Monthly Archives: October 2012

Commissioner outlines administrative treatment of GST refunds pending amendment of existing law

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On 17 August 2012 the Assistant Treasurer released draft legislation for public consultation dealing with refunds of overpaid GST.  The amendments are intended to apply to tax periods commencing on or after the date of the announcement. Today the ATO published its proposed administrative treatment for GST refunds pending the enactment of the new legislation – the page of the ATO website can be accessed here.

The legislation repeals the discretion in s 105-65 of Schedule 1 to the TAA and introduces Division 36 into the GST Act which does not provide any discretion but simply provides when refunds will (and will not) be payable, which will allow taxpayers to self-assess their entitlements to refunds. My analysis of the proposed amendments can be accessed here.

The administrative procedure is as follows:

The ATO will apply the existing law and follow current procedure until the proposed law is enacted where taxpayers:

  • are required to write to the Commissioner to claim a refund of overpaid GST as a result of a mischaracterisation of a supply (for example a supply is treated as taxable but is actually GST-free), and
  • are not required to write to the Commissioner to claim a refund of overpaid GST as a result of a miscalculation of an amount of GST payable (for example, the amount of GST payable was incorrectly calculated on a taxable supply of real property using the margin scheme), and can instead self-assess their claim to a refund of overpaid GST.

After the new law is enacted, taxpayers will need to review their circumstances regarding their claims for refunds of overpaid GST made during the period between the date of the announcement and enactment.

If a taxpayer is required to seek amendments and the amendments result in an increase in their liability there will be no shortfall penalties or interest imposed where the amendments are made within 28 days after enactment.  Otherwise the full GIC will apply from the date of enactment.

If amendments reduce a taxpayer’s liability, appropriate interest on any overpayment will be paid.

 

Commissioner issues ATO ID on whether council rates are an “Australian tax” for the purposes of Division 81 of the GST Act

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On Friday the Commissioner issued ATO ID 2012/87 ‘GST and Division 81 of the GST Act: whether payment of general rates imposed by local government is an ‘Australian tax” for Division 81 purposes.  The view of the Commissioner is that general rates are an “Australian tax” for the purposes of s 81-5(1) of the GST Act, so that general rates are not subject to GST.

An “Australian tax” is defined as a tax imposed under an ‘Australian law’, which is defined to be a law of the Commonwealth, State or Territory.  The power to charge rates is found in the Local Government Act (being a legislative act of State Parliament).  Further, the rates as a “tax” because they are “a compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered”: referring to Matthews v Chicory Marketing Board (Vict) (1938) 60 CLR 263 per Latham CJ.

The Commissioner also relied on the long-standing High Court decision in The Municipal Council of Sydney v The Commonwealth (1904) 1 CLR 208, where all three judges found that the municipal rates in question were taxes within the meaning of s 114 of the Constitution.

I note with interest that the Commissioner also refers to this decision in GSTR 2006/5 ‘GST: meaning of ‘Commonwealth, a State or a Territory’, where the Commissioner states as follows:

…all three judges found that the Council was the “State” for the purposes of s 114.  The power delegated to the Council, by State legislation, which allowed the Council to levy rates, was the determinative factor in that case.

Somewhat surprisingly, in that ruling the Commissioner contends that there is no general proposition that local governments are “State” for the purposes of s 114 of the Constitution, and that the legislation constituting a particular local government must be considered.  This contention is made notwithstanding the subsequent approval of The Municipal Council of Sydney by the High Court in Essendon v Criterion Theatres Pty Ltd (1947) 72 CLR 1 (per Latham CH at 13, Dixon J at 17, McTiernan J at 27), Deputy Federal Commissioner of Taxation v State Bank of NSW (1992) 174 CLR 219 (per the Court at 25), SGH Ltd v Commissioner of Taxation (2002) 210 CLR 51 (per Gummow J at [47]), Roy Morgan Research Pty Ltd v Commissioner of Taxation [2011] HCA 35 (per the six judge majority at [23]-[24]).

It is difficult to understand the basis for the Commissioner’s contention.  No examples are given where the legislation in question does not constitute local councils as “State”.  It is instructive to consider the following extract from the Court in Deputy Federal Commissioner of Taxation v State Bank of NSW (at [25]):

Indeed, the decision in The Municipal Council of Sydney v The Commonwealth is direct authority for the proposition that a corporation exercising governmental functions is “a State” for the purposes of s 114.  In that case the municipal council, a body corporate, which levied local government rates on property, was held to be the State and its rates were held to be a tax on property for the purposes of that section.

Given the above statement, for the Commissioner’s contention to succeed it would arguably need to be shown that the terms of the legislation constituting a local council were such that the local council was no longer exercising governmental functions.  This would include, presumably, the government function of levying rates on properly held by its constituents.  I am not aware of any of the various State Acts in question being drawn in such terms.

 

First anniversary – a year in review

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Today marks the first anniversary of this site going live.

The past 12 months have been a busy time for GST in Australia.  We have seen a number of decisions by the Courts and Tribunals, significant legislative change and activity by the ATO.  Some of the highlights include:

  • one decision of the High Court (Qantas); two applications for special leave to appeal to the High Court by the Commissioner (Qantas – successful, Multiflex – unsuccessful); four decisions of the Full Federal Court – three in favour of the taxpayer (Unit Trend, Multiflex, Qantas) and one in favour of the Commissioner (MTAA Superannuation Fund), two decisions of the Federal Court (ECC Southbank, Yacoub), plus multiple decisions of the Tribunal
  • Legislative developments including: self assessment for GST from 1 July 2012; the Commissioner’s ability to retain refunds pending investigation (s 8AAZLG of Schedule 1 to the TAA); exposure draft for new GST refund provisions (proposed Division 36 of the GST Act)
  • The Commissioner has published four GST Rulings, eight GST Determinations, 12 ATO IDs dealing with GST issues, and around 600 private rulings dealing with GST issues have been published on the ATO’s Private Ruling Register

In my view, there will continue to be a lot of activity in the area of GST.  Some things to look forward to over the coming year include:

I would like to thank those people who have supported this site during the last year.  In the past year the site (and its various pages) has received in excess of 18,000 views and 130 people have signed up to receive updates by way of email.  These statistics appear to reflect the level of interest in GST in Australia and the continued activity in the area.

Tribunal affirms 75% penalty and 20% uplift where taxpayer failed to report sales of residential apartments

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In Subloo’s Investments Pty Ltd and Commissioner of Taxation [2012] AATA 703 the Tribunal affirmed the Commissioner’s decision to impose penalties of 75% plus an uplift of 20% because of the repetition of the conduct of the taxpayer in failing to report the sales of residential apartments.  In this case, the penalties almost equated to the GST shortfall.

For the first three tax periods in question, the applicant lodged activity statements claiming input tax credits but failed to record the sale of apartments during those periods, resulting in refunds being paid to the applicant.  For the remaining tax periods, the applicant failed to record any of the sales made. An audit by the ATO showed a GST shortfall of $534,018 and a shortfall penalty of $460,447.95 was made.  This was based on a base penalty of 75% (intentional disregard) and, except for the first month, the base penalty be increased by 20% because of the repetition of the conduct.

The applicant did not contest the GST shortfall, nor the characterisation of its conduct as intentional disregard.  The only issue was whether the penalties should be remitted.  The essential argument appeared to be that the applicant’s financier, without their consent, applied the GST component of the sales to reduce the mortgage debt rather than paying the GST and the project then got into financial difficulties.  The Tribunal found no basis for remission, essentially because the applicants chose not to account for GST for 18 months and chose not to contact the Commissioner to explain such difficulties that they may have been experiencing.

GST Private Rulings published in September 2012 – focus on grants of financial assistance and GST refunds

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In September 2012 the Commissioner published nearly 60 private rulings dealing with GST issues on the Private Rulings Register.  A list of the rulings can be accessed here.

This month I would like to focus on a private ruling made on the difficult issue of whether grants of financial assistance are consideration for taxable supplies and a private ruling made on the perennial issue of GST refunds.

Private ruling No. 1012140548318 – grants of financial assistance

This private ruling deals with the difficult issue of whether grants of financial assistance are consideration for taxable supplies.  The private ruling is interesting because it involves the application of the Commissioner’s views in GSTR 2012/2 ‘Goods and services tax: financial assistance payments which was published earlier this year.  My analysis of that ruling can be accessed here.

The facts of the private ruling were as follows.  The applicant (A) was registered for GST and under the terms of a deed, B made a grant to A for the approved purpose, being the design, construction, delivery and installation of an item to be used in a specified location.

Clause A provided the following conditions for the grant:

  • to use the grant only for the approved purpose
  • to store, maintain, transport, clean, erect and dismantle the item
  • to make the item available to authorised users
  • to maintain proper financial records in relation to the grant
  • to disclose the grant as a separate and identifiable item in your financial statements
  • to provide annual audited financial statements
  • to keep the other party informed on progress and provide other information as agreed

Clause B provided that A was required to publicly acknowledge the assistance of the grant from the other party

Clause C dealt with the possible repayment of the grant, at the option of the other party, if A failed to apply the grant for the approved purposes.

Clause D stated that the grant did not include GST, but B agreed that if GST was payable the additional amount for GST would be paid.

Having regard to GSTR 2012/2, the Commissioner concluded that, viewing the arrangement as a whole, A made a supply to B for consideration and GST was payable on the grant.  The basis for this conclusion is that the terms of the deed go beyond providing a grant to enable A to acquire the item, which on its own could result in a mere expectation only (and no supply).  The additional clauses (including the obligation to make the item available to authorised users and to store, maintain, transport, clean, erect and dismantle the item) evidence that there is more than a mere expectation.  Further, it is only be building the item that the express obligations to maintain them and make them available to users can be fulfilled.

In coming to this conclusion, the Commissioner referred to the following example in GSTR 2012/2 where it was considered no supply was made because there is a mere expectation:

  • A local tennis club is seeking funding to enable them to resurface their privately owned tennis courts.  The local council provides financial assistance to the tennis club on the basis that the money is only used for the resurfacing of the tennis courts.
  • The local council has an expectation that the works will be carried out.  However, as there is no binding obligation on the tennis club to actually carry out the resurfacing of the courts, and there are no other goods or services passing between the parties there is no supply to the local council

As discussed in my analysis of the Ruling, the reasoning behind this example appears to be that the agreement with the local tennis club is not binding and it creates expectations alone. This may be a simplification of the arrangement between the parties, which in my view would necessarily involve a binding agreement, including the following terms (whether express or implied):

  • the funds will be used for no other purpose than to resurfacing the tennis courts; and
  • the funds will be repaid if the funds were not used for that purpose

If not, the payment would simply be a gift and the tennis club would be free to spend the money as it saw fit, including retaining the money.

The justification for departing from this example in the private ruling appears to the presence of additional obligations on A. However, those obligations only come into effect if A actually uses the grant to acquire the item.  There are no obligations on A to actually acquire the item, and in this regard it is difficult to see how a distinction can properly be made with the example of the local tennis club.

What this private ruling does show is the difficulty of drawing a line between those arrangements which, while being enforceable legal arrangements, involve no supply because there is simply an expectation on a recipient of the funds to do something, and those arrangements where there is an obligation on the recipient to do something.

The recent decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 may also raise difficulties with the Commissioner’s approach in GSTR 2012/2.  Where a party receives a grant in return for entering into a deed (and thereby entering into legal obligations), applying the reasoning of the majority (that the airline made a taxable supply upon entry into contractual obligations), it is difficult to see how there could not a be a taxable supply.

Private Ruling No. 101224509666 – GST refunds

The register shows that a number of private rulings were published on whether the Commissioner would exercise his discretion in s 105-65 of Schedule 1 to the TAA to refund overpaid GST.  This ruling is interesting because it deals with the difficult question of taxpayers having to reimburse recipients for the overpaid GST before being entitled to a refund of the GST (and thereby be exposed to the cash flow issues and also the risk of the Commissioner refusing to pay the refunds).

In this case, where the recipients were not registered nor required to be registered for GST, the applicant proposed the following arrangement because it claimed that it was not in a financial position to first reimburse its customers:

  • the applicant would send a letter to each recipient notifying them of their entitlement to a refund of GST, to which those recipients must respond within a specified time frame and also agree to being charged an administration fee, which would be offset against the refund entitlement
  • based on the response of the customers, the applicant could confirm the exact quantum of the GST refund to be claimed (i.e., the refund claim would equate to the claims made by recipients)
  • any refund paid by the Commissioner would be held in an audited trust account for the benefit of customers and the funds would be solely used to refund GST to customers (subject only to the administration fees)

The Commissioner denied to exercise the discretion to pay the refunds, for the following reasons:

  • the Commissioner will generally not exercise the discretion in cases where the supplier has not reimbursed the unregistered recipients a corresponding amount of the overpaid GST, unless there are countervailing reasons for doing so
  • the applicant has not presented any countervailing reasons why the discretion should be exercised – in citing cash flow reasons, the applicant has not demonstrated that its circumstances are exceptional or different to any other entity that may refer to receive a refund in advance.
  • if the Commissioner was to exercise the discretion, it would result in increased costs of administration for the Commissioner – he would need to take appropriate measures to ensure that all the terms of the arrangement were complied with both before and after the refund was paid, otherwise there was a risk that the refund would not be passed on to end consumers and this would result in a windfall gain to the applicant.

In denying the discretion, the Commissioner was clearly concern about setting a precedent.  As noted in the private ruling:

If the Commissioner were to exercise the discretion in your circumstances, then all future requests for similar arrangements would have to be considered accordingly.  The wording of the legislation, and the public ruling, indicate that this is not the scope or intention of the legislation.

The Commissioner was also clearly concerned about having to assume an administrative burden in ensuring that the refund was eventually paid to the recipients. In circumstances where the applicant has entered into legally binding arrangements to pay the refunds to customers, and the refunds are placed in a trust account solely for the benefit of those customers, whether the Commissioner should properly undertake this administrative burden may be doubted.

In any event, this private ruling shows that the Commissioner is taking a very strict approach to the requirement that the overpaid GST first be reimbursed to the customers before any refund is paid to the supplier.

Tribunal decision on GST and penalties

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Yesterday the Tribunal handed down its decision in Hirezi and Ors and Commissioner of Taxation [2012] AATA 688 where it affirmed the Commissioner’s decision to impose penalties in respect of the applicant’s GST shortfall.  The applicant unsuccessfully contended that he was blameless in the management of his affairs and that he was a victim of his tax agent who was incompetent.

The applicant was a member of a partnership which developed an industrial estate for sale.  The partnership did not correctly account for GST on the lots sold and there was no dispute that there was a GST shortfall.  The Commissioner imposed penalties at 50% (on the basis of reckless conduct) but remitted that penalty to 25% because of the applicant’s good compliance record.  The applicant contended that the penalty should have been imposed at a lower rate and also remitted further.

The Tribunal found that the applicant’s argument on the imposition of the penalty could not succeed.  There was clearly a basis for a finding of reckless conduct by the tax agent.

The Tribunal also found that the penalties should not be remitted further. The applicant argued as follows:

  • the applicant was essentially blameless for what occurred and it would be harsh to make them responsible for the consequences of their tax agent’s failings; and
  • even if the Commissioner was not inclined to provide relief for taxpayers from the sins of their agents in the ordinary course, it would be harsh to take that approach in this case because the agent was uninsured and had few assets to satisfy a judgment.

The Tribunal accepted that the applicant was not aware of any of the mismanagement by his tax agent and was not being wilfully blind to what was going on.  However, the Tribunal was not satisfied that the applicant was blameless – this is because he signed whatever was put in front of him without asking some basic questions about what he was signing.  Accordingly, the applicant did contribute, albeit in a small way, to his own misfortune.

Interestingly, the Tribunal found that remittal of penalty might be considered where it served no purpose to visit a penalty on the taxpayer – referring to a recent decision of the Tribunal in Johnson and Commissioner of Taxation [2011] AATA 20. The Commissioner did not concede that it was generally appropriate to remit a penalty where the taxpayer is blameless in the face of an incompetent tax agent. Those considerations did not apply here as the applicant did contribute to events and there would be a purpose in the penalty as it would reflect the applicant’s failure to be more diligent in his dealings with his tax agent.

International cases update – September 2012 – single vs multiple supplies and possible impact of Qantas

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In September 2012 the following cases dealing with VAT issues were published in the UK.  From my research there were no significant cases published in New Zealand or Canada.

It is notable that two of the decisions of the Tribunal involved the perennial question of whether a transaction involved a single supply or multiple supplies for VAT purposes.  My analysis of these decisions can be found here.  Also, as discussed in my analysis, one wonders whether the recent decision of the High Court in Qantas will impact on how Australian Courts will approach this question going forward.

United Kingdom

First Tier Tribunal

  • Chipping Sodbury Golf Club v Revenue & Customs [2012] UKFTT 557 – VAT – sporting exemption for golf clubs – Article 13A(1)(m) Sixth Directive – members’ subscriptions – single supply or multiple supplies – Card Protection Plan considered – held single supply – profit making proprietary clubs – whether entitled to exemption – no – appeals dismissed
  • Colin Summers & Christopher Summers v Revenue & Customs [2012] UKFTT 590 – VALUE ADDED TAX — registration — whether appellants trading as single partnership or as two differently constituted partnerships — on the evidence, two separate partnerships — appeal allowed
  • Goals Soccer Centres plc v Revenue & Customs [2012] UKFTT 576 – VAT – Single or multiple supplies; five-a-side football; Pitch hire agreements and management services of sports leagues; whether single supply or multiple supplies, whether artificial to split or artificial to combine; tests to be applied and factors to be taken into account; relevance of the principle of fiscal neutrality
  • Goodman Equine Ltd v Revenue & Customs [2012] UKFTT 565 – VAT – input tax claim refused – horse trading – is business test satisfied – no
  • JIB Group Ltd v Revenue & Customs [2012] UKFTT 547 – VAT – INPUT TAX – was professional independent trustee of pension schemes entitled to deduct VAT on services of third party advisers relating to schemes? – held yes – are amounts paid by schemes in relation to advisers’ services consideration for supplies of services by trustee? – held yes – do principles of legitimate expectation, fiscal neutrality and equal treatment lead to different result? – held no – appeal allowed
  • Lakeside Collector Cards v The Commissioners Revenue & Customs [2012] UKFTT 563 – VALUE ADDED TAX – Input tax – Change from cash accounting – Return submitted 2½ years late – Capping provisions – Whether input tax capped as from time return due or from time received by Respondents – Status of Respondents’ manual published on Internet considered
  • Lok’nstore Group Plc v Revenue & Customs [2012[ UKFTT 589 – VAT – INPUT TAX – partial exemption – whether standard method and special method produce fair and reasonable attribution of input tax – held yes – whether special method proposed by Appellant produces fairer and more reasonable result than standard method – held yes – appeal allowed
  • Nathaniel David Roden and Rebecca Catherine Roden v Revenue & Customs [2012] UKFTT 586 – VAT –  let of hotel accommodation by undisclosed agent – deemed supply by and to agent under s47(3) VATA – whether deemed supply to agent necessarily has same VAT status as deemed  supply by agent – no – whether Item 1(d) of Group 1 to Schedule 9 VATA only exempts supplies to physical user of accommodation – no – appeal allowed in principle
  • Westminster College of Computing Ltd v Revenue & Customs [2012] UKFTT 579 – VAT – EXEMPT SUPPLIES – education – whether appellant school – held no – whether appellant college of institution of UK university– held no – appeal dismissed

High Court allows Commissioner’s appeal in Qantas

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Today the High Court handed down its decision in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41.  By a majority of 4:1 (Heydon J dissenting) the Court allowed the Commissioner’s appeal and found that Qantas was liable to pay GST with respect to fares for travel which was not taken by passengers.

In summary, the view of the majority was that upon entry into the contract with passengers, Qantas made a taxable supply for consideration (being the fare) and GST was payable and attributable to the tax period in which the fare was received.  At [33] the majority said as follows:

The Qantas conditions and the Jetstar conditions did not provide an unconditional promise to carry the passenger and baggage on a particular flight.  They supplied something less than that.  This was at least a promise to use best endeavourrs to carry the passenger and baggage, having regad to the circumstances of the business operations of the airline.  This was a “taxable supply” for which the consideration, being the fare, was received.

My initial comment is that while this case involved the GST implications of a transaction which did not proceed to completion, the majority’s conclusion would appear to apply to all contracts, regardless of whether those contracts complete or not.  Accordingly, whenever a party enters into a contract and receives consideration (or provides an invoice), that party makes a taxable supply, with the supply being the entry into the obligations and or the provision of rights to the recipient.  This may raise a number of difficulties going forward.

In his dissenting judgment, Heydon J essentially approved of the reasons given by the Full Court.  In doing so, his Honour found that the expression “supply for consideration” connoted a bargained-for exchange of value for performance and identified the flight as what the passenger paid for. His honour also found that an interpretation of s 9-5 fastening on the latter supply (ie, the flight) conforms more closely to practical reality.