or in part with all 5 recommendations (11 out of 16 parts).

Particular concerns emerged in relation to the ATO’s use of refund retention to address risks of serious fraud within the precious metals industry. The IGOT acknowledged the seriousness of these fraud risks but also noted the prolonged timeframes to finalise such cases. The IGOT has recommended the Government consider amending the relevant provision to allow the ATO to effectively investigate and address risks of fraud the seriousness of which has been established.

The report can be accessed here.

The response by the ATO can be accessed here.

The response by the Government can be accessed here.

 

 

Federal Court allows Commissioner’s appeal against order of Tribunal for the production of internal legal advice

On 23 January 2018 I reported on a decision of the Tribunal in ACN 154 520 199 Pty Ltd and Commissioner of Taxation [2018] AATA 33 where the Tribunal ordered the Commissioner to produce internal legal advice. The order was made pursuant to s 37(2) of the Administrative Tribunal Act whereby the Tribunal can order the decision maker (in this case the Commissioner) to lodge with the Tribunal “documents that may be relevant to the review of the decision by the Tribunal”. My post discussing that decision can be accessed here.

In Commissioner of Taxation v ACN 154 520 199 Pty Ltd (in liq) (formerly EBS & Associates Pty Ltd) [2018] FCA 1140 the Federal Court allowed the Commissioner’s application for judicial review of the Tribunal’s decision and ordered that the decision be set aside.

The review proceedings filed with the Tribunal involve GST assessments totalling in excess of $122 million and the imposition of penalties totalling over $58 million. The substantive review proceedings are scheduled to be heard before the Tribunal in September 2018.

The subject of the GST assessments was the entitlement of the respondent to claim input tax credits in respect of acquisitions described as “scrap gold” which was used in the production of  gold bullion that had a 99.9% fineness. The Court (at [6]) described the issue in the following terms :

The Commissioner determined that, by ss 11-15(2)(a), 38-385 and 40-100 of the GST Act, EBS’ input tax credit entitlement turned on, amongst other things, EBS’ use of the scrap gold to make the first supply of gold bullion after refining. Under the GST assessments, the Commissioner disallowed the input tax credits that EBS had claimed for acquiring scrap gold, which the Commissioner found had the same 99.99% purity as the gold bullion that EBS produced from that scrap. Those input tax credits were disallowed on the basis that EBS did not undertake refining, because the purity of the scrap inputs into EBS’ production process was the same as the purity of EBS’ bullion output. That basis for the assessments is referred to here for convenience as the “no refining issue”.

 The Commissioner also issued penalty assessments and did not exercise his discretion to remit those penalties. In respect of this issue, the Tribunal ordered the Commissioner to produce internal legal advice prepared by officers of the ATO that fell within the following category:

Any internal legal advice produced by officers of the Australian Taxation Office in relation to the contention by the Respondent that s 38-385 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) does not apply to the supplies of gold bullion by the Applicant because the supply of that bullion was not the first supply after its refining because the Applicant did not undertake any ‘refining’ to produce the bullion as the refining material from which the gold was produced had a purity of at least 99.5%.

The Court (at [26]) described the reasoning of the Tribunal in making the direction in the following terms:

The Tribunal then went on to state that internal legal advices produced by officers of the Commissioner on the no refining issue which either support EBS’ position, state that it is arguable or do not support its position at all, “may be relevant” to the Tribunal’s review of the objection decision, in that those advices would address EBS’ “particular circumstances” and would go to the issue of whether EBS’ position on the no refining issue was reasonably arguable, as was in turn relevant to the issue of remission. The Tribunal considered that EBS’ application for the disclosure was not premature or a fishing expedition, and that, given that the category of documents specified was narrow, it was appropriate to issue a direction for the disclosure of the relevant advices pursuant to s 37(2).

The Court (at [46]) observed that the “live question” to be answered was whether the Tribunal’s opinion that the legal advices sought to be produced may be relevant “is an opinion that was capable of being, and was, in fact, formed, by reference to a correct understanding of the law applicable to the merits review process”. If it was shown that that the opinion actually formed was not an opinion of this character, then the necessary opinion does not exist in law, the direction was made without jurisdiction and it thus constituted a jurisdictional error.

In considering this question, the Court (at [49]) considered that it was impossible to see how the factors that may be taken into account by the Tribunal on the question of remission of penalties could be expanded to include subjective material, especially if that material was not before the original decision-maker and could not have been known to respondent so as to influence and in some way explain the stance that it took. Any internal legal advice of the Commissioner could not be relevant to the objection question before the Tribunal on the remittal of penalties. It followed that the Tribunal formed an opinion that the internal legal advices concerning the respondent and the “no refining issue” may be relevant upon a basis that was not open to it. The decision to give the direction was made without jurisdiction being engaged and therefore constituted a jurisdictional error.

I also note that in related interlocutory proceedings, in ACN 154 520 199 Pty Ltd and Commissioner of Taxation [2018] AAT 2404 the Tribunal allowed a summons to be issued to a third party so as to explore issues of credit going to expert evidence to be relied on by the Commissioner at the substantive hearing.

New South Wales State Revenue Office issues ruling to clarify duty position on the new GST withholding rules

Today the New South Wales State Revenue Office issued Revenue Ruling DUT 047 which confirmed that duty will be payable on the total consideration, including any amount on account of GST, even if the new GST withholding rules apply and the purchaser pays the amount directly to the ATO instead of paying the amount to the vendor.

The ruling confirms that the duty payable on the sale of real property will remain the same, regardless of whether the GST is required to be withheld by the purchaser and paid directly to the ATO or the GST is paid to the vendor at settlement as part of the settlement proceeds.

I would expect that each of the other State Revenue Offices will adopt the same position.

The Budget and GST – the war on phoenix activity continues

The recently introduced provisions requiring purchasers of real property to withhold up to 10% of the purchase price on account of GST are intended “to address and prevent tax evasion by unscrupulous property developers” (see the media release). In a similar vein, the Government announced in the Budget last week that the corporations and tax laws will be reformed to provide regulators with additional tools to assist them to deter and disrupt illegal phoenix activity. The package of reforms includes the following matters that impact GST:

  • extending the Director Penalty Regime (DPR) to GST (and luxury car tax and wine equalisation tax) – making directors personally liable for the company’s debts;
  • expanding the ATO’s power to retain refunds where there are outstanding tax lodgements.

The Budget is short on detail, but these reforms will likely have a significant impact on the way directors view their company’s GST liabilities. Set out below are some general comments on the position in other countries and how the DPR regime operates in Australia.

The position in other countries

The effect of the reforms will bring Australia in line with Canada, which makes directors personally liable for unpaid GST, although the ability to recover those liabilities under the DPR regime gives the ATO a much easier path. In Canada, recovery can only be made from directors where the Revenue has first demonstrated its inability to recover the amounts directly from the company, whether by the execution of a writ against the corporation or proving in the liquidation of the company.

In New Zealand, directors may be liable for unpaid GST in certain circumstances. There there must have been an arrangement entered into by the company, an effect of which was being unable to meet a tax liability (either arising at the time of the arrangement or after), with it being reasonable to conclude a purpose of the arrangement was to have that effect and that a director making reasonable enquiries at the time would have anticipated that a tax liability would or would likely be required to be met.

The DPR regime in Australia

Division 12 of Schedule 1 to the Taxation Administration Act 1953 (TAA) imposes various withholding obligations on entities, including s 12-35 which imposes an obligation on an entity to withhold an amount from the salary or wages it pays to an individual as an employee. The new withholding obligation on purchasers is to be included in this Division.

Subdivision 269-A of Schedule 1 imposes an obligation on directors to cause the company to comply with certain withholding obligations, in particular PAYG withholding and superannuation guarantee. These obligations continue until such time that:

  • the company complies with its obligation; or
  • an administrator of the company is appointed; or
  • the company begins to be wound up.

Directors become liable to pay the Commissioner a penalty equal to to unpaid amount if the company does not comply with its obligation to withhold. The issue of a Director Penalty Notice to the director is a requirement before proceedings can be commenced by the ATO to recover the penalty and proceedings cannot be commenced until 21 days after the notice is given.

The penalty will be remitted if, within 21 days after the notice is given, the director causes one of the following to occur:

  • payment of the liability by the company;
  • appointment of an administrator of the company; or
  • commencement of winding up of the company.

However, the second and third options cannot be used if more than three months have elapsed from the company’s due date – the only option in those circumstances is for the company to pay the liability.

The liability of a director to the penalty is subject to a number of defences, including:

  • because of illness, or for some other good reason, it would have been unreasonable to expect the director to take part, and the director did not take part, in the company;
  • taking all reasonable steps to ensure that one of the following happened:
    • the directors caused the company to comply with its obligation
    • the directors caused an administrator to be appointed
    • the directors caused the company to begin to be wound up
  • or there were no reasonable steps the director could have taken to ensure that any of the above things happened

An additional defence to the penalty for superannuation guarantee is where the penalty resulted from treating the Superannuation Guarantee (Administration) Act 1992 as “as applying to a matter or identical matters in a particular way that was reasonably arguable, if the company took reasonable care in connection with applying that Act to the matter or matters”. Effectively where the entity had a reasonably arguable position and it took reasonable care.

The DPR was extended to superannuation guarantee obligations pursuant to the Pay as You Go Withholding Non-Compliance Tax Act 2012. The Explanatory Memorandum to the Bill explained the concepts of reasonable care and reasonably arguably in the following terms:

Reasonable care

1.55              Exercising reasonable care means making a reasonable attempt to comply with the relevant law.  The effort required is one commensurate with all the company’s circumstances, including its knowledge, experience and skill.

Reasonably arguable

1.56              The term reasonably arguable is defined in subsection 995‑1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to have the meaning given by section 284-15 of Schedule 1 to the TAA 1953.  A matter is reasonably arguable ‘if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect’.  This definition provides a suitable standard for the purposes of the defence.

1.57              Generally, if a company has a ‘reasonably arguable’ position, it will have also exercised reasonable care.  However, there may be unusual cases where a company has failed to exercise reasonable care, but by chance has a reasonably arguable position.  Both standards must be satisfied in order for the defence to apply.

I would expect that a similar provision will apply to unpaid GST. The GST can be a complex tax and there are numerous uncertainties in its application.

Commissioner issues draft Law Companion Guide on GST withholding for purchasers of real property

Yesterday the Commissioner published draft Law Companion Guide  LCR 2018/D1 – Purchaser’s obligation to pay an amount for GST on taxable supplies of certain real property which sets out the Commissioner’s view on how the new GST withholding provisions are to apply. When finalised, the guide will operate as a public ruling with effect from 1 July 2018. Comments on the draft are due by 25 May 2018.

 

 

 

Legislation introduced for GST withholding by purchasers of new residential premises and potential residential land

Yesterday legislation was introduced into Parliament to require purchasers of new residential premises and “potential residential land” to withhold an amount from vendors and to pay the amount directly to the ATO at or before settlement. The legislation takes effect from 1 July 2018.

The documents can be accessed here:

A media release by the Minister for Revenue and Financial Services (here) states that the changes will prevent tax evasion by unscrupulous property developers that fail to remit the GST on sales of new residential premises and new subdivisions, despite having claimed GST on construction costs.

An Exposure Draft of the legislation was introduced on 6 November 2017 and my discussion of the draft can be accessed here.

Summary of the amendments

The withholding regime – s 14-250 of Schedule 1 to the Taxation Administration Act

The amendments are to be introduced into Schedule 1 of the Taxation Administration Act 1953 as an extension of the withholding provisions in Division 14. These provisions require a payer to withhold part of monies payable to another person in certain circumstances and to pay those amounts to the ATO – for example PAYG withholding.

S 14-250(1) and (2) – The withholding obligations will apply to the supply of:

  • “new residential premises” – other than premises have been created through substantial renovations of a building and commercial residential premises; and
  • “potential residential land” which is defined as “land that it is permissible to use for residential purposes, but does not contain any buildings that are *residential premises” – other than land which contains any building that is in use for a commercial purpose.

For the sale of “potential residential land”, the withholding obligation only arises if the purchaser is not registered for GST or does not acquire it for a creditable purpose.

S 14-250(6)-(7) – The purchaser must pay to the Commissioner an amount equal to 1/11th of the “price” for the supply, but where the margin scheme applies 7% of the “price” must be withheld – although the Minister may determine a higher percentage but not exceeding 9%. Where the contract of sale specifies an amount as the “contract price”, that is the price to be used.

S 14-250(4) – The amount must be paid on or before the day on which any of the consideration for the supply (other than as a deposit) is first provided. This will usually be at settlement, but for a contract payable by instalments, the obligation will be triggered at the time of payment of the first instalment (not being the deposit).

S 14-250(11) – Where there are multiple purchasers, the supply will be treated as separate supplies to each purchaser and each purchaser will be required to withhold the appropriate portion of the price. Purchasers who are joint tenancy are treated as single recipients.

Where the purchaser pays the amount to the Commissioner, the supplier will be entitled to a credit equal to that amount.

Disclosure obligations on the vendor – s 14-255

S 14-255(1) – A supplier must not make a taxable supply of “residential premises” or “potential residential land” to another entity unless, before making the supply, the supplier gives to the other entity a written notice including:

  • Whether the other entity will be required to make a payment under s 14-250 in relation to the supply.
  • If so, particular information including the amount required to be paid and when the amount is required to be paid.

A notice will need to be given each time residential premises are supplied as a taxable supply – not just where the supply falls within the amendments. This is to assist purchasers to comply with the legislation.

S 14-255(2) – The notification obligation does not apply to the sale of commercial residential premises or to “potential residential land” to a purchaser who is registered or acquires the land for a creditable purpose.

S 14-255(6) – If the supplier does not give the notice, it is liable to an administrative penalty of 100 penalty units (a penalty unit is currently $210).

S 14-255(3) – The failure of the vendor to comply with the notification obligation under (1) does not affect the purchaser’s obligation to withhold and to pay the Commissioner.

 

Penalties

If the purchaser does not pay the amount to the Commissioner the purchaser will be liable to a penalty equal to the amount payable – s 16-30 of Schedule 1 to the TAA. However, no penalty will be applied where:

  • the amount related to the taxable supply of new residential premises and the purchaser reasonably believed the premises not to be new residential premises, the purchaser received a notification stating that the premises were not new residential premises or the notification indicated that no amount was required to be paid to the Commissioner, and at the time consideration was first provided for the supply there was nothing in the contract or any other circumstances that made it unreasonable for the purchaser to believe that the notification was incorrect.
  • the purchaser gave to the vendor a bank cheque for the amount and made payable to the Commissioner on or before the day consideration was first provided (usually settlement)

Proposed commencement of the amendments

The amendments are to apply to supplies on which any of the consideration (other than the deposit) is first provided on or after 1 July 2018, regardless of the date of the contract of the sale. However, if the contract was entered into before 1 July 2018, the amendments do not apply if consideration (other than the deposit) is first provided before 1 July 2020. Transitional provisions also apply to existing “property development arrangements” .

Welcome to 2018 – Victorian Court of Appeal allows appeal and AAT orders the Commissioner to produce internal legal advice

Welcome to 2018. Two decisions relating to GST were handed down over the break.

In December 2017 the Victorian Court of Appeal allowed the appeal brought by the vendor in A & A Property Developers Pty Ltd v MCCA Asset Management Ltd as trustee for the MCCA Property Fund [2017] VSCA 365. The Court found that the insertion of the words “GST”, rather than “plus GST”, in the Particulars of Sale to the standard form contract of sale meant that the parties had agreed that the price was exclusive of GST and any risk of GST liability fell to the purchaser. My discussion of the decision of the primary judge (A & A Property Developers Pty Ltd v MCCA Asset Management Ltd [2016] VSC 653) can be accessed here.

Tate JA considered the contest to be a narrow one – described as follows:

…whether the inclusion of the letters ‘GST’ in the relevant box, rather than ‘plus GST’, is a sufficient indication that under the contract the risk of liability for GST lay with the purchaser. In other words, does the absence of the preceding single word ‘plus’ in the relevant box preclude the conclusion that the parties agreed to reverse the default allocation of liability for GST by employing the mechanism in general condition 13.1?

Her Honour considered that there was sufficient indication in the contract that the parties agreed to reverse the default allocation of the liability for GST. Her Honour considered the absence of the word “plus” did not preclude that conclusion. Had the parties remained content with the default allocation of liability for GST, there was no need for any words to be added to the box – the box could simply have been left blank. That blank box would have sat alongside all the other blank boxes in the particulars of sale. A reasonable business person would have understood the letters “GST” in the relevant box to mean that the parties, objectively, intended to reverse the default allocation of liability for GST to the vendor and intended to do so by employing the mechanism in general condition 13.1.

Osborn and Kaye JJA came to a similar conclusion. Their Honours were persuaded that: the inclusion of the letters “GST” in the Particulars of Sale; the parties being selective as to which spaces, in those particulars, were filled in; and the commercial context to that notation in the contract, taken together, lead to the conclusion contended for by the vendor – that the risk of liability for GST was to lie with the purchaser.

____________________________________________________________________________________________

In ACN 154 520 199 Pty Ltd and Commissioner of Taxation [2018] AATA 33 the Tribunal ordered the Commissioner to produce internal legal advice prepared by officers of the ATO that fell within the following category:

Any internal legal advice produced by officers of the Australian Taxation Office in relation to the contention by the Respondent that s 38-385 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) does not apply to the supplies of gold bullion by the Applicant because the supply of that bullion was not the first supply after its refining because the Applicant did not undertake any ‘refining’ to produce the bullion as the refining material from which the gold was produced had a purity of at least 99.5%.

The applicant sought the order pursuant to s 37(2) of the Administrative Tribunal Act whereby the Tribunal can order the decision maker (in this case the Commissioner) to lodge with the Tribunal “documents that may be relevant to the review of the decision by the Tribunal”.

The proceeding involved GST assessments and assessments of administrative penalties that were issued on the basis of recklessness by the applicant. The subject of the GST assessments was the entitlement of the applicant to claim input tax credits in respect of the acquisitions made in respect of the supply of gold bullion- whether those acquisitions were “creditable acquisitions”. Where that supply of gold bullion was GST-free under s 38-385, input tax credits would be available. However, where that supply was input taxed, s 11-15(2)(a) would block any entitlement to input tax credits. The Tribunal observed that the central issue in the substantive proceedings was directed to whether the supply of gold by the applicant was the first supply after it had been refined by the applicant.

The applicant submitted that the Tribunal should be satisfied that legal opinions prepared by internal legal advisors may be relevant to the decision under review. It was put to the Tribunal that the Commissioner had received internal written legal advice to the effect that the position adopted by the applicant was either correct or that the position adopted by the Commissioner was unlikely to be accepted by a court. The applicant contended that if, in making its statements to the Commissioner, a taxpayer adopted a position that is reasonably arguable, it cannot, a priori, have been “reckless” – In the alternative, the applicant contended that whether or not the taxpayer’s position was reasonably arguable was relevant to the consideration of whether a penalty should be remitted.

The Commissioner submitted that any legal advice obtained by him had no relevance to any “taxable fact” with which the proceedings were concerned, that a position may be reasonably arguable but still be reckless, that the request was premature, and that the advice was subject to legal professional privilege.

The Tribunal did not accept the Commissioner’s argument that the application was premature or a fishing expedition. The Tribunal concluded that such internal legal advice produced by officers of the Commissioner go to the issue of whether the applicant’s position is reasonably arguable, which is relevant to the issue of remission of penalties. Further, whether any documents produced are subject to legal professional privilege is a matter to be addressed when documents have been lodged and the question arises whether the Tribunal should direct that they provided to the applicant.

 

 

 

 

Tribunal finds the applicant’s professional valuations are not “approved valuations” for the purposes of the margin scheme

In Decleah Investments Pty Ltd and Anor as Trustee for the PRS Unit Trust and Commissioner of Taxation [2017] AATA 2418 the Tribunal found that the professional valuations obtained by the applicant were not “approved valuations” for the purposes of the margin scheme in Division 75 of the GST Act. The Tribunal found that the only “approved valuation” before it was that provided by the Commissioner, which gave a lower value to the land and resulted in a shortfall of GST for the applicant. The Tribunal also increased the penalties from 25% to 50% on the basis that the applicant’s behaviour was reckless.

The matter involved the sale of lots in a property development in which the Commissioner carried out two audits a number of years apart.

The first audit involved the sale lots by the applicant during the period 1 January 2004 to 31 March 2006. In the course of the audit, the applicant provided three valuations to the Commissioner. The third valuation valued the land at $20,000,000. The Commissioner did not accept any of the valuations as approved valuations and assessments were issued.

The applicant objected to the assessments and proceedings were brought before the Tribunal. The applicant obtained a fourth valuation of $34,000,000 which the Commissioner also rejected. The Commissioner obtained his own valuation of the land of $8,155,000. The matter was settled prior to hearing on the basis of an agreed value of $9,378,250, which equated to $17,051 per lot. The deed of settlement contained the following acknowledgement by the Commissioner:

the valuation of $17,051 per lot sold will not be applicable to tax periods on or after the tax period ended 31 March 2006, unless the taxpayer holds a supporting valuation of the land that complies with the requirements under Division 75 of the GST Act.

The second audit involved sales for subsequent tax periods. The Commissioner concluded that the applicant had not relied on an approved valuation and issued assessments on the basis of a margin determined by reference to the acquisition cost of the property, being $670,000, being $1,192 per lot. The Commissioner also issued penalty assessments at 50% on the basis of recklessness.

The applicant objected to the assessments and provided a fifth valuation of $22,000,000. All of the valuations produced by the applicant were provided by the same professional valuer.

At objection, the Commissioner found that none of the valuations provided by the applicant were approved valuations but partially allowed the objection by increasing the value of the land to $9,378,250, being the value agreed to in the settlement agreement  for the previous tax periods. The Commissioner also reduced the penalties from 50% to 25%.

The issue before the Tribunal was whether the applicant held an “approved valuation” – did any of the valuations provided by the applicant’s valuer comply with the requirements in Determination MSV 2005/3 or Determination MSV 2009/1? The Tribunal concluded that the answer was no. The only valuation that complied with those requirements was that produced by the Commissioner.

The Tribunal referred to the following statement of Middleton J in Brady King Pty Ltd v The Commissioner of Taxation (No.2) [2008] FCA 1918 where his Honour said:

The fact that there may be matters of subject analysis undertaken is encompassed and envisaged by the Determination which relies upon a professional valuer undertaking the task and coming to a valuation. However, in reaching the final valuation, the professional valuer must not deviate from the method of valuation dictated by the terms of the Determination.

As the land was acquired by the applicant prior to 1 July 2000, the land was to be valued at 1 July 2000. Both Determinations required that the valuation be done in accordance with professional standards.

The Tribunal observed that the applicant’s valuer had relied on a “discounted cash flow” methodology in the valuations and that his instructions were to perform the value on an as is basis. The valuer understood these instructions referred to actual costs and sales post valuation date. This allowed him to use actual costs and income at the time of making the valuation, which was August 2014. The valuer said that if he had been asked to perform the valuation on an as was basis, he would have been restricted to using only data known or predicted at the valuation date. The valuer’s evidence was that these instructions were taken from his interpretation of a letter provided by the ATO to the applicant in October 2009. The letter included the following paragraph:

… the market value for the subject property should have regard to the physical and legal state of the subject property as reflected at the date of valuation, being 1 July 2000. The valuation is to be completed on a ‘as is basis’ after consideration of all known factors affecting the market valuation as at the date of valuation. It is the value of the interest in the land, improvements, buildings and machinery fixed to the land, and any property rights connected to the interest that were in existence, in the condition, and under the approved zoning that applied as at the valuation date, 1 July 2000.

The Tribunal concluded that a proper reading of the letter from the ATO made it clear that the expression “as is” is a shorthand method of explaining that what was required was the relevant circumstances relating to the land as it existed at the valuation date. The Tribunal also observed that the discounted cash flow methodology is used in valuations of property at a particular date after discounting for risk of uncertain future events – it is forward looking, not backwards looking. The Tribunal concluded the valuer had misapplied the methodology – it was therefore not in accordance with professional standards and did not comply with either Determination.

The Tribunal agreed with the Commissioner that the objection decision made by the Commissioner (applying the agreed value of $9,378,250) was incorrect. The Tribunal accepted the Commissioner’s submission that the margin scheme can only be calculated by reference to an approved valuation. In other words, the Commissioner’s valuation of $8,155,000 must be applied.

The Commissioner submitted that despite the decision of the Commissioner to reduce the penalties from 50% to 25%, the appropriate level in this case was 50% because the applicant’s conduct was reckless.  The Tribunal agreed and set aside the Commissioner’s decision to reduce penalties, effectively re-instating the initial penalty of 50%.