Author Archives: chrissievers

Full Federal Court hands down decision in ATS Pacific appeal

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Yesterday the Full Federal Court handed down its decision in ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33. The Court dismissed the taxpayer’s appeal and allowed the Commissioner’s cross-appeal.

Justice Edmonds (who delivered the lead judgment – Pagone and Davies JJ agreed with his Honour) observed that the case involved the proper characterisation of the supply by Australian travel agents or tour operators to non-resident travel agents or tour operators in booking or arranging accommodation, goods and services for the customers of the non-resident travel agents or tour operators, namely the non-resent tourists. His Honour also noted that this issue had previous come before the Federal Court in Saga Holidays Ltd v Commissioner of Taxation [2005] FCA 1892; (2005) 149 FCR 41 (Conti J); on appeal Saga Holidays Ltd v Commissioner of Taxation [2006] FCAFC 191; (2006) 156 FCR 256 and observed that:

The advent of these two cases so early in the life of the GST says something about the difficulty of drafting legislation to give effect to the policy design of the GST, in the factual context of the way in which tours to Australia are packaged and sold to non-resident tourists, where the policy design is, undeniably, that “[g]oods and services consumed by tourists in Australia, such as meals and hotel accommodation are subject to GST under the general rules” (Explanatory Memorandum, A New Tax System (Goods and Services Tax) Bill 1998 (Cth) at 12).

Critically, the Full Federal Court rejected the appellant’s contention that the characterisation of the supply was to be determined having regard to the terms of the contract and considered that, at the end of the day, the determination of the characterisation of the supply in a case such as the present was a matter of practical or business reality. This approach can be compared with the recent decision of the UK Supreme Court earlier this month in Revenue & Customs v Secret Hotels2 Ltd [2014] UKSC 16 (considered in an earlier post) where the Supreme Court appeared to rely more heavily on contract law principles to characterise the supply made under similar circumstances.

My analysis of the decision can be accessed here. I published an analysis of the decision of the primary judge at the time of judgment and I have extended that analysis to include the appeal.

News flash! – Treasury introduces Bill to replace s 105-65 of Schedule 1 to the TAA with Division 142 of the GST Act

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Today the Tax Laws Amendment (2014 Measures No.1) Bill 2014 was introduced into the House of Representatives. The Bill proposes to repeal the current regime dealing with refunds of GST found in s 105-65 of Schedule 1 to the TAA and replace it with a totally new regime in Division 142 in the GST Act.

Division 142 effectively creates a deeming regime, whereby overpaid GST that has been passed on to another entity is taken to have always been payable until that other entity is reimbursed for the passed on GST. Taxpayers can self assess their entitlement to GST refunds, where the GST has not been passed on or the GST has been reimbursed. The Commissioner retains a discretion to pay refunds, but it is expected to have a narrow operation.

The Bill can be accessed here.  The Explanatory Memorandum can be accessed here.

The legislation was published as an exposure draft in February 2014. My post discussing the exposure draft can be accessed here.

Legislation was previously introduced into the House of Representatives on 26 June 2013 but the bill lapsed upon the calling of the election. At around that time I prepared a a paper entitled “Refunds of overpaid GST: from s 105-65 to Division 142 – where did we come from, how did we get here and where are we going?” which takes a detailed look at the troubled history of s 105-65 and also provides an analysis of the proposed provisions in Division 142. The aim of the paper was to outline the historical context in which Division 142 has been introduced as well as my views on the provisions themselves. My paper can be accessed here.

A more detailed analysis of the new provisions will be posted shortly. In the meantime, the key changes to the legislation introduced before the election appear to be as follows:

  • The amendments will apply to tax periods starting on or after the day the legislation receives royal assent. This is a significant change as the legislation introduced before the election was to apply retrospectively, with application to tax periods commencing on or after 17 August 2012 (the date of the original announcement of the measures). This means that the current regime under s 105-65 of Schedule 1 to the TAA continues to apply. This is good news for those taxpayers who may have claims where GST was overpaid by reason of a miscalculation of GST (as opposed to a misclassification of GST) – for example under the margin scheme.
  • The amendments clarify that taxpayers have objection rights under Part IVC of the TAA with respect to decisions by the Commissioner in respect of s 105-65. This addresses the decision of the Tribunal in Naidoo that there were no rights of objection for such decisions. The amendments also validate objections purportedly made by taxpayers in respect of s 105-65, and also any decisions of the Tribunal or a Court purportedly made under the jurisdiction given by Part IVC of the TAA. A example is the decision of the Tribunal in the Luxottica case to exercise the discretion in s 105-65 to pay refunds of overpaid GST to the taxpayer. The amendments also give taxpayers affected by the Naidoo decision an extension of time to lodge an objection. That extension would appear to be effectively 60 days after the commencement of the provisions (i.e., 60 days after royal assent).

 

International Cases Update – January/February 2014

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In January and February 2014 the following decisions dealing with VAT in the UK were handed down. My research has not uncovered any decisions in New Zealand or Canada.

Of particular interest is that on Friday the UK Supreme Court handed down its decision in Revenue & Customs v Secret Hotesl2 Ltd [2014] UKSC 16 where it allowed the appeal by the taxpayer. The appeal concerned the liability for VAT of a company which markets and arranges holiday accommodation though an on-line website and the essential question was whether the appellant was acting as a principal, or as an agent, when making the supplies of hotel accommodation. The Supreme Court found that the contractual documents and the website made it clear that the hotel room was provided through the agency of the appellant, and that the manner in which the appellant carried on its business did not support a contrary conclusion. It is a case that appears to have some similarity to ATS Pacific Pty Ltd v Commissioner of Taxation [2013] FCA 341 (which is currently on appeal to the Full Federal Court).

My analysis of the decision of the UK Supreme Court can be accessed here. 

Upper Tax Tribunal

  • HMRC v Brockenhurst College [2014] UKUT 46 – VAT – whether supplies of catering and entertainment services to members of the public are exempt as supplies closely related to the provision of education – Sixth VAT Directive, Article 13A(1)(m); Principal VAT Directive, Article 132(1)(i) – VATA 1994, Sch 9, Group 6, Item 4 – appeal dismissed

First Tier Tax Tribunal

  • Associated Newspapers Ltd v Revenue & Customs [2014] UKFTT 116 – VAT – retailer vouchers – delivery to customers as part of newspaper sales promotional scheme – whether articles 3 and 5 of the Value Added Tax (Supply of Services) Order 1993 apply to impose an output tax liability by reference to the cost of the vouchers – whether the vouchers were used for a purpose other than a purpose of the business of the Appellant – held no – preliminary issue decided in favour of the Appellant
  • British Printing Industries Federation v Revenue & Customs [2014] UKFTT 150 – VAT- exempt services – Value Added Tax Act 1994, Schedule 9, Group 9, item 1(d), note (5) and Article 132(1)(l) of the Principal VAT Directive (2006/112/EC) – employers federation providing services to members in return for annual subscriptions – whether membership subscriptions exempt from VAT – whether ‘trade union’ association – whether primary purpose of federation included making representations to third party decision makers – whether objectives of association were for the collective interests of members
  • Concept Multi Car Ltd v Revenue & Customs [2014] UKFTT 110 – VAT – Zero rating- whether camper vans converted from VW T5 motor vans supplied to disabled customers by appellant were adapted “permanently and substantially” to enable a disabled person who usually used a wheel chair  “to enter and drive or otherwise be carried in” the vehicle for the purposes of Note 5L to Item 2A Schedule 8 Group 12 VATA 1994 – combination of adaptations consisting of ambulance ramp fitting strip and swivel seats fulfilled criteria – appeal allowed
  • The English Bridge Union Ltd v Revenue & Customs [2014] UKFTT 181 – VAT – sport – whether contract bridge a sport within Art 132(1)(m) of Principal VAT Directive
  • Envoygate (Installations) Ltd & Richvale Ltd v Revenue & Customs [2014] UKFTT 221 – VALUE ADDED TAX – supply of replacement box sash windows and supply of draught stripping for windows – installation of energy-saving materials – supplies at reduced rate of VAT – whether single supply or separate supplies so that supply of draught stripping for windows is a supply at reduced rate – if single supply, whether nevertheless the reduced rate of VAT should be applied to draught stripping work as a concrete and specific aspect of the single supply – on the facts the supply of draught stripping for windows is a separate supply taxable at the reduced rate of VAT – appeal allowed – s 29A and Group 2, Sch. 7A VATA 1994
  • European Tour Operators Association v Revenue & Customs [2014] UKFTT 213 – VAT – Exempt services – Item 1(d) of Group 9 of Schedule 9 VATA 1994 – Whether membership subscriptions of a trade association constitute exempt supplies – Matter remitted by Upper Tribunal for reconsideration – Appeal allowed
  • Finmeccanica Group Services Spa v Revenue & Customs [2014] UKFTT 224 – VAT – Place of Supply – organisation of enclosure at Farnborough air show – whether advertising services or exhibition.
  • GSTS Pathology Services LLP v Revenue & Customs [2014] UKFTT 211 – Value Added Tax – exemption – medical care – analysis of medical samples – service supplied to medical institution or practitioner, not to patient – whether exempt
  • Kumon Educational UK Co Ltd & Kumon Book Services (UK) Ltd v Revenue & Customs [2014] UKFTT 109 – VAT – OUTPUT TAX –provider of standard rated tuition programme set up subsidiary to provide worksheets as zero rated supplies – whether subsidiary made zero rated supplies of worksheets – yes – whether supplies of worksheets part of single standard rated supply of services – no – whether contractual arrangements sham – no – whether contractual arrangements abusive practice – no – appeals allowed
  • SAE Education Ltd v Revenue & Customs [2014] UKFTT 218 – VAT – Exemption – Company providing educational courses to students – succession of agreements between company and university – whether supply of educational courses by company exempt – whether courses supplied by eligible body – whether company a college of a university – VATA 1994 Sch 9, Group 6, Item 1, Note (1)(b) – EC Council Directive 2006/112, Art 132(1)(i) – appeal allowed
  • SIMON JAMESON NAGLE & JULIE KEMSLEY t/a SIMON TEMPLAR BUSINESS CENTER v Revenue & Customs [2014] UKFTT 131– VAT – Input tax – Whether valid claim for recovery of input tax in respect of retail vouchers (as defined by paragraph 4(1) schedule 10A Value Added Tax Act 1994) – Whether the supply of retail vouchers is a standard or zero-rated supply – jurisdiction of Tribunal in case of  legitimate expectation
  • Way Ahead Group Ltd v Revenue & Customs [2014] UKFTT 178 – Value added TAX – Treatment of supplies by primary ticket agent – Whether “Booking Fee” exempt? – On facts – Yes – Appeal allowed
  • Working Museum and Arts and Crafts Centre v Revenue & Customs [2014] UKFTT 176 – VAT –was appellant charity making a taxable supply to local authority under services agreement – yes – appeal allowed.
  • Wilton Park Ltd & Others v Revenue & Customs [2014] UKFTT 115 – VAT – whether face-value vouchers issued by appellant companies and paid for by patrons using debit and credit cards for use in payment for dancers’ services in appellant companies’ lap dancing clubs and subsequently redeemed by dancers dealings in credit guarantees or any other security and on redemption exempt from VAT– item 1 Group 5 Schedule 9 to VATA 1994 – yes – whether dealings in vouchers separate dealings in security for money – no – redemption of vouchers held to be ancillary part of overall composite taxable supply of performance facilitation services by appellants –  appeals dismissed

Exposure Draft published for the re-introduction of Division 142 dealing with refunds of overpaid GST

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Yesterday the Treasurer published an exposure draft of the Tax and Superannuation Laws Amendment (2014 Measures No.2) Bill 2014:refunding Excess GST. The legislation will repeal s 105-65 of Schedule 1 to the TAA and introduce Division 142 into the GST Act. Legislation was originally introduced into the House of Representatives on 26 June 2013, but the legislation lapsed after the election was called.

The legislation can be accessed here. The Explanatory Memorandum can be accessed here. The relevant page from the Treasury website can be accessed here.

The key changes to the earlier legislation are stated to be as follows:

  • restore rights of review for taxpayers following a subsequent finding by the Administrative Appeals Tribunal (AAT) that it does not have jurisdiction to consider refund matters under the existing refunds provisions in section 105-65 in Schedule 1 to the Taxation Administration Act 1953;
  • strengthen the integrity aspects of the provisions by  clarifying that tax invoices are only prima facie evidence of amounts being passed on to another entity to the extent that the amount of GST ascertained from the tax invoice has been paid to the Commissioner of Taxation; and
  • reduce uncertainty and compliance costs for industry by amending the measure to only apply on a prospective basis. Under the earlier legislation, the measure was to have applied for tax periods commencing on or after 17 August 2012 (the date of the original announcement of the measure) with exceptions for refunds claimed before the date of introduction of the Bill into the House of Representatives.

Submissions are due by Friday 28 February 2014.

GST Determination on call option fee and the margin scheme

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Yesterday the Commissioner published GSTD 2014/2 ‘Goods and services tax: where real property is acquired following the exercise of a call option, does the call option fee form part of the consideration for the acquisition for the purposes of subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999.

In the Determination the Commissioner takes the view that the call option fee does not form part of the consideration for the acquisition of real property for the purposes of s 75-10(2) of the GST Act. This is because the supply of the call option and the supply of the land are two separate taxable supplies and as a consequence of s 9-17(1), the consideration for the supply of the land is limited to any consideration provided in addition to the call option fee.

This means that the purchaser is not entitled to input tax credits relating to the consideration paid for the land (with that consideration going to the margin), but is entitled to credits for the call option fee.

I note that the Determination does not address the case where the parties agree that the option fee is to form part of the consideration for the purchase if it is exercised. The reasoning in the Determination would suggest that in such a case the option fee does not form part of the margin. This is because s 9-17(1) expressly states that the consideration for the supply of the thing on the exercise of the option is limited to any “additional consideration” provided for the supply.

However, s 75-10(2) states that the margin is “the amount by which the consideration for the supply exceeds the consideration for your acquisition…”. Where the parties contractually agree that the option fee is to form part of the price, one could argue that the option fee forms part of the consideration for the acquisition. Whether s 9-17(1) overrides that outcome is an interesting question, particularly given that s 45-5 provides that the special rules (which includes Division 75) override the provisions of chapter 2 (which includes s 9-17(1)) “but only to the extent of any inconsistency”.

International Cases Update – November/December 2013

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In November and December 2013 the following VAT/GST decisions were handed down in the UK, New Zealand and Canada.

Of particular interest was the decision of the First Tier Tribunal in AV Concepts Ltd v Revenue & Customs [2013] UKFTT 646. The taxpayer sold electronic “white boards” to schools for cash, plus the supply by the school to the taxpayer of various obsolete projectors and similar equipment. The issue was whether the sale was a part-exchange or barter transaction in which the consideration consisted of the receipt of cash plus the value of the part-exchange item – or whether the obsolete item should be treated as a discount, with the consideration being confined to just the cash. My analysis of the decision can be accessed here.

United Kingdom

Upper Tax Tribunal

  • Finance & Business Training Ltd v Revenue & Customs [2013] UKUT 594 – Value Added Tax – whether services provided by Appellant exempt under Value Added Tax Act 1994, Schedule 9, Group 6, Item 1 – whether Appellant was “an eligible body” within Note (1)(b)- whether Appellant was a college or institution of the University of Wales – whether possible to be an eligible body in relation to some of the Appellant’s activities and not an eligible body in relation to the remainder of its activities
  • Leeds City Council v HMRC [2013] UKUT 596 – VALUE ADDED TAX – claim for repayment of VAT – failure of UK to implement Article 4.5 of Sixth VAT Directive – erroneous guidance issued by HMRC – curtailment of limitation period for claims – section 80 VAT Act 1994 – whether compatible with EU legal principles – appeal dismissed

First Tier Tribunal

  • AV Concepts Ltd v Revenue & Customs [2013] UKFTT 646 – Value Added Tax  –  Whether goods were sold for a combination of cash and the value of part-exchange items, or whether the part-exchange items were in substance the equivalent of a discount so that the goods should be treated as sold for the cash consideration alone  –  Appeal dismissed
  • Cabvision Ltd v Revenue & Customs [2013] UKFTT 721 – VAT – Consideration – Other –arrangements similar to those used in Tower MCashback – appellant sold software to LLP investment vehicle – purchase funded  by member subscriptions and debt incurred to bank 1 – debt guaranteed by bank 2 – guarantee secured by deposit made by appellant – appellant paid VAT on £22,602,979 received from LLP – whether correct VAT was lesser amount because some of that amount was security for bank loan to LLP and received subject to restrictions – yes – loan transaction which funded purchase and restrictions on the amount received elements of the same transaction – VAT due on amount actually received by appellant which was lesser amount taking account of the banking arrangements –  alternatively as argued by the appellant VAT was lesser amount because later settlement of dispute reduced price  through a collateral oral agreement between the appellant and the LLP – appeal allowed
  • DPAS Ltd v Revenue & Customs [2013] UKFTT 676 – VAT – Whether dental payment plan administrator provided services to patient for consideration –  Whether these services were exempt or standard rated supplies – If exempt whether change in contractual arrangements from 1 January 2012 amounted to a “Halifax” abusive practice – Appeal allowed
  • Intelligent Managed Services Ltd v Revenue & Customs [2013] UKFTT 741 – VAT – Whether transfer of a business can be a transfer as a going concern and/or total transfer of business assets if transferee is a member of a VAT group which makes supplies only to another member of the same VAT group – Appeal dismissed
  • John Martin Holdings Ltd v Revenue & Customs [2013] UKFTT 714 – VALUE ADDED TAX – Zero rating of the supply of a qualifying motor vehicle for handicapped person who usually uses a wheelchair – Items 2(A) and 2(f) and Note 5L Group 12 Schedule 8 VATA 1994 considered.  Whether supply made to handicapped person/disabled wheelchair user for domestic or personal use – whether sufficient evidence available to supplier to allow zero rating of supply – Appeal dismissed.
  • Leyton Sixth Form College v Revenue & Customs [2013] UKFTT 660 – VALUE ADDED TAX – construction of buildings – whether zero-rated or standard-rated supplies – whether construction of a building by a college was an enlargement of, or an extension to, an existing building, or the construction of an annexe to an existing building – whether, if an annexe, it was capable of functioning independently from the existing building, and whether there is one main access to annexe and existing building – construction was an extension to an existing building and therefore supplies standard-rated – appeal dismissed – VATA 1994, Schedule 8, Group 5, Item 2 and Notes 16 and 17
  • Magic Memories Ltd v Revenue & Customs [2013] UKFTT 730 – VALUE ADDED TAX– supply of photo-books at the visitor attractions – whether supply of goods or services – if supply of goods, whether a supply of photographs or of photo-books – whether photo-books were “books or booklets” within Item 1 of Group 3 of Schedule 8 Value Added Tax Act 1994- appeal allowed

New Zealand

Canada

Tax Court

Commissioner publishes final GST Determination on objecting to a private ruling dealing with s 105-65 of the TAA and refunds

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Happy new year and welcome to my first post for 2014.

Last week the Commissioner published GST Determination GSTD 2014/1 ‘Goods and Services tax: can you object to a private ruling that the Commissioner makes on the way in which section 105-65 of Schedule 1 to the Taxation Administration Act 1953 applies or would apply to you?”

The Determination has been issued in response to the decision of the Tribunal in Naidoo and Commissioner of Taxation [2013] AATA 443 where 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. On 23 August 2013 the Commissioner published a  Decision Impact Statement confirming that he accepted the decision of the Tribunal and that the Tribunal has no jurisdiction to consider an application with respect of the Commissioner’s refusal to exercise his discretion under s 105-65 to refund overpaid GST. 

The issue addressed in the draft GST Determination is whether taxpayers have jurisdiction to object to a private ruling dealing with the application of s 105-65.

The Commissioner considers that he has the power to make an private ruling on the application of s 105-65. However, an objection can only be made to a private ruling if an assessment of the applicant’s net amount has not been made: paragraph 359-60(3)(a) of Schedule 1 to the TAA.

This means:

  • for tax periods prior to 1 July 2012, if no assessments have been made an objection can be made to a private ruling on the application of s 105-65;
  • for tax periods post 1 July 2012, due to the introduction of the self-assessment regime, GST returns are regarded as assessments and an objection cannot be made to a private ruling dealing with s 105-65 if it relates to a tax period in which a GST return has been lodged. An objection can be made if the private ruling relates to future tax periods.  As observed by the Commissioner, given that s 105-65 is about the refund of overpaid GST, this is unlikely to frequently occur in practice.

Implications

The current state of the law appears to be that taxpayers cannot exercise the powers of review under Part IVC of the TAA (including objections and seeking reviews by the AAT or the Federal Court) where the issue involves refunds of GST under s 105-65 of Schedule 1 to the TAA. Rights of review are limited to judicial review proceedings under s 39B of the Judiciary Act 1903 or under the Administrative Decisions (Judicial Review) Act 1977.

However, in November 2013 the Treasurer announced that the Government would be proceeding with the previously announced measures to restrict GST refunds and that the amendments would address the finding of the Tribunal in Naidoo. The previous measures were introduced into the House of Representatives on 26 June 2013 as the Tax Laws Amendment (2013 Measures No.4) Bill 2013. The Bill proposed to repeal s 105-65 of Schedule 1 to the TAA and introduce Division 142 into the GST Act. 

Queensland Court of Appeal finds insurer not entitled to reduce claim payout by 1/11th

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In Mattress Innovations Pty Ltd v Suncorp Metway Insurance Limited [2013] QCA 377 the Court of Appeal found that upon the proper construction of the insurance contract the insurer was not entitled to reduce the  amount payable to the insured by 1/11th on account of input tax credits to which the insured may be entitled.

The case is a further example of a contractual dispute between parties relating to GST. We have seen a number of disputes relating to real property contracts (e.g., whether the price is GST exclusive or inclusive) – some examples are referred to in my paper published earlier this year entitled “GST and Real Estate Contracts – when things go wrong” , but this case shows that disputes can arise in all types of transactions, including insurance.

The clauses at issue included the following:

16.2 Calculating Claims

If You make a claim under this Policy, any payment or supply We make to You in respect of the acquisition of goods, services or other supply (or monetary compensation in lieu thereof) or otherwise in relation to Your claim will be calculated on the GST inclusive cost of Your claim.

In calculating such payment, We are entitled to reduce it by any ITC which You are, or would be, entitled to:

(a) for the acquisition of such goods, services or other supply; or

(b) had the compensation been used to acquire such goods, services or other supply

However, the total of all payments We make to You will not exceed Your sum insured, limit or sublimit of liability, or other monetary limitation.

The sums insured, limits and/or sublimits of liability, or any other monetary limitations are inclusive of any taxes, levies, duties or charges that the payment would be affected by or subject to.

The insured’s building (which was leased ) was destroyed by fire and the loss was greater than the total sum insured. The insurer could elect to pay the insured value of the damaged property or restore the property. The insurer elected to pay the total sum insured, less 1/11th of the sum. The insured used those monies to rebuild the property, and claimed an input tax credit for the building costs. In this regard, one can readily understand the intent of the clause.

At first instance, the insured contended that the effect of the general condition was that the total amount of the loss should be reduced by 1/11th, so that if the remaining amount was more than the total sum insured the insured was entitled to the total sum. The insurer contended that the starting point (for the purpose of the 1/11th reduction) was the sum insured. The primary judge agreed with the insurer, noting that was anomalous that “an insured whose claim is more than the sum insured (ie. an under-insured insured) should be in a better financial position, relatively speaking, than an insured whose claim is within policy limits”.

The Court of Appeal observed that the constructions proposed by both parties resulted in anomalies. Ultimately, the Court of Appeal accepted the construction proposed by the insured over that of the insurer (which had been accepted by the primary judge). The factor which the Court appears to have found decisive was described as follows (at [23]):

On the other hand, the construction adopted by the trial judge produces the result that the limit of the insurer’s liability to satisfy its obligations under the policy by payment to the insured is not the Sum Insured stated in the certificate of insurance in simple and unqualified terms, but is instead 10/11ths of that amount. That is such a surprising result as to suggest that the construction which produces it could not reflect the intention of reasonable contracting parties. Furthermore, for the reasons given earlier, the appellant’s construction of General Condition 16.2, that the insurer’s maximum potential liability after taking into account input tax credits extends to the Sum Insured, more closely reflects the text and structure of that clause in the context of the policy as a whole than does the construction which the trial judge preferred. In my respectful opinion the appellant’s construction is correct.

The decision is a further example of the difficulties involved in drafting GST clauses. The Court (both on appeal and at first instance) commented on the poor drafting of the clause. The primary judge observed that the conditions were “infelicitously drafted” and marked by “poor word choice, and a lack of conceptual clarity as a matter of ordinary English”.

Tribunal sets aside amended assessment aimed at recovering GST refund paid to applicant

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On Friday the Tribunal handed down its decision in Swanbat Pty Ltd and Commissioner of Taxation [2013] AATA 891 where the Tribunal found that the Commissioner could not issue an assessment to recover a GST refund paid to the taxpayer more than 4 years after the relevant tax period, even though the taxpayer’s entitlement to the refund was exhausted by the operation of s 105-55 of Schedule 1 to the TAA.

This is yet another decision of the Tribunal dealing with the interaction between the GST Act and the recovery provisions in Schedule 1 to the TAA. Interestingly, the decision appeared to result in a partial win to both parties although it is likely that the taxpayer will be ultimately required to pay back the refund under the mistaken payment provisions in s 8AAZN of the TAA. My analysis of the decision can be accessed here.

The Tribunal also handed down its decision in The Married Couple and Commissioner of Taxation [2013] AATA 888. In this case the applicants purchased a rural property, which was vacant land, having been used as a cattle station. The couple constructed a residential building on the property and also did some other works, including clearing of some of the land. They intended to make the building available for short-term holiday letting. They also intended to grow olive trees on the property for production of table olives and olive oil. At one stage, Mr and Mrs C also intended to farm goats.

In or about early October 2009, Mr and Mrs C executed a partnership agreement and became registered for GST purposes, initially with a date of effect of 29 September 2009. However, the partnership’s registration was subsequently backdated by the Commissioner of Taxation, at the request of the Married Couple’s accountant, to 1 January 2007. This was because Mr and Mrs C wanted to claim input tax credits (ITCs) for their acquisitions, including in relation to the construction of the residential building.

The Commissioner conducted an audit shortly after backdating the GST registration of the Married Couple as a partnership and concluded that the Married Couple was not a partnership and was not carrying on an enterprise within the meaning of the GST Act. Also, the input tax credits that had been claimed by the partnership in respect of the tax periods between 1 January 2007 and 30 June 2010 (Relevant Period) were incorrect because the Married Couple was not carrying on an enterprise. Even if the Married Couple was carrying on an enterprise during the Relevant Period, the Commissioner stated that the acquisitions were not made in the course of carrying on an enterprise or even if they were, they were excluded from being acquired for a creditable purpose because they related to making supplies that would be input taxed supplies of residential premises.

The Tribunal found that the activities of Mr and Mrs C were essentially preparatory in nature, while there was an intention to carry on a business in the future. Similarly, their evidence reflected an intention that they were to carry on business as partners, but the business activities had not yet commenced. Accordingly, no enterprise was being carried on and input tax credits could not be claimed. The Tribunal also found that the property constructed was not commercial residential premises.

Tribunal finds applicant not entitled to input tax credits

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In VGGL and Commissioner of Taxation [2013] AATA 867 the Tribunal affirmed the Commissioner’s objection decision that the applicant was not entitled to claim input tax credits for certain costs incurred by the applicant, who carried on a property development business.

The applicant operated a property development business and was also a director of a company which sold and maintained water filtration systems. The claims related to the following expenses:

  • Amounts incurred in respect of the construction of a townhouse, where the Contract of Sale expressly indicated that the sale was not a taxable supply and was not sold in the course or furtherance of an enterprise carried on by the applicant (two other townhouses had been sold as taxable supplies).
  • Legal fees in respect of proceedings brought by a shareholder of a company of which the applicant was also a shareholder.
  • Other expenses purportedly incurred in the course of the property development enterprise

Acquisitions relating to the construction of the townhouse

The Tribunal noted that the Contract of Sale specifically made it clear that the sale was not made “in the course or furtherance of an enterprise that the vendor carries on”. Further, a box on the contract was ticked, indicating that the sale was not a taxable supply and that the margin scheme would not apply. This could be distinguished from the contracts from two other townhouses sold by the Applicant which were clearly sold as taxable supplies.

The Tribunal observed that there was noting to suggest that any of these markings on the Contract were in any way inappropriate or failed to reflect the true position – noting that it appeared that the contract was prepared by competent solicitors who would have known the significance of the markings. The Tribunal observed that “the position seems to be that the Applicant intended from the outset that the sale of Lot 3 would not be a taxable supply and this was properly reflected in the markings on the Contract of Sale”.

Implicit in the observations of the Tribunal appears to be that the applicant failed to discharge its burden of showing that the sale was a taxable supply, particularly given the express terms in the Contract of Sale. I do not think that a taxpayer can “intend” that a sale is not a taxable supply or can contract out of the GST Act by including a term in a contract that the supply is not a taxable supply or that the supply is not made in the course of its enterprise.

Acquisition of legal expenses

In early 2005 the applicant sold one of the two issued shares in the company to B, which in April 2005 brought proceedings against the applicant alleging oppression and misleading and deceptive conduct. The applicant claimed an input tax credit for the legal fees.

The Tribunal found that the evidence did not provide a clear connection between the legal services acquired and the conduct of a business of property development. The applicant contended that the legal fees were largely incurred so as to protect the Applicant’s reputation as a director and that any adverse findings against the Applicant would have resulted in a complete collapse of the townhouse development. The Tribunal rejected this contention, finding that the reality was that the legal fees had nothing whatsoever to do with property development – rather they were connected a company whose business was in the maintenance and sale of water filtration systems.

Other expenses

The Tribunal found that the applicant was not entitled to input tax credits for the other expenses claimed. The applicant did not produce tax invoices and very little evidence was produce to substantiate the claims or to demonstrate how the expenses were creditable acquisitions.