Tribunal finds GST payable on the sale of new residential premises

In FKYL and Commissioner of Taxation [2016] AATA 810 the Tribunal found that the Applicant was liable for GST in respect of the sale of four residential premises as they were “new residential premises” within the meaning of s 40-75 of the GST Act. The Tribunal also found that the Applicant was not entitled to use the margin scheme and that the Applicant was only entitled to a proportion of input tax credits for construction costs because the premises were rented out before they were sold.

New residential premises

The Applicant constructed the premises, some of which were sold more than 5 years after construction was completed. The Applicant contended that the premises were no longer “new residential premises” because they were only used for making input taxed supplies under s 40-35(1)(a) – i.e. they were leased for residential purposes. The Applicant faced a number of difficulties in substantiating its contention, including:

  • Some of the premises were sold less than five years after construction was completed (but more than five years after acquisition). The Tribunal found that the time period starts once a person has a right to occupy the premises – which is not necessarily the date of completion of the building and it cannot be during the period when construction continues to take place.
  • Some of the premises were not rented until some time after completion. Also, due to difficulties with tenants the premises were vacant for substantial periods of time. In each case the total amount of time of rental was less than 5 years.
  • The Applicant required the tenants to also sign an agreement to purchase the house.

The Tribunal found that the Applicant did not satisfy its onus of showing that the 5-year period was satisfied.

Margin scheme

The Applicant contended that it was entitled to utilise the margin scheme for the sale of the residential premises (the Commissioner accepted that the Applicant had purchased the properties under the margin scheme). The Commissioner granted the Applicant an extension of time to obtain written agreements with each purchaser to use the margin scheme. The Applicant did not produce written agreements. The Tribunal found that the Applicant had failed to show that the statutory requirement of a written agreement to use the margin scheme was met.

Input tax credits

The Commissioner contended that because the residential premises were rented out before they were sold, the Applicant was only entitled to claim part of the input tax credits on the construction costs. The Commissioner calculated the apportionment based on the sale price divided by the sum of the sale price and rental income received. The Tribunal found that the basis of the Commissioner’s apportionment was fair and reasonable and it reflected the returns available from sale and rental respectively.

The Commissioner also allowed input tax credits on certain non-construction costs. The Tribunal rejected the application of the Applicant that it was entitled to input tax credits for additional non-construction costs as it could not substantiate those claims.

The Tribunal affirmed the Commissioner’s decision to impose penalties at 25% for failure to take reasonable care.



Tribunal affirms decision of Commissioner to disallow apportionment methodology for retirement village construction

In RSPG and Commissioner of Taxation [2016] AATA 687 the Tribunal affirmed the decision of the Commissioner to disallow a claim for input tax credits in respect of the construction of a retirement village on the basis that the apportionment methodology relied on by the taxpayer was not “fair and reasonable”. Under the proposed methodology, the taxpayer claimed that it was entitled to recover 91% of the input tax credits in respect of the construction of the retirement village.

The Commissioner did not take issue with the proposed apportionment methodology itself, it being taken from GSTR 2011/1, but contended that the application of the formula was inappropriate and did not reflect a fair and reasonable apportionment and produced significant distortions. The Tribunal agreed.

The applicant also contended that the entire retirement village fell within the definition of “commercial residential premises”, being similar to a “hostel” or a “boarding house”. The Tribunal rejected this contention.

The apportionment methodology

The formula was an output based revenue formula, based on the following formula in GSTR 2011/1:

total value of economic benefits reasonably expected to be obtained from making input taxed supplies /

total value of economic benefits reasonable expected to be obtained in respect of the arrangement

The taxpayer applied the formula in the following way:

Benefit of interest free loan for 1 month (A) + rent (B) /

A + B + recurrent charges (C) + exit fee (D) + licence fee (E)

This formula gave a percentage of acquisitions relating to input taxed supplies of 9%, giving a percentage relating to creditable acquisitions of 91%.

The Commissioner attacked the following aspects of the formula:

  • A – benefit of the interest free loan
    • The taxpayer contended that the economic benefit of the interest free loan was only 1 month, because residents could leave upon giving one month’s notice.
    • The Tribunal agreed with the Commissioner’s contention that the value of an interest free loan is the interest saved during the period that the loan continues. The Tribunal noted that the evidence was that the average period of occupation of residents was 12 years. The Tribunal also considered that it may not be appropriate to limit the benefit to one resident, given the evidence as to the relatively short time ti took to replace outgoing residents.
    • Accordingly, the value to be attributed to the interest free loan was much larger than 1 month – this would increase both the numerator and the denominator, resulting in a larger percentage (and a smaller creditable purpose recovery)
  • B and E – rent and licence fee
    • The Commissioner noted that the taxpayer had spread the rent over 50 years, so that only 1/50th of the rent appeared in the numerator. This assumed that residents would stay for 50 years, which was contrary to the evidence. Further, the Commissioner noted that the taxpayer had included the whole of the licence fee in the denominator. This inconsistency in approach effectively led to an increase in the creditable recovery.
  • D – exit fee
    • The Commissioner contended that the real question was not the proper characterisation of exit fees, but of the payments that may have to be made by the resident at the end of the lease (described as “end of lease payments”) – the Commissioner contended that these payments were consideration for the input taxed supply of the residential units to the residents – the taxpayer contended that the payments were deferred service payments
    • The Tribunal agreed with the Commissioner and found that the payments should be included in the numerator and the denominator
  • E – licence fee
    • This was a one-off licence fee payment by the resident to the Operator pursuant to the Service Agreement – it allowed residents access to the Common Areas at the village
    • The Commissioner accepted that the licence provided by the Operator to the residents was a taxable supply and was not the supply of residential premises – however, the Commissioner contended that the licence “related” to the supply of residential premises in a “substantial” and “real” way – and therefore the inclusion of the licence fee only in the denominator distorts the resulting percentage – the Tribunal agreed

Commercial residential premises

The taxpayer did not develop the argument beyond the contention that “the similarity with a hostel or boarding house is close enough to bring the “normal retirement village” within paragraph (f) of the definition of commercial residential premises.

The Tribunal found that there were fundamental differences between a retirement village and a hostel or boarding house, in particular the nature of the rights or interests which the residents of the retirement village acquired, particularly in respect of their units, and the security and relative permanency of occupation of those units.




NSW Commissioner of State Revenue issues Revenue Ruling on market value and GST

The New South Wales Office of State Revenue has issued Revenue Ruling No. DUT 045 “Market Value and GST” where the Commissioner concludes that it is not possible to determine a GST-exclusive market value and that the value of land will include any GST which the vendor may be liable to pay.

The Commissioner has also stated that he will not accept a valuation as a market valuation that is expressed to be on a “GST-exclusive” basis or where the valuer was instructed to make a determination of market value on that basis. The reason for this view is that the Commissioner accepts the view of the Courts in a line of authorities (including Storage Equities Pty Ltd v Valuer-General [2013] NSWLEC 137) that while GST may have an impact upon the market value of property, it is a not a separate amount to be deducted when determining the market value of the item. My post discussing the decision in Storage Equities can be accessed here.

The ruling observes that the Court’s conclusion in Storage Equities was that the land value is the amount expected to be received on the sale of the land, including any GST which the vendor may be liable to pay. The ruling also considered the following points of the decision to be noteworthy:

  • The starting point for determining land value is the test articulated in Spencer v Commonwealth (1907) 5 CLR 418, namely the price negotiated between a hypothetical willing vendor and a hypothetical willing purchaser, both having access to all current information affecting the property (see paras [24], [42] and [44]);
  • The impact of GST upon each of the vendor and purchaser depends upon their particular, individual circumstances. However, the hypothetical vendor under the Spencer test cannot be assumed to have attributes (eg: GST registered or selling as a going concern) which affect the GST consequences of the sale for the vendor (see paras [45], [46] and [47]);
  • In determining value by reference to comparable sale transactions, no adjustment should be made to those transactions on account of any GST liability of the vendor (see para [48]).

The Commissioner also noted that the view in the ruling was consistent with the policy of the Valuer General.

The ruling refers to the following simple example:

A valuer is engaged to value 2 residential properties located side by side. On the valuation date, one property is a newly completed house which has never been occupied and the other is an established home built some years before.

The valuer would need to take GST into account when determining the market value of the first property, but not the second, because GST is not payable on the sale of  an established home. To complete the engagement, the valuer will need to determine a market value for each property. But it would not be open to the valuer to determine a “GST-exclusive” market value for the first property. That would be contrary to the decided cases and the Valuer General’s policy.



Privy Council finds VAT not payable where supplier waived right to payment

In Shophold (Mauritius) Ltd v The Assessment Revenue Committee [2016] UKPC 12 the Privy Council allowed the taxpayer’s appeal against the finding of the Supreme Court of Mauritius that the taxpayer was obliged to pay VAT where it waived the enforcement of a contractual right to be paid for services that it provided and neither issued an invoice nor received payment for those services. The decision looks at the meaning of “consideration” in the context of VAT.

The taxpayer had entered into a management services agreement with a related entity in March 2003. In May 2003 the taxpayer resolved to waive its right to be paid the management fee until such time that the entity was in a sufficient profit making position. The management services agreement was not amended to reflect the waiver and the taxpayer continued to provide management services to the entity, albeit at a reduced level. In December 2007 the taxpayer resolved  that the management fee be reinstated. During the period in which the waiver was in effect, the taxpayer did not issue any invoice in respect of its management services or receive any payment for those services.

The Revenue contended that the taxpayer had made taxable supplies by providing the services, whether or not it had submitted invoices or had been paid for the services.

The Supreme Court agreed with the Revenue. In substance, the Supreme Court held that because the taxpayer had only waived its entitlement to receive the Management Fee and had not agreed a variation of the Agreement, the contractual obligation to pay the Management Fee remained. That contractual obligation was the consideration given for the management services, and as a result the services were taxable supplies subject to VAT. Accordingly, the taxpayer ought to have received payment for the service at the end of each month during the relevant period and was liable to VAT as if it had.

The appeal

The Revenue contended that the fundamental error in the taxpayer’s case was that the assumption that because there had been no payment, no consideration passed from the related entity to the taxpayer. The Revenue contended that the continuing contractual obligation to pay the management fee, even if not enforced by the taxpayer, provided the necessary “consideration” to found a taxable supply.

The Privy Council did not agree, observing that the concept of “consideration” in the VAT legislation is quite different from the contractual concept of consideration. In the law of VAT, “consideration” refers to “reciprocal performance”, referring to the following statement of the Court of Justice in Tolsma v Inspector der Omzetbelasting Leewarden [1994] STC 509 (para 14):

…a supply of services is effected ‘for consideration’ …, and hence is taxable only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.

The Privy Council considered that when the Court of Justice was looking at the matter from the perspective of the supplier. This requires that under the legal arrangement the supplier receives or is to receive remuneration for the service that it has performed, either from the recipient of the service or a third party. That is not the same as the meaning of “consideration” in contract law.


The approach of the Privy Council is similar to the position in Australia. In Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 the majority of the High Court (at [14]) stated that the phrase “the supply for consideration” in the definition of “taxable supply” in s 9-5(a) does not adopt contractual principles, but requires a connection or relationship between supply and consideration. In my view, that connection will likely involve some form of “reciprocal performance”.

It is also interesting to consider this set of facts in light of the decision of the High Court in Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49. In that case the Court found that an executory contract will generally give rise to at least two supplies, a supply on entry into the contract and a further supply on performance of the contract. In this context, the management services agreement would involve a supply by the taxpayer on its execution and further supplies of the provision of management services. These further supplies would be made “for” the management fee. Accordingly, during the period that the taxpayer had waived the right to recover payment it could be said that the supply of management services were not “supplies for consideration”.


UK Supreme Court dismisses taxpayer’s appeal in Airtours

In a 3:2 decision, the UK Supreme Court has dismissed the taxpayer’s appeal in Airtours Holidays Transport Ltd v Revenue & Customs [2016] UKSC 21. The issue in the appeal was whether Airtours was entitled to recover, by way of input tax, VAT charged by PwC in respect for services provided by PwC to various financial institutions which were paid for by Airtours.

The majority reviewed previous domestic and Court of Justice judgments, including Redrow and Loyalty Management. In doing so, the majority agreed with the majority in Loyalty Management that Lord Millet’s observations in Redrow went too far, when he said that the question to be asked was whether the taxpayer obtained “anything- anything at all”. Rather, the question to be asked was as follows (at [50]):

…where the person who pays the supplier is not entitled under the contractual documentation to receive any services from the supplier, then, unless the documentation does not reflect the economic reality, the payer has no right to reclaim by way of input tax the VAT in respect of the payment to the supplier.

Applying this analysis, Airtours appeal failed for the following reasons:

  • it was not entitled under the contract (expressly or by implication) to receive any services from PwC; and
  • the Contract did reflect economic reality and was not in any way an artificial arrangement.

The dissenting judgements considered that the “narrow legalistic approach” of the majority was too narrow, was inappropriate in the circumstances, and gave too little attention to the legal relationship between PwC and Airtours and to the economic realities of that relationship.

The decision illustrates the difficulties that can arise in the context of VAT/GST and “tripartite agreements”. The decision also illustrates how minds may readily differ on the characterisation of a transaction for the purposes of VAT/GST, with strong dissenting judgments in both the Supreme Court and the Court of Appeal.

My analysis of the decision can be accessed here. A more detailed analysis of the issue of tripartite agreements can be found in a paper that I presented earlier this year at the Television Education Network GST Symposium in Brisbane – my paper can be accessed here and also under the “My Articles” menu.

Federal Court dismisses taxpayer’s appeal in Crown Estates decision

In Crown Estates (Sales) Pty Ltd v Commissioner of Taxation [2016] FCA 335 the Federal Court dismissed the taxpayer’s appeal of the decision of the Tribunal in Crown Estates (Sales) Pty Ltd and Commissioner of Taxation [2015] AATA 94. The Tribunal found that the taxpayer was not entitled to claim input tax credits in respect of acquisitions made in providing property management services to owner-clients because the taxpayer was acting as the agent of those owner-clients. My post on that decision can be accessed here.

The Court upheld the Commissioner’s objection to the appeal on the ground that the notice of appeal did not specify any question of law. The Court noted that an appeal can be made from a decision of the Tribunal only on a question of law and that the question of law must be specified in the notice of appeal.

The decision illustrates the difficulties in properly framing an appeal from a decision of the Tribunal.

The amended questions of law were stated to be as follows:

(1) Whether the Tribunal erred in properly construing and applying s 11.5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) in concluding that the Applicants did not make creditable acquisitions in the course of their dealings with suppliers of goods and services to properties owned by the clients of the Applicants.
(2) Whether the Tribunal erred in construing and applying the law of agency in determining that the Applicants acted as agents in the course of all their dealings with suppliers of goods and services to properties owned by the clients of the Applicants.

The Court considered that the questions of law did nothing more than solicit a broad and hypothetical enquiry as to the construction and operation of statutory provisions. They did not identify a question of law.

The Court observed that an additional reason why the Commissioner submitted that question 2 (expressly) and also 1 (by necessary implication) in the notice of appeal raised no question of law was that a conclusion that the taxpayer was an agent of the property owners was one of fact. The Court considered that questions as to the existence of agency are usually questions of fact and that those questions of fact emerge from settled legal principles. However, the Court considered that it was not impossible to conceive of a case where a question of law might be found in posing as a question that, having found particular facts, was the Tribunal obliged in law to conclude that an agency relationship existed? The Court noted that neither question of law was pleaded in this way.

The Court also observed that another way putting such a proposition would be to pose as a question whether, on the facts found, the Tribunal was obliged in law to conclude that it was the taxpayer which had made the creditable acquisition? Once again, that is not the way in which either question was pleaded.

The Court nevertheless addressed the issue raised in the appeal, which was whether the taxpayer had made “creditable acquisitions” for the purposes of the GST Act – i.e., whether the taxpayer was acting as a principal that acquired goods and services from third parties which it resupplied to its owner-clients, or was it dealing with the contractors et al. as the agent of the owners in each case.

The Court observed that the taxpayer chose not to give detailed evidence as to the circumstances appertaining to each and every creditable acquisition for each and every period in question to establish that the taxpayer was the entity that made the acquisition. Further, the Tribunal was not shown any evidence that suggested that the finding of agency was wrong – for example invoices or other documents evidencing or describing transactions in a way that suggested the third party and the taxpayer intended that goods or services would be supplied to the taxpayer as principal, rather than to a property-owning client.

The Court concluded that the relationship of principal and agent between the taxpayer and its client was the correct conclusion in law.





New South Wales Supreme Court orders Contract of Sale to be rectified to make the price “plus GST”

In SAMM Property Holdings Pty Ltd v Shaye Properties Pty Ltd [2016] NSWSC 362 the Supreme Court found that a Contract of Sale should be rectified to reflect the common intention of the parties that the purchase price was to be exclusive of GST.

The decision is another example of the difficulties that can arise where real estate is sold and there is confusion as to whether the price is exclusive or inclusive of GST. The amounts at issue can be significant, in this case it was $325,000 (10% of the purchase price of $3.25m). Similar disputes arose in the NSW Supreme Court in Gallinar Holdings Pty Ltd v Riedel [2014] NSWSC 476Ashton v Monteleone [2010] NSWSC 258 and Tam v Mannall [2010] NSWSC 250. The issue is discussed in more detail in my paper “GST and Real Estate Contracts – when things go wrong“.

In this case, the Contract of Sale clearly provided that the price was inclusive of GST – in contrast to other cases where the proper construction of the contract was at issue. The vendor contended that despite the form of contract executed, the “clear and common intention” of the parties was that the price was “plus GST” and the contract should be rectified accordingly.

The Court observed that rectification was available where there is “clear and convincing proof” that by reason of the common mistake of the parties, the document they signed did not “embody the final intention of the parties”. The evidentiary burden placed on the party seeking rectification is high and the relief is not easily obtained.

The difficulty faced by the Court (and the applicant) in the case was that there was a sharp divide in the evidence given on behalf of the parties. At the end of the day, the evidence that appeared to sway the Court was that of the auctioneer, who recalled telling the crowd at the auction that the bids were to be exclusive of GST and that GST would be in addition to the knockdown price. Critically, the auctioneer sent an email shortly after the auction confirming his recollection of events. The evidence of the auctioneer was consistent with a “Reserve Price Letter” given by the vendor to the agent before the auction stating that the reserve price was “$3,500,000 + GST”.

The email was seen by the Court as decisive, being described as an almost contemporaneous note by the auctioneer of what he said at the auction. Given the disparity in oral evidence of what was actually said at the auction, the email provided the Court with a piece of documentary evidence upon which it could base its finding. This can be compared with the decision in Tam v Mannall where the auctioneer gave evidence that he informed the bidders that the price was to be increased for GST but, given the disparity in the oral evidence given at trial about what was actually said at the auction, the Court found that the vendor could not establish that the purchasers had heard those words and the parties held a common intention that the price was to be plus GST.






UK Upper Tax Tribunal finds management company did not make taxable supplies to subsidiaries

In Norseman Gold Plc v Revenue and Customs [2016] UKUT 69 the Upper Tax Tribunal agreed with the finding of the First Tier Tribunal that a UK management company providing management services to overseas subsidiaries was not entitled to input tax credits because it did not make taxable supplies to those subsidiaries. The management company was found to have made supplies to its subsidiaries, but those supplies were not made “for consideration”

The decision illustrates two differences between the UK VAT regime and the GST in Australia. First, the threshold requirement for claiming input tax credits is different. Second, the requisite nexus between “supply” and “consideration” is narrower in the UK.

In the UK, an entitlement to input tax credits arises if acquisitions are made in the course of conducting “economic activity”, meaning the making of taxable supplies (supplies for consideration) or intending to make at some time in the future taxable supplies. The First Tier Tribunal found that the taxpayer had supplied management services to its subsidiaries and that what it supplied was “capable” of amounting to a taxable supply – however, what it had supplied was not in fact supplied for consideration and was therefore not a taxable supply. Any understanding (referred to by the First Tier Tribunal as a “vague intention”) between the taxpayer and its subsidiaries about payment being made for services when the subsidiaries could afford to pay was insufficient to establish that supplied would be made “for consideration”.

On appeal, the Upper Tribunal agreed with the First Tier Tribunal and found that the supplies were not made for consideration, they were made gratuitously. The Upper Tribunal noted (at [126]) that the taxpayer did intend to make supplies to its subsidiaries, but the question was whether the taxpayer intended to make supplies “for consideration”. The answer to this question was no because:

…the direct and immediate link between the supplies and intended supplies on the one hand and any payment in respect of those supplies on the other hand was absent at the time when the input tax was incurred.

The conclusion of the Upper Tribunal was helpfully summarised as follows (at [137]:

Putting the matter in the very briefest of ways, this is a case where one party (Norseman) has supplied services to closely related parties (its subsidiaries) with, at best from Norseman’s point of view, an intention on its part to charge at some unspecified time in the future for its services, but with no agreement with the subsidiaries to that effect (even to the effect that the subsidiaries would pay if an when they had the funds available to do so) and no understanding of the amount or timing of such payment. The charge/payment, if and when introduced, might or might not match or exceed recovery of the costs incurred in providing the services and might or might not include a profit element. It might even be nominal…This is an insufficient basis on which to be able to say, at any time prior or during the relevant period, that the eventual charge and payment would have the immediate and direct link with the services provided which EU law requires. If it is not possible to find the necessary link in relation to future supplies and the intended payments for those supplies, still less is it possible to find a link where there has, as yet, been no payment at all, in particular in relation to services provided during the relevant period.


The decision illustrates two differences between the UK VAT regime and the GST Act.

Entitlement to claim input tax credit

In the UK the entitlement to claim input tax credits arises where there is a direct connection between the acquisition and the making of taxable supplies (i.e., the making of supplies for consideration). In Australia, the test is one of “creditable purpose” and requires that the entity make the acquisition “in carrying on its enterprise”: s 11-15(1) (subject to the “blocking provision” in s 11-15(2) where the acquisitions relate to making supplies that would be input taxed or where the acquisitions are of a private or domestic nature).

These tests can operate quite differently. In the UK an entity must show that it is, or will be, making taxable supplies (i.e., supplies for consideration). In contrast, in Australia an entity need only show that it is making the acquisitions “in carrying on its enterprise”.  To constitute an enterprise, an entity must carry out an activity, or series of activities, done, inter alia, in the form of a business or in the form of an adventure or concern in the nature of trade: s 9-20(1). Given that the carve-out for activities undertaken without a reasonable expectation of profit or gain is limited to individuals (whether on their own or in partnership), it does not appear necessary that a corporate entity carry out these activities for profit or gain or that it actually make taxable supplies. This raises the question of whether this case would be decided differently in Australia.

Meaning of “for consideration”

The meaning of the words “supply for consideration” is narrower in the UK.The Upper Tribunal observed that the authorities established that a supply is “for consideration” where there is a direct link between the service supplied and the consideration received, although there need not be a legally binding agreement between the parties. The nexus between “supply” and “consideration” is a direct one.

In contrast, the words “supply for consideration” in s 9-5(a) of the GST Act need to be seen in light of the expansive definition of “consideration” in s 9-15. In AP Group Limited v Commissioner of Taxation [2013] FCAFC 105  (Edmonds and Jagot JJ) observed that if the definitions in s 9-15 were inserted in substitution for the defined terms where they appear in s 9-5, the result was as follows:

you make a supply for [any consideration, within the meaning given by sections 9-15 and 9-17 in connection with the supply or acquisition].

In Australia, the nexus between “supply” and “consideration” is broader than the UK.  There will be a “supply for consideration” where the supply is made “in connection with” consideration. This nexus may therefore be direct or indirect, although it would appear that a “trivial” or “remote” connection will not suffice.



Treasury introduces bill on GST and cross-border supplies including digital downloads

On 10 February 2016 the Treasurer introduced Tax and Superannuation Laws Amendment (2016 Measures No.1) Bill 2016 into Parliament. The Explanatory Memorandum to the Bill can be accessed here. The Bill contains measures initially flagged in the Budget. The measures have been the subject of a detailed consultation process and two forms of Exposure Draft have been published for comment.

In summary, the amendments have the following aims:

  • to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to goods and services tax in a similar way to equivalent supplies made by Australian entities; and
  • to better target the way Australia’s goods and services tax rules apply to cross-border supplies that involve non-resident entities.

A brief outline of the amendments are set out below. The measures are to take effect for tax periods starting on or after 1 July 2017.

Extending GST to imported digital products and other services

Expansion of the concept of “connected with Australia”

Under the existing law, for a supply to fall within the GST net and potentially be a taxable supply it must be “connected with the indirect tax zone” (i.e., connected with Australia) pursuant to s 9-25 of the GST Act. The amendments expand this concept considerably.

Section 9-25 contains the following categories of supplies that may be connected with Australia:

  • supplies of goods wholly within Australia – sub-section (1);
  • supplies of goods from Australia – sub-section (2);
  • supplies of goods to Australia – sub-section (3);
  • supplies of real property – sub-section (4); and
  • supplies of anything else – sub-section (5).

Section (5) currently makes a supply of “anything else” connected with Australia where one of the following applies:

  • the thing is done in Australia;
  • the supplier makes the supply through an enterprise carried on in Australia; or
  • the supply is a right or option to the supply of a thing that would be connected with Australia.

The amendments expand subsection (5) to provide that a supply of anything other than goods or real property is connected with Australia if “the *recipient is an *Australian consumer“.

An “Australian consumer” is essentially an entity that is an Australian resident who is not registered for GST, or if it is registered, the entity does not acquire the thing supplied solely or partly for the purpose of an enterprise carried on by the entity.

This means that all supplies of intangibles (e.g., digital downloads, professional services etc) to a private consumer, or a registered consumer who acquires it not for the purpose of an enterprise (e.g., in a private capacity), from an overseas entity will be “connected with Australia” and will be potentially subject to GST in the same way as supplies from entities in Australia – i.e., if the other requirements in s 9-5 are satisfied. This also means that overseas suppliers will be required to register for GST if they exceed the GST turnover threshold. The stated aim is for there to be a “level-playing field” where all intangibles acquired by consumers have the same GST treatment, regardless of where the supplier is.

Safeguards for overseas suppliers

The Explanatory Memorandum recognises that in may cases foreign suppliers will have only a limited capacity to investigate the residency and GST registration status of the recipient. The amendments provide a safeguard for supplies, to the effect that the offshore supplier will only be liable for GST in relation to a supply if:

  • the supplier takes reasonable steps to obtain information concerning whether the recipient of the supply is an Australian consumer; and
  • having taken these steps, reasonably believes that the recipient is not an Australian consumer.

Interestingly, the safeguards do not extend to the reverse situation, where the overseas supplier wrong treats the recipient as a consumer and over-pays GST. The Explanatory Memorandum states that in such case Division 142 of the GST Act would apply and the supplier should generally be required to reimburse the Australian consumer for the GST before being able to claim a refund.

Shift of GST liability to electronic distribution platforms

The amendments shift the liability for GST from the overseas supplier to the operator of an “electronic distribution platform”. This is a platform operating over the internet, but not a physical store or one operated by mail.

The rationale for shifting liability is that the platform operator has most of the information about the recipients of the supplies and is generally larger and better resourced than most of the entities making supplies through the platform.

The parties can agree to shift the liability for GST to the supplier if the parties agree in writing and the recipient is given a document identifying the supply as having been made by the supplier.

GST-free and input taxed supplies

Divisions 38 and 40 are to be amended to allow Legislative Determinations to be made that a specific class of supplies that fall within the amendments to be GST-free or input taxed.

The Explanatory Memorandum states that this power will only be exercised where the current treatment of the supply or class of supply is contrary to Australia’s international trade law obligations and the Treasurer is satisfied that a supply made by a comparable Australian resident entity would receive the same treatment.

Tax invoices

The Amendments provide that the supplier is not obliged to provide a tax invoice or adjustment note at the request of the recipient. The rationale for this is that unlike most other types of taxable supplies, offshore supplies falling within the amendments by definition cannot be made to an entity that is entitled to an ITC in relation to the acquisition of the supply.

The margin scheme in Division 75 operates in the same way. As the purchaser is not entitled to input tax credits where the margin scheme is used, there is no need for a tax invoice to be provided.

GST treatment of B2B cross border transactions

These Amendments are not aimed at altering the tax base. Rather, they are aimed at streamlining the way the GST applies to cross-border supplies between businesses by relieving non-resident suppliers of the obligation to account for GST on certain supplies.

The amendments do this by ensuring that certain supplies made by non-residents are not connected with Australia – those supplies are treated as being “disconnected”. For these supplies, the recipient will be responsible for for determining if they have a GST liability under the reverse charge rules in Division 84 of the GST Act – that liability will arise to the extent that the acquisition is not creditable. If the acquisition is fully creditable in the hands of the recipient, Division 84 does not apply – there is no need to collect the GST revenue where that is fully offset by the claim for input tax credits.

ECJ finds VAT payable on unused flights

In a decision handed down just before Christmas, the European Court of Justice in Air France – KLM [2015] EUECJ C-250/14 found that Air France was liable to VAT on unused air transport tickets – also described as “no-shows”. The same issue was considered in Australia in 2012 where the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 found that GST was payable.

The Court approached the question on the basis a supply of services, such as air passenger transport, is subject to VAT where:

  • first, the sum paid by a passenger to an airline company, in the context of the legal relationship constituted by the transport contract, is directly linked with an identifiable service for which it constitutes the remuneration; and
  • secondly, that service is performed.

In respect of the first dot-point, the Court observed that it had previously found that the services provided in performance of obligations arising from a contract to transport passengers by air are the checking-in and the boarding of passengers, the on-board reception of those passengers at the place of take-off agreed in the transport contract, the departure of the aircraft at the scheduled time, the transport of the passengers and their luggage from the place of departure to the place of arrival, the care of passengers during the flight, and, finally, their disembarkation in conditions of safety at the place of landing and at the time scheduled in that contract.

In respect of the second dot-point, the Court observed that it was  possible to perform those services only if the passenger of the airline company turns up on the agreed date and at the agreed place of boarding, the customer’s right to performance of those services being given by the company until the time of boarding, according to the conditions set out in the contract to transport passengers concluded when the ticket was purchased.

Nevertheless, the Court found that the consideration for the ticket consisted of the passenger’s right to benefit from the performance of obligations arising from the transport contract, regardless of whether the passenger exercises that right, since the airline company fulfilled the service by enabling the passenger to benefit from those services.

The finding of the Court is similar to that of the majority of the High Court in Qantas, where the taxable supply was identified as being “at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline”, with the fare being consideration for that supply. In the context of both decisions it did not matter whether the flight was actually taken by the passenger.