Monthly Archives: November 2012

Commissioner finalises four GST Determinations on telecommunication supplies

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Yesterday the Commissioner published four GST Determinations on telecommunications.  The determinations deal with four issues considered in the Telecommunications Industry Liason Group – Industry Register.  The views of the Commissioner in the Determinations are consistent with those expressed in the issues register.

While the determinations are specific to telecommunication supplies, one general point of interest flow from the views of the Commissioner is that he considers that the words “supply is provided” in subsection 38-190(3)(b) is to be contrasted with the term “made” in Item 2 of the table.  The Commissioner considers that the word “provided” is used to distinguish between the contractual flow of the supply made to a non-resident recipient and the actual flow of the service or other things provided to another entity.

NZ Supreme Court dismisses appeal by receivers for refund of GST

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Yesterday the NZ Supreme Court handed down its decision in Stiassny and others v Commissioner of Inland Revenue [2012] NZSC 106  where the Court dismissed an appeal against the decision of the Court of Appeal that the claim for a refund of GST by the receivers appointed to the partners in a GST-registered partnership should be struck out.

The case is interesting as it considers the question of whether the receivers of the partners (who were not appointed as receiver to the partnership) were personally liable to pay GST on the sale of partnership property. A similar question may arise under s 58 of the GST Act.  Secondly, the case discusses the scope for a claim based on restitution.  An outline of the facts and my analysis of the decision of the Court of Appeal can be accessed here.

Were the receivers personally liable for GST?

The Court of Appeal rejected the Commissioner’s contention that the receivers were personally liable for the GST of the partnership.  Before the Supreme Court, the Commissioner ran the same argument, being that the provisions of s 57 and s 58 (dealing with the GST consequences of “incapacitated entities”) should be given a construction which was consistent with their purpose, being to make the receivers liable for the GST of the partnership (notwithstanding that the partnership itself was not in receivership).

The Supreme Court rejected the argument for similar reasons to the Court of Appeal – essentially that the argument required words in s 57 to be ignored and additional words to be put into s 58.  The decision is another example of the limits of a “purposive” construction to statutory construction.

Can the receivers recover the GST paid?

The first argument of the receivers was that the payment of GST was made by them, rather than by the partnership.  This argument was rejected on the basis that the documents lead to the conclusion that it was simply not arguable that the GST payment was made otherwise than from a partnership bank account with funds to which it had title.

The second argument was that because the proceeds held by the receiver were insufficient to discharge the obligations owing by the partnership to secured creditors, those funds were held on bare trust for the secured creditors and, in equity the payment to the Commissioner utilised the property of the secured creditors, which can be recovered. This claim was rejected because of the effect of the introduction of the Personal Property Securities Arrangement regime which gives a creditor priority over a security interest in the funds paid to the creditor.

The third argument was that the payment had been made because of a mistake by the receivers or because they were, in practical terms, compelled to make it.  The Supreme Court agreed that the receivers were making a mistake about the law when they wrongly caused the partnership to pay the GST – they wrongly thought they were personally liable for the GST so paid it to protect their personal position. The Supreme Court also observed that it was well-settled that someone who makes a payment acting on a view of the law which a court later declares to be wrong, may be able to recover it.  In this context, the basis of the claim was to recover a payment made by mistake to the wrong creditor, to someone who would not have been paid but for the mistake.

The Supreme Court nevertheless found that the third argument failed on restitutionary principles.  This is because the partnership did owe the Crown the GST which was paid, therefore the Commissioner gave good consideration in accepting the payment in discharge of the debt.  Also, there could be no suggestion that the Commissioner induced the mistake – he made no demand for payment.  There was no unjust enrichment to the Crown at the expense of the partnership.

ATO publishes guide on Division 81 payments

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The ATO has published on its website a helpful guide to assist government agencies to determine whether GST applies to a government charge or whether the charge is exempt from GST under Division 81 of the GST Act.  The guide can be accessed here.

The current determination of the Treasurer, which lists government charges that are exempt from GST, no longer applies from 1 July 2013.  From that date, government agencies must review their government charges to self-assess whether GST is payable.

UK Tax Tribunal finds VAT not payable on retained overpayments

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In Borough Council of King’s Lynn and West Norfolk v Revenue & Customs [2012] UKFTT 671 the UK First Tier Tax Tribunal found that the Council was not liable to pay VAT on overpayments made by members of the public in respect of car parking.  The Council operated ticket vending machines which displayed sliding scale hourly parking charges and indicated that overpayments were accepted but no change was given.  The overpayments occurred where members of the public voluntarily paid more for a parking ticket than they were required to pay (for example if they did not have the correct change), which ranged between 2.25% to 3.46% of total payments per year.

The Revenue submitted that there was a supply of services by the Council and VAT was payable on “the whole consideration paid or payable”.  Further, the parking ticket confirmed the full payment as being made for the supply.

The Council submitted that the payment was ex gratia and the member of the public gets nothing in return for the payment.  There was no link between what is supplied and what is received – in the absence of the nexus, the overpayment cannot be treated as consideration for the the purposes of VAT.

In considering the issue, the Tribunal made the following statement of principle:

There must be a direct link between the supply made and the consideration given.  The supplier would normally expect something in return for a supply and will not fulfil their contractual obligation unless payment is received or forthcoming.  If there is no direct link between the supply which is made and the payment received or if a party was not obliged to pay then it cannot be said that there was consideration for the supply.  There must be some form of reciprocity between the parties.

In finding for the Council, the Tribunal observed that the fact that a party receives a sum of money does not mean that that sum represents consideration.  What was missing in this case was a direct link between what is supplied and what is paid for.

In the Australian context, the “nexus” is broader (being “in connection with” rather than a direct nexus between supply and consideration).  The question would be whether the overpayment was received “in connection with” the supply of car parking – or to use the approach adopted by the Commissioner – whether there was “a substantial relation, in a practical business sense”, between the overpayment and the supply.  The application of the nexus was recently considered by the Tribunal in AP Group Limited and Commissioner of Taxation [2012] AATA 409 dealing with the GST implications of various motor vehicle incentive payments.  The pending appeal of that decision to the Federal Court may well provide some guidance as to how the issue considered in the UK Tribunal should be dealt with in the Australian context.

UK Tribunal looks at whether retailer entitled to refund of VAT for goods paid for by fraudulent use of credit cards – is there a supply?

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In Dixons Retail plc v Revenue & Customs [2012] UKFTT 666 the UK Tax Tribunal has referred to the ECJ the question of whether a retailer is required to account for VAT on the sales of goods paid for by the fraudulent use of credit cards where the retailer has not been required to repay the payments received from the issuing banks.

This case raises the interesting question of whether the retailers made a “supply” of goods to the customers, notwithstanding that the goods were obtained by fraudulent means.  The context of the dispute has a similarity with the recent decision of the High Court in Qantas as in both cases the taxpayer received a payment in circumstances where the “intended transaction” does not proceed but is entitled to retain the funds received. If a supply is nevertheless made, VAT/GST is payable.  If a supply is not made, the taxpayer receives a financial benefit with no VAT/GST consequences.

While the Tribunal referred the question to the ECJ, it is interesting to consider the arguments put by both parties.

The taxpayer made the following submissions:

  • the presence of a legal relationship requiring reciprocal performance is a fundamental criterion to the identification of a “supply of goods”
  • the existence of a supply will primarily be determined by the terms of the agreement between the retailer and the cardholder
  • it has already been held that obtaining goods by illegal means (theft) does not equate to a transfer of a right to dispose of tangible property as owner – there is no legitimate distinction to be drawn between goods obtained illegally by theft and those obtained by credit card fraud
  • any payment received by the retailer only forms part of the “taxable amount” to the extent that there is a direct link between the goods provided and the consideration received.  In the circumstances of a fraudulent card transaction there is no reciprocal assumption of any obligation by the fraudster in connection with the payment for the goods and thus no direct link between any sum received by the retailer and the release of the goods
  • it is crucial to identify what the payment is “for”

The Commissioner made the following submissions:

  • there is plainly a supply of goods by the retailer to a customer where the customer fraudulently uses a credit card which he knew he was not authorised to use – in the course of the transaction the relevant goods were handed over to the fraudulent customer by the retailer in the same way a they would have been to any other customer
  • the transactions are not identical to the theft of goods – the latter is a unilateral undertaking by the thief, with nothing agreed and no relationship between the thief and the owner
  • the state of mind, motive or dishonest intent of a customer is not relevant to whether there is a supply – an objective approach is required.  A transaction is not prevented from being a supply because it involved some fraud and is therefore unlawful
  • the retailer received payment of the price of the goods from the third party bank – the payment was directly linked to the making of the supply of the goods to the customer – this payment constituted third party consideration for the supply of the goods

While the UK VAT system is different to here, in particular the UK requires a “direct link” between supply and consideration whereas here the link is the broader “in connection with”.  Nevertheless, the views of the ECJ on this issue may well have relevance in the Australian context.


Commissioner issues Decision Impact Statement for Qantas

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On Friday the Commissioner issued his Decision Impact Statement for the decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41.

Some highlights from the Commissioner’s views in the statement include:

  1. The decision does not cause any significant change in the way the Commissioner approaches ‘supply’ or the nexus between supply and consideration.
  2. In cases where a payment is made on entry into a contract which secures rights (whether conditional or not) to a further supply, the Commissioner considers that the payment will be consideration for a supply consisting of at least the provision of those rights (and entry into the corresponding obligations), even if the further contemplated supply is not ultimately made
  3. There is nothing in the Qantas decision that would suggest that supplies need to be ‘dissected’ into their component parts, or that the focus of GST should be on contractual rights and obligations instead of performance.
  4. The Commissioner maintains the view, as recognised in his public rulings, that in many cases, the entry into contractual obligations and corresponding creation of rights should be construed, where relevant, as part of a composite supply that includes the performance of those obligations.

The views of the Commissioner in the Decision Impact Statement will likely cause much discussion.  For my part, I am not sure that matters 2, 3 and 4 sit comfortably together.

Tribunal finds that parties agreed in writing that a sale was of a going concern

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On Friday the Tribunal handed down its decision in SDI Group Pty Ltd and Commissioner of Taxation [2012] AATA 763 where it found that the applicant (vendor) and the purchaser of commercial property had satisfied the requirement that the parties agree that the sale was a supply of the going concern, notwithstanding that no such agreement was provided for in the Contract of Sale.

The case is very much restricted to its facts, but the decision arguably conflicts with the Commissioner’s stated view in GSTR 2002/5 that the term “agreed in writing” in s 38-325 means “that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply…is a supply of a going concern”.  This is because there was nothing actually signed by the purchaser to the effect that the agreement was the supply of a going concern, and the Tribunal found that it in the particular circumstances certain “unilateral documents” under the hand of the vendor were sufficient.

The facts can be summarised as follows:

  • in December 2009 the applicant and the purchaser executed a contract of sale for the sale of commercial property. At the time there was a tenant of the property on a monthly lease – the contract was expressly subject to the lease.  The Contract did not refer to the property being a going concern.
  • After the contract was signed, there was a dispute between the parties as to whether the sale was a going concern due to there being a only a monthly lease only.
  • Prior to, or at settlement, the applicant provided the purchaser with a tax invoice which contained the words “NO GST (SOLD AS A GOING CONCERN)” and a Goods Statutory Declaration in which the Box was ticked “Yes” in answer to the question “Does the contract relate to the sale of a going concern?”

The Commissioner contended that the parties had not “agreed in writing” that the sale was the supply of a going concern, and that the tax invoice and Statutory Declaration were “unilateral documents”.

The Tribunal found in favour of the applicant on the basis that there was sufficient evidence that the applicant and purchaser agreed in writing that the supply involved a going concern – indeed the Tribunal found that the parties had “incorporated an agreement in writing that the supply involved a going concern”.  The requirement for the agreement to be “in writing” was satisfied by a combination of the contract of sale, the tax invoice and the Statutory Declaration.

The Commissioner’s concern appeared to be that the applicant could not point to a document evidencing an agreement in writing which was signed by the purchaser – the Commissioner accepts that such an agreement need not be found exclusively in the Contract of Sale. One way of looking at the Tribunal’s decision is that by the purchaser proceeding with settlement after receiving the tax invoice and the Statutory Declaration, that the purchaser, by conduct, agreed that the sale was of a going concern in accordance with those documents.  Such an agreement is arguably still an agreement “in writing”, as it is evidenced by the written terms of the tax invoice and the Statutory Declaration. It remains to be seen whether the Commissioner appeals the decision on the basis that an agreement will only be “in writing” where a document evidencing the agreement is executed by both parties.

PSLA issued on retaining GST refunds pending verification; Appeals update on “son of holdback” – Commissioner lodges Cross Appeal

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In the wake of the Multiflex decision, Tax and Superannuation Laws Amendment Act (2012 Measures No.1) Act 2012 was introduced to amend the Taxation Administration Act 1953 to allow the Commissioner of Taxation to hold refunds for verification prior to payment.  Yesterday, the Commissioner published PSLA 2012/6 ‘Exercise of the Commissioner’s discretion under section 8AAZLGA of the Taxation Administration Act 1953 to retain an amount that would otherwise have to be refunded’.  The purpose of the practice statement is to provide guidance to tax officers on when it is reasonable to exercise the Commissioner’s discretion to delay a refund amount pending verification of the taxpayer’s entitlement to the amount.

An analysis of the practice statement will be posted next week.

Appeals update

In September the Tribunal handed down its decision in in AP Group Limited and Commissioner of Taxation [2012] AATA 617, finding that the taxpayer’s objection was partially allowed, on the basis that certain incentive payments were not consideration for a supply.  The Tribunal handed down its interim decision in July 2012, [2012] AATA 409.

The Federal Court portal shows that on 12 October 2012 the taxpayer lodged an appeal to the Federal Court.  Also, on 19 October 2012 the Commissioner lodged a cross-appeal.  Given both parties have appealed, it would appear that the Federal Court will have an opportunity to consider one of the fundamental planks of GST, namely whether payments are consideration for, or in connection with, a supply.

The matter has been set down for directions on 6 November 2012.  Because the decision was by two Deputy Presidents, the appeal can be heard by the Full Federal Court (rather than a single Judge) if considered appropriate. One would expect that this would likely be the case.

My post discussing the Tribunal’s decision can be accessed here.

International cases update – October 2012: analysis of three decisions with Australian implications

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In October the following decisions dealing with VAT and GST were handed down in the UK and Canada.  From my research no decisions were handed down in New Zealand.

This month I have analysed three decisions, each of which has potential interest in the Australian context:

  • Whether a payment received under a Settlement Agreement in respect of the breach/termination of an agreement is taxable in Canada: Surrey City Centre Mall Ltd v The Queen 2012 TCC 346.  The Canadian legislation has a specific deeming provision which treats payments for the breach of an agreement to make a taxable supply to be consideration for that taxable supply.  Australia contains no such provision and whether such a payment is taxable depends on whether it is consideration “in connection with” a supply. Under the current view of the Commissioner in GSTR 2001/4, the payment would not appear to be subject to GST as it is in the nature of damages.  However, the recent decision of the High Court in Qantas gives cause to revisit the issue.  My analysis of the decision can be accessed here.
  • Whether the supply of “hot food” in UK is taxable or zero-rated: Sub One Limited T/A Subway v HMRC [2012] UKUT 34.  The Upper Tribunal found that the subjective test applied by the Courts since 1988 was contrary to EU law, which required that an objective test be applied.  This raises the question of whether the test to be applied in Australia is subjective or objective.  My analysis of the decision can be accessed here.
  • Whether the sale of goods sold online where a charge was imposed for postage involved the single supply of delivered goods (all taxable) or two supplies: Orchardcrown Ltd v Revenue & Customs [2012] UKFTT 608. The Tribunal applied the established principles in Card Protection Plan and found there was a single supply.  In light of the recent decision of the High Court in Qantas, this raises the question of whether that test will continue to be applied here.  My analysis of the decision can be accessed here.

United Kingdom

Upper Taxation Tribunal

  • HMRC v The Rank Group Plc [2012] 347 – whether imposing VAT on gaming machines a breach of the principle of fiscal neutrality
  • Sub One Limited T/A Subway v HMRC [2012] UKUT 34 – Value Added Tax – zero-rating – Value Added Tax Act 1994 Schedule 8 Part II Group 1 Note (3)(b)(i) – food – toasted sandwiches and meatball marinara – whether heated for the purposes of enabling it to be consumed at temperature above ambient air temperature – whether legislation and/or interpretation and/or application thereof infringed principle of fiscal neutrality – whether FTT findings irrational – application to adduce further evidence – for my case analysis click here

Tax Tribunal

  • Damazda International UK Ltd v Revenue & Customs [2012] UKFTT 615 – Value Added Tax Act 1994 sec 84(7B) &  Sch 11 para 6A – Directive 2006/112 Art 273 – Direction to keep records – scope of appeal jurisdiction – proportionality – risk of tax loss – appeal allowed
  • Isle of Wight Council v Revenue & Customs [2012] UKFTT 648 – Value Added Tax – Taxable person – Local authority – Provision of off-street car parking – Impact of exemption on relevant market – Distortion of competition – Whether local authorities taxable persons in respect of provision of such parking – Questions referred to ECJ for determination – Application of ruling of ECJ (Case C-288/07) – EC Council Directive 77/388, art 4(5) (now art 13 of Directive 2006/114)
  • Kandiah Skandamoorthy v Revenue & Customs [2012] UKFTT 638 – VATA 1994 s73 – incomplete records – assessment to ‘best of their judgment’ – whether all relevant evidence taken into account – prolonged delays by taxpayer – appeal dismissed
  • Orchardcrown Ltd v Revenue & Customs [2012] UKFTT 608 – VAT – output tax – supply of goods with charge for postage – whether a single supply – whether supplier acts as agent for customer in contracting with Royal Mail – Customs & Excise Commissioners v Plantiflor Ltd considered – single supply by appellant – no agency established – appeal dismissed
  • Pinevale Ltd v Revenue & Customs [2012] UKFTT 606 – Value Added Tax – Reduced rate supply – Energy saving materials – Insulation for roofs – Polycarbonate panels for conservatories – Panels supplied to create new roof – Panels supplied to replace existing panels – Radiation reflector strips installed in  existing panels – Whether energy saving materials comprising insulation for roofs – Appeal allowed

Canada

Tax Court