Tribunal decision on GST and use of industry benchmarks; ATO ID on input tax credits for employee reimbursements

On Friday the Tribunal handed down its decision in Carter and Commissioner of Taxation [2013] AATA 141 and on Thursday the Commissioner issued ATO ID 2013/3 “Amount of input tax credits relating to employee reimbursements”.

In Carter and Commissioner of Taxation the Tribunal affirmed the Commissioner’s assessment for income tax and GST in respect of the applicant’s florist business. The basis of the assessment was that the BASs and income tax returns lodged by the applicant were based on a Cost of Goods Sold (COGS) of 83% of her reported business income, which was outside the COGS industry benchmark of between 44% and 54%. The Tribunal found that the applicant had failed to discharge her burden of showing the assessments were excessive. The Tribunal also rejected an argument by the applicant that the use of benchmarks by the Commissioner breached s 99 of the Commonwealth Constitution (which prevents the Commonwealth from giving preference to one State over another State). The applicant contended that the use of benchmarks were in appropriate for Western Australia as the costs of flowers and other items are more expensive than the eastern States. The Tribunal found that there was no factual basis for the contention, but found that it did not have jurisdiction to consider the question.

In ATO ID 2013/3 the Commissioner takes the view that the amount of input tax credit available under s 111-10 of the GST Act is reduced under s 11-30 if the acquisition is partly creditable. The issue was considered in the context of a financial institution where an employee is reimbursed for an expense that is related directly to his activities as an employee and is for an acquisition that was a taxable supply to the employee.

The basis of the Commissioner’s view is that while s 111-10 provides that the amount of the input tax credit is 1/11th of the reimbursement, and the section expressly overrides s 11-25 (which is about the amount of input tax credits for creditable acquisitions), s 111-10 does not override s 11-30 (which is about partly creditable acquisitions) so therefore, to the extent that the acquisition for the reimbursement relates to making input taxed supplies, the acquisition is not creditable. Having regards to the words of the various sections, while I can understand the reasoning behind the Commissioner’s view, in my view this approach may be doubted.

Section 111-10(3) states that s 111-10 has effect despite s 11-25 (and makes no express reference to overriding s 11-30). However, in my view it can be argued that s 111-10, by implication, also overrides s 11-30. The basis for that view is as follows:

  • s 11-25 states that “The amount of input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only *partly creditable.” (emphasis added). The underlined words shows that s 11-30 operates to reduce the input tax credit otherwise available under s 11-25.  Accordingly, if s 111-10(3) excludes s 11-25, it also (by implication) excludes s 11-30.
  • S 111-10(2) provides a stand alone mechanism whereby the input tax credit deemed by s 111-10(1) can be reduced – the Commissioner’s view is that s 11-30 operates as a further mechanism whereby that input tax credit may be reduced. If the intent of Parliament was to provide for the further reduction of the input tax credit on that basis, it could easily have said so.
  • The Explanatory Memorandum introducing Division 111 states that “the input tax credit is generally  equal to 1/11th of the actual reimbursement” and refers to the scope for reduction in s111-10(2) – no reference is made to a further scope for reduction under s 11-30.
  • Section 45-5 provides that the special rules (which includes Division 111) override the provisions of Chapter 2 “but only to the extent of any inconsistency”. In my view it can be argued that the provisions in s 111-10 are inconsistent with s 11-25 and s 11-30.

The effect of this construction is that the financial institution referred to in the ATO ID would be entitled to an input tax credit equal to 1/11th of the amount of the reimbursement, notwithstanding that the financial institution would be entitled to a lower recovery threshold for acquisitions made directly.

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