In Norseman Gold Plc v Revenue and Customs [2016] UKUT 69 the Upper Tax Tribunal agreed with the finding of the First Tier Tribunal that a UK management company providing management services to overseas subsidiaries was not entitled to input tax credits because it did not make taxable supplies to those subsidiaries. The management company was found to have made supplies to its subsidiaries, but those supplies were not made “for consideration”

The decision illustrates two differences between the UK VAT regime and the GST in Australia. First, the threshold requirement for claiming input tax credits is different. Second, the requisite nexus between “supply” and “consideration” is narrower in the UK.

In the UK, an entitlement to input tax credits arises if acquisitions are made in the course of conducting “economic activity”, meaning the making of taxable supplies (supplies for consideration) or intending to make at some time in the future taxable supplies. The First Tier Tribunal found that the taxpayer had supplied management services to its subsidiaries and that what it supplied was “capable” of amounting to a taxable supply – however, what it had supplied was not in fact supplied for consideration and was therefore not a taxable supply. Any understanding (referred to by the First Tier Tribunal as a “vague intention”) between the taxpayer and its subsidiaries about payment being made for services when the subsidiaries could afford to pay was insufficient to establish that supplied would be made “for consideration”.

On appeal, the Upper Tribunal agreed with the First Tier Tribunal and found that the supplies were not made for consideration, they were made gratuitously. The Upper Tribunal noted (at [126]) that the taxpayer did intend to make supplies to its subsidiaries, but the question was whether the taxpayer intended to make supplies “for consideration”. The answer to this question was no because:

…the direct and immediate link between the supplies and intended supplies on the one hand and any payment in respect of those supplies on the other hand was absent at the time when the input tax was incurred.

The conclusion of the Upper Tribunal was helpfully summarised as follows (at [137]:

Putting the matter in the very briefest of ways, this is a case where one party (Norseman) has supplied services to closely related parties (its subsidiaries) with, at best from Norseman’s point of view, an intention on its part to charge at some unspecified time in the future for its services, but with no agreement with the subsidiaries to that effect (even to the effect that the subsidiaries would pay if an when they had the funds available to do so) and no understanding of the amount or timing of such payment. The charge/payment, if and when introduced, might or might not match or exceed recovery of the costs incurred in providing the services and might or might not include a profit element. It might even be nominal…This is an insufficient basis on which to be able to say, at any time prior or during the relevant period, that the eventual charge and payment would have the immediate and direct link with the services provided which EU law requires. If it is not possible to find the necessary link in relation to future supplies and the intended payments for those supplies, still less is it possible to find a link where there has, as yet, been no payment at all, in particular in relation to services provided during the relevant period.

Comment

The decision illustrates two differences between the UK VAT regime and the GST Act.

Entitlement to claim input tax credit

In the UK the entitlement to claim input tax credits arises where there is a direct connection between the acquisition and the making of taxable supplies (i.e., the making of supplies for consideration). In Australia, the test is one of “creditable purpose” and requires that the entity make the acquisition “in carrying on its enterprise”: s 11-15(1) (subject to the “blocking provision” in s 11-15(2) where the acquisitions relate to making supplies that would be input taxed or where the acquisitions are of a private or domestic nature).

These tests can operate quite differently. In the UK an entity must show that it is, or will be, making taxable supplies (i.e., supplies for consideration). In contrast, in Australia an entity need only show that it is making the acquisitions “in carrying on its enterprise”.  To constitute an enterprise, an entity must carry out an activity, or series of activities, done, inter alia, in the form of a business or in the form of an adventure or concern in the nature of trade: s 9-20(1). Given that the carve-out for activities undertaken without a reasonable expectation of profit or gain is limited to individuals (whether on their own or in partnership), it does not appear necessary that a corporate entity carry out these activities for profit or gain or that it actually make taxable supplies. This raises the question of whether this case would be decided differently in Australia.

Meaning of “for consideration”

The meaning of the words “supply for consideration” is narrower in the UK.The Upper Tribunal observed that the authorities established that a supply is “for consideration” where there is a direct link between the service supplied and the consideration received, although there need not be a legally binding agreement between the parties. The nexus between “supply” and “consideration” is a direct one.

In contrast, the words “supply for consideration” in s 9-5(a) of the GST Act need to be seen in light of the expansive definition of “consideration” in s 9-15. In AP Group Limited v Commissioner of Taxation [2013] FCAFC 105  (Edmonds and Jagot JJ) observed that if the definitions in s 9-15 were inserted in substitution for the defined terms where they appear in s 9-5, the result was as follows:

you make a supply for [any consideration, within the meaning given by sections 9-15 and 9-17 in connection with the supply or acquisition].

In Australia, the nexus between “supply” and “consideration” is broader than the UK.  There will be a “supply for consideration” where the supply is made “in connection with” consideration. This nexus may therefore be direct or indirect, although it would appear that a “trivial” or “remote” connection will not suffice.

On 10 February 2016 the Treasurer introduced Tax and Superannuation Laws Amendment (2016 Measures No.1) Bill 2016 into Parliament. The Explanatory Memorandum to the Bill can be accessed here. The Bill contains measures initially flagged in the Budget. The measures have been the subject of a detailed consultation process and two forms of Exposure Draft have been published for comment.

In summary, the amendments have the following aims:

• to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to goods and services tax in a similar way to equivalent supplies made by Australian entities; and
• to better target the way Australia’s goods and services tax rules apply to cross-border supplies that involve non-resident entities.

A brief outline of the amendments are set out below. The measures are to take effect for tax periods starting on or after 1 July 2017.

Extending GST to imported digital products and other services

Expansion of the concept of “connected with Australia”

Under the existing law, for a supply to fall within the GST net and potentially be a taxable supply it must be “connected with the indirect tax zone” (i.e., connected with Australia) pursuant to s 9-25 of the GST Act. The amendments expand this concept considerably.

Section 9-25 contains the following categories of supplies that may be connected with Australia:

• supplies of goods wholly within Australia – sub-section (1);
• supplies of goods from Australia – sub-section (2);
• supplies of goods to Australia – sub-section (3);
• supplies of real property – sub-section (4); and
• supplies of anything else – sub-section (5).

Section (5) currently makes a supply of “anything else” connected with Australia where one of the following applies:

• the thing is done in Australia;
• the supplier makes the supply through an enterprise carried on in Australia; or
• the supply is a right or option to the supply of a thing that would be connected with Australia.

The amendments expand subsection (5) to provide that a supply of anything other than goods or real property is connected with Australia if “the *recipient is an *Australian consumer“.

An “Australian consumer” is essentially an entity that is an Australian resident who is not registered for GST, or if it is registered, the entity does not acquire the thing supplied solely or partly for the purpose of an enterprise carried on by the entity.

This means that all supplies of intangibles (e.g., digital downloads, professional services etc) to a private consumer, or a registered consumer who acquires it not for the purpose of an enterprise (e.g., in a private capacity), from an overseas entity will be “connected with Australia” and will be potentially subject to GST in the same way as supplies from entities in Australia – i.e., if the other requirements in s 9-5 are satisfied. This also means that overseas suppliers will be required to register for GST if they exceed the GST turnover threshold. The stated aim is for there to be a “level-playing field” where all intangibles acquired by consumers have the same GST treatment, regardless of where the supplier is.

Safeguards for overseas suppliers

The Explanatory Memorandum recognises that in may cases foreign suppliers will have only a limited capacity to investigate the residency and GST registration status of the recipient. The amendments provide a safeguard for supplies, to the effect that the offshore supplier will only be liable for GST in relation to a supply if:

• the supplier takes reasonable steps to obtain information concerning whether the recipient of the supply is an Australian consumer; and
• having taken these steps, reasonably believes that the recipient is not an Australian consumer.

Interestingly, the safeguards do not extend to the reverse situation, where the overseas supplier wrong treats the recipient as a consumer and over-pays GST. The Explanatory Memorandum states that in such case Division 142 of the GST Act would apply and the supplier should generally be required to reimburse the Australian consumer for the GST before being able to claim a refund.

Shift of GST liability to electronic distribution platforms

The amendments shift the liability for GST from the overseas supplier to the operator of an “electronic distribution platform”. This is a platform operating over the internet, but not a physical store or one operated by mail.

The rationale for shifting liability is that the platform operator has most of the information about the recipients of the supplies and is generally larger and better resourced than most of the entities making supplies through the platform.

The parties can agree to shift the liability for GST to the supplier if the parties agree in writing and the recipient is given a document identifying the supply as having been made by the supplier.

GST-free and input taxed supplies

Divisions 38 and 40 are to be amended to allow Legislative Determinations to be made that a specific class of supplies that fall within the amendments to be GST-free or input taxed.

The Explanatory Memorandum states that this power will only be exercised where the current treatment of the supply or class of supply is contrary to Australia’s international trade law obligations and the Treasurer is satisfied that a supply made by a comparable Australian resident entity would receive the same treatment.

Tax invoices

The Amendments provide that the supplier is not obliged to provide a tax invoice or adjustment note at the request of the recipient. The rationale for this is that unlike most other types of taxable supplies, offshore supplies falling within the amendments by definition cannot be made to an entity that is entitled to an ITC in relation to the acquisition of the supply.

The margin scheme in Division 75 operates in the same way. As the purchaser is not entitled to input tax credits where the margin scheme is used, there is no need for a tax invoice to be provided.

GST treatment of B2B cross border transactions

These Amendments are not aimed at altering the tax base. Rather, they are aimed at streamlining the way the GST applies to cross-border supplies between businesses by relieving non-resident suppliers of the obligation to account for GST on certain supplies.

The amendments do this by ensuring that certain supplies made by non-residents are not connected with Australia – those supplies are treated as being “disconnected”. For these supplies, the recipient will be responsible for for determining if they have a GST liability under the reverse charge rules in Division 84 of the GST Act – that liability will arise to the extent that the acquisition is not creditable. If the acquisition is fully creditable in the hands of the recipient, Division 84 does not apply – there is no need to collect the GST revenue where that is fully offset by the claim for input tax credits.