Tribunal finds taxpayer not entitled to input tax credits under an agreement for the purchase of assets

In McKinnon Holdings (NSW) Pty Ltd as Trustee for the McKinnon Equipment Trust and Commissioner of Taxation [2016] AATA 917 the Tribunal found that the applicant was not entitled to input tax credits in respect of the acquisition of plant and equipment from a related entity under an Asset Sale and Purchase Agreement because no consideration (whether monetary or non-monetary) was provided.

The applicant carried on a business of providing excavation and earth moving services. On 1 July 2010 the applicant entered into an Asset Sale and Purchase Agreement with an associated entity. The assets owned by the associated entity were subject to charges held by third party financiers. On 24 September 2010 the associated entity went into liquidation.

No GST was collected or remitted by the associated entity in respect of the agreement, but the applicant subsequently sought to claim input tax credits in respect of the assets said to be acquired under the agreement.

The terms of the agreement were considered by the Tribunal to be important to the resolution of this issue. Essentially, the parties agreed that if the aggregate liabilities of the associated entity exceeded the value of the assets subject to the agreement the consideration payable for the assets would be $1.00. It was common ground at the hearing that the aggregate liabilities exceeded the value of the assets and that no monies were actually paid.

The applicant contended that it provided consideration of:

  • $922,000, being the unencumbered value of the assets; or
  • $1,206,272.70, being the liabilities assumed by the applicant under the agreement.

In respect of the first argument, the Tribunal found that the clear and intended effect of the agreement was that the amount payable was nil or possibly $1.00 if the liability attaching to the assets exceeded the purchase price. As a result, there was no payment made under the agreement in connection with the supply of anything.

In respect of the second argument, the Tribunal observed that no explanation was given as to how the liabilities were assumed by the applicant and how the economic value of those liabilities was determined. The Tribunal identified the following “immediate and seemingly insurmountable problems” for the applicant:

  • the agreement did not in and of itself legally assign the liabilities to the applicant. The most that can be said is that clause 8 of the agreement provided for the associated entity to “use its reasonable endeavours to assist” the applicant to obtain prior to completion or as soon as possible after completion the assignment or novation of each Equipment Lease and consents from other parties as needed;
  • according to the liquidators no such assignment or novation ever occurred;
  • according to the same liquidators, the finance companies did not consent to the transfer of assets and liabilities

The Tribunal concluded that there was neither a legal, nor an effective, assumption of liabilities as suggested was the case by the applicant. This was made demonstrably clear by the fact that the liabilities never in fact moved to the applicant either in a legal sense or in a practical sense. Accordingly, there was no non-monetary consideration provided by the applicant.

Comment 

The Commissioner contended that there was no evidence to support the contention that the applicant acquired the assets under the agreement. At the highest, the Commissioner appeared to accept that the agreement could be construed on the basis that the associated entity made a supply to the applicant of the right to use the assets. In the end, the argument about what, if any, supply was made under the agreement was academic, as the Tribunal did not accept that the applicant provided any consideration for the supply. Therefore, no taxable supply could be identified to support a claim by the applicant for input tax credits.

 

 

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