Tribunal decision on s 105-65 and “claw back” of GST – also no jurisdiction to hear the issue

On Friday, the Tribunal handed down its decision in Naidoo and Commissioner of Taxation [2013] AATA 443 where the Tribunal confirmed the Commissioner’s decision that the applicant was not carrying on an enterprise and was therefore not entitled to input tax credits.

Of greater interest is that the Tribunal rejected the Commissioner’s contention that the applicant was still obliged to pay GST in the relevant period by relying on s 105-65 of Schedule 1 to the TAA and the issue of a GST assessment for a positive net amount – even though the Commissioner formed the view that the applicant was not carrying on an enterprise. Also, the Tribunal found that it had no jurisdiction to hear an application to review a decision of the Commissioner with respect to s 105-65. The Tribunal noted that the Tribunal had, in the past, proceeded on the basis that it had jurisdiction (eg, Luxottica), but observed that the jurisdiction issue appeared not to have been previously the subject of deliberation.

This decision involved a similar contention that was unsuccessfully raised by the Commissioner in The Private Tutor and Commissioner of Taxation [2013] AATA 136. The Tribunal in that case also made some adverse comments on the Commissioner’s conduct in issuing assessments to the taxpayer for a positive net amount in an attempt to “claw back” GST while maintaining that the  taxpayer was not entitled to be registered for GST. My post discussing that decision can be accessed here.

After that decision, the Commissioner released a decision impact statement stating that he “respectfully maintains his view” that he is entitled to rely on s 105-65 to retain refunds in such circumstances. The Commissioner also noted that the Tribunal had reserved a decision dealing with this question in another case and he would review his position generally once the Tribunal hands down its decision in that matter. That has now occurred and one would expect the Commissioner to review his position stated in the decision impact statement.

The decision

The relevant facts and issues can be shortly stated:

  • the applicant was a partnership and was registered for GST for the tax periods between 1 April 2007 and 31 March 2011 and lodged activity statements. The activity statements were mostly for negative net amounts, save for three small positive net amounts.
  • the Commissioner conducted an audit and determined that the applicant was not carrying on an enterprise during the relevant period and cancelled its GST registration.
  • The Commissioner also found that the applicant was not entitled to input tax credits but was still liable for GST. As noted by the Tribunal (at [4]): (emphasis added) “The Commissioner formed the view that the Naidoo Partnership was still liabile to pay GST in the relevant period relying on s 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA). Peculiarly, even though the Commissioner formed the view that the Naidoo Partnership was not carrying on an enterprise, he assessed the Naidoo Partnership to positive net amounts for the relevant tax periods.

The operation of s 105-65

The Tribunal agreed that the applicant was not carrying on an enterprise and was not entitled to input tax credits. However, the Tribunal found disagreed with the Commissioner on the effect of s 105-65, and stated as follows (at [6]):

With respect to the issue of the application of s 105-65 of Schedule 1 to the TAA, I have decided that it does not apply in the way that the Commissioner argued and that the net amount for each tax period in the relevant period is zero, not a positive amount. As explained in the reasons below, this is because s 105-65 does not alter the net amount that is worked out under the GST Act.

The Tribunal noted that its reasons were substantially the same as those given recently in Re The Private Tutor and Commissioner of Taxation. The Tribunal also noted that it gave the parties an opportunity to file further written submissions addressing that decision and detailed submissions were filed. In the decision the Tribunal helpfully outlines the submissions of both parties, in particular those of the Commissioner.

The primary contention of the Commissioner appears to have been that s 105-65 of Schedule 1 to the TAA is not merely a procedural provision, it is a necessary step in establishing a taxpayer’s substantive liability in respect of GST. In particular, s 17-5 of the GST Act, which deals with the determination of “net amount”, is not self contained and should be construed with the more generic provisions of the TAA. The Tribunal rejected the Commissioner’s contention for the following reasons:

  • the GST Act provides for the working out of the net amount in a precise manner using clear and unambiguous language in s 17-5 of the GST Act.
  • the Commissioner’s contention that “net amount” means the amount that is arrived at after considering all the relevant provisions that bear on the taxpayer’s legal obligation or entitlements are taken into account (including s 105-65) has no basis in the statutory framework and leaves the issue at large creating uncertainty.
  • there is no disputing that the GST Act and the TAA are to be construed together, but it is difficult to see how s 105-65 can be worked into the statutory definition of net amount in circumstances where “GST” is also specifically defined in s 17-5(1) of the GST Act.
  • S 105-65 can only operate after the net amount has been calculated.

In conclusion (at [96]):

I conclude that, contrary to the Commissioner’s approach, s 105-65 of Schedule to the TAA is not a provision which allows the Commissioner to alter the net amount calculated under s 17-5(1) of the GST Act. There is nothing in the statutory provisions of either the GST Act or the TAA which produces the result that the Commissioner contends for, nor do any of the authorities to which he referred compel such a conclusion. Indeed, none of the cases expressly canvass the operation of s 105-65 with respect to the net amount. Accordingly, in the face of the statutory provisions, s 105-65 cannot be taken into account in the determination of the net amount for a tax period. I prefer the view that s 105-65 operates after the net amount for a tax period is calculated under the GST Act.

Jurisdiction to review decisions on s 105-65

The Tribunal observed that s 14ZZ of the TAA provided the Tribunal with jurisdiction to review a decision made by the Commissioner with respect to an objection. In the context of GST, that is an objection on the grounds that an assessment of net amount is excessive. Given the finding that s 105-65 did not alter the taxpayer’s net amount, the Tribunal therefore had no jurisdiction to review the Commissioner’s decision under s 105-65. This meant that the taxpayer’s recourse must be found in judicial review proceedings under s 39B of the Judiciary Act 1903 or the Administrative Decisions (Judicial Review) Act 1977.

The Tribunal also noted as follows:

Whether or not this was intended to be the case when the legislation was drafted is unclear. The Commissioner may be correct in his view (at paragraph [159] of MT 2010/1) that it would be desirable for taxpayers to be able to challenge such a decision under Part IVC of the TAA and also able to obtain merits review in the Tribunal. However, this is of no assistance in circumstances where the statutory framework does not provide for this outcome.

Exercise of the Commissioner’s discretion

The Tribunal also considered the question of whether the Commissioner should exercise his discretion in s 105-65 to refund the overpaid GST to the applicant. The Commissioner submitted that the discretion should not be exercised because the applicant would receive a “windfall gain” if a refund was paid.

The Commissioner appeared to contend that the entire of the GST paid by the applicant fell within s 105-65 (ie, including the entirety of the GST included in the activity statement). The Tribunal appeared to reject this contention and found that if it had jurisdiction to review the decision made under s 105-65, it would have only refused to refund the positive net amounts reported in the three activity statements lodged by the applicant.

Division 142

In the decision impact statement for The Private Tutor, the Commissioner noted that the draft legislation introducing division 142 into the GST Act  (and repealing section 105 – 65) would likely remove any uncertainty as to the correct approach in cases like this one. Last week legislation was introduced into the House of Representatives – my post can be accessed here.

Division 142 would appear to remedy the issue of jurisdiction as the effect is that the overpaid GST “is taken to have always been payable” and would appear to directly impact on the taxpayer’s net amount.

However, if the Commissioner is correct in his view that Division 142 would remove an uncertainty, this may illustrate a harsh application of the proposed division. By incorrectly registering for GST, a taxpayer is exposed to repaying input tax credits falsely claimed, but the full amount of GST that was incorrectly payable as a result of being incorrectly registered is “taken to” to have always been payable. For example, assume a taxpayer incorrectly registers for GST and claims input tax credits of $100,000 and pays GST of $100,000. That taxpayer would have a net amount of nil, but if the Commissioner subsequently determines that the entity was not carrying on an enterprise, the taxpayer will be required to repay the input tax credits in full but remain liable to pay the whole of the GST.

It will take time for the full implications of Division 142 to be realised, but this may be just a taste of its potential full force and effect.

One thought on “Tribunal decision on s 105-65 and “claw back” of GST – also no jurisdiction to hear the issue

  1. Chris, this is helpful. Jeremy Geale referred me to this, and I note I have a case coming through the AAT, where a taxpayer self-amended refunds totalling about $1.4m after getting positive rulings that its products were GST-free. The Commissioner immediately used s105-65 of the TAA1 to issue assessments clawing back those self-amended refunds and on Jeremy’s suggestion, we are going to argue just this – that s105-65 operates after the ‘net amount’ is determined, and the assessments ought to be set aside as excessive. We are then further arguing that the AAT has no further jurisdiction to review the operation of s105-65 of the TAA1. Cheers, John Morgan (Extn 8920;

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