Tribunal hands down decision in “son of holdback” GST case – partial wins for both sides

Yesterday the Tribunal handed down its decision in AP Group Limited and Commissioner of Taxation [2012] AATA 409, involving the GST treatment of certain “incentive” payments by car manufacturers to dealers.  The decision follows from the earlier decision of the Federal Court in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 where car dealers successfully obtained refunds of GST paid on “holdback” payments.

A range of incentive payments were before the Tribunal.  In each case, the Tribunal had to decide whether the payments were properly characterised as consideration for supplies made the the applicant.  If they were not, an issue was whether the applicant was entitled to a refund of overpaid GST.  In this context, the operation of the Commissioner’s discretion in s 105-65 of Schedule 1 to the TAA was relevant.

The Commissioner’s first argument was essentially that by performing (or agreeing to perform) the obligations imposed by the Dealer Agreements and the various sales bulletins and incentive flyers, the applicant made a supply to the manufacturer and the incentive payments were consideration for that supply. In rejecting the Commissioner’s argument, the Tribunal noted as follows:

Given the breadth of the concept of supply – “any form of supply whatsoever”, and specifically “an entry into…an obligation to do anything” – it is not hard to see why the Commissioner submits that the Applicant made a supply to the manufacturer when it did, or agreed to so, any of those things.  But there is an air of unreality in such an outcome.  One could just as readily conclude that a retailed makes a supply to its wholesaler by taking on an obligation to pay for the goods it purchases, or that the wholesaler makes a supply not only of its goods, but also of the promise to deliver those goods in a timely fashion.  When one overlays on to the concept of “supply” the similarly broad concept of “consideration” – which includes not only payments but also any “any act or forbearance in connection with a supply” – it would follow, on this analysis, that the retailer probably makes a taxable supply to the wholesaler (of a promise to pay for the goods) and also that the wholesaler makes an entirely unexpected taxable supply of the promise to deliver goods on time.

In the context of the overall business relationships and contractual arrangements between the applicant on one hand, and the various manufacturers on the other we do not think that the Applicant’s acceptance of the obligations or the making of the promises is properly viewed as the making of supplies to the manufacturers.  Instead, they are part of the foundation underpinning the relationships, the background to the bargain the parties have made – in a sense, the rulebook by which the game is to be played.

If we are wrong with that, and the Applicant is to be regarded as making supplies to the manufacturers, we nevertheless do not think it is making taxable supplies to them.  The incentive payments are not made “for” or even “in connection with”, any such supplies. There is no nexus between the payment of the incentives and the making of the promises, the performance of the oblations, or the compliance with the manufacturers’ various rules and policies.  The Commissioner’s submissions do not grapple with the indisputable truth that, on his argument, the Applicant always carries on its business in a particular way (as it has agreed with the manufacturers to do), but it only gets paid for doing so in circumstances which warrant the payment of an incentive; otherwise the supply is provided for free.  We do not see how that can possibly be so.

The Commissioner’s second argument only related to some of the incentives before the Tribunal.  The argument was that these incentives (fleet rebate, run-out model support payment and retail target incentive payment) were consideration for the supply of a vehicle to the retail customer.  The Tribunal agreed with the Commissioner on the fleet rebate and run-out support payment and found that the payments were “in connection with” the supply of the vehicle to the customer.  The Tribunal found that there was not a sufficient connection for the retail target incentive payment as the incentive did not have a nexus with any one particular supply, but rather was paid in connection with supplies generally.

The result was that the applicant was successful in arguing that GST was not payable in respect for some of the payments.  This raised the issue of whether the Commissioner could rely on the discretion in s 105-65 to refuse to pay the refunds.  The Tribunal has asked the parties to provide submissions on whether the Commissioner had, in fact, made such a decision and if so, whether the Tribunal has jurisdiction to review such a decision.  This is an important development as in the past Tribunals have considered the operation of s 105-65 (see for example Luxottica Retail Australia Pty Limited and Commissioner of Taxation [2010] AATA 22).  Further, the question on jurisdiction would appear to extend beyond s 105-65, but also to the limitation provisions in s 105-50 and s 105-55.

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