Author Archives: chrissievers

Tribunal finds GST payable on the supply of an irrevocable proxy

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On Friday the Tribunal handed down its decision in Australian Style Investments Pty Ltd as Trustee for the Australian Style Investments Unit Trust and Commissioner of Taxation [2013] AATA 847. This case involved the question whether the supply of an irrevocable proxy was taxable or was input taxed as a financial supply. Prior to this decision there appears to have been only two decisions dealing with financial supplies – American Express ([2010] FCAFC 122) and  The Recoveries Trust ([2004] AATA 1075).

The applicant was a unit holder in trusts constituting a managed investment scheme, which had been granted the concession by the State of Queensland in respect of a major infrastructure project, the Brisbane Airport Link Project. The applicant executed a deed providing for, amongst other things, the delivery of irrevocable proxies by which the applicant would appoint entities involved in the Project to vote against resolutions to be considered at a meeting of unit holders in the trusts.

The primary issue in the case was whether the supply made by the applicant upon execution of the deed was a “financial supply” for the purpose of the GST Act, and therefore input taxed. Particularly, the question before the Tribunal was whether the subject of the supply constituted an “interest in or under…[s]ecurities” for the purposes of regulation 40-5.09 of the GST Regulations. The Tribunal found that it was not such an interest, and was therefore a taxable supply.

Given that I appeared in the case I will not be providing an analysis of the decision. Rather, set out below are the questions the Tribunal considered it was necessary to address and the conclusions of the Tribunal on each question.

At [47] the Tribunal considered that it was necessary to address the following questions with respect to whether there was a “financial supply”:

  • what was the subject of the supply made upon execution of the deed? At [58] the Tribunal concluded that:

In my view, the subject of the supply was the promises made by the applicant enumerated in clause 4 of the Deed (see Qantas Airways Ltd at [33]). The execution of the Deed by the applicant constituted “an entry” into obligations to do things and to refrain from acts within the terms of s 9–10(2)(g) (see subparas (i) and (ii)). Alternatively, if the word “obligation” in s 9–10(2)(g) should not be read as including the plural according to the customary rule, the execution of the Deed constituted the entry into each of the obligations in clause 4, which in combination formed a single supply by operation of s 9–10(2)(h).

  • what “interest” did the subject of the supply constitute for the purposes of regulation 40-5.09(3)? At [71] the Tribunal concluded that:

I have expressed the view that the subject of the supply was wholly executory in nature, in the sense that the supply was complete upon the making of each of the promises in clause 4 of the Deed. On that basis, it seems to me that the “interest” reflected in the subject of the supply, being the thing “recognised at law or in equity as property in any form” (see reg 40-5.02) that was provided by the applicant, was a chose in action which comprised the rights of action arising under the Deed in respect of those promises, including the promise to deliver the irrevocable proxies (clause 4(a)) (see Loxton v Moir [1914] HCA 89; (1914) 18 CLR 360 at 379). (I note that such rights were the subject of clause 6.

And at [92]-[93]:

In summary, the “interest” provided by the applicant for the purposes of reg 40-5.09 upon execution of the Deed is to be characterised according to the legal effect of the Deed.

As I have said, my view is that the “interest” provided was a chose in action which comprised the rights of action arising under the Deed in respect of each of the promises in clause 4 of the Deed, including the promise to deliver the irrevocable proxies (clause 4(a)).

  • what is the proper construction of the words “in or under” in regulation 40-5.09(3)? At [99] the Tribunal concluded as follows:

In my view, the phrase “interest in or under” ought to be read confluently, that is to say as a whole (see Sea Shepherd Australia Limited v Commissioner of Taxation (2013) 212 FCR 252at [34] and the cases referred to therein) and by importing the definition of the term “interest” in reg 40-5.02 (“anything that is recognised at law or in equity as property in any form”) into the substantive provision so as to aid in its construction (see Allianz Australia Insurance Limited v GSF Australia Pty Limited [2005] HCA 26; (2005) 221 CLR 568 at [12] per McHugh J, citing Kelly v The Queen [2004] HCA 12; (2004) 218 CLR 216 at [103]).

And at [104]:

In any event, in my view the prepositions “in” and “under”, read in the context in which they appear, naturally import an immediate nexus with the matters enumerated in reg 405.09(3), including securities, in the sense that the interest must reside in those matters (see Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 at 249-50). The examples of interests provided in reg 40-5.02 tend to confirm that that is so.

  • was the interest “an interest in or under [s]ecurities” for the purposes of item 10 in the table in 40-5.09(3), the “securities” being either “the capital of a…trust” (for the purposes of para (d) of Item 10) or “interests in a managed investment scheme” (for the purposes of s 92(1)© of the Corporations Act)? At [110] the Tribunal concluded as follows:

The rights provided to TJ under the Deed, being the rights of action arising in respect of the promises made by the applicant in clause 4 and perhaps extending to the irrevocable right to act as the applicant’s proxy as appointed, were contractual rights, enforceable only against the applicant. The interest provided by the applicant was therefore not a “property interest broadly conceived” in or under the capital of the Trusts or rights to benefits produced by the Trusts in the sense described by the majority in American Express. It was not enforceable at law or equity in or under such “[s]ecurities”. Furthermore, as I have said, the proxy’s rights under s252W of the Corporations Act were held solely in its capacity as the applicant’s agent. Those statutory rights were therefore not capable of constituting an “interest in or under … [s]ecurities” supplied by the applicant for the purposes of reg 40-5.09(3).

The Commissioner had imposed administrative penalties of 50% on the basis that the applicant had been reckless as to the operation of the GST Act. The Tribunal was not satisfied on the balance of probabilities that the applicant was not reckless in the sense described in BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164; (2001) 46 ATR 347. The Tribunal was also not satisfied that it was appropriate to remit all or part of the penalty.

News Flash! Commissioner issues interim Decision Impact Statement on MBI Properties

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Just hours after I posted that the Commissioner was seeking leave to appeal to the High Court against the decision of the Full Federal Court in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCAFC 112, the Commissioner has published an Interim Decision Impact Statement for the decision.

The Commissioner acknowledges that subject to his application for special leave, the decision of the Full Court means that purchasers of leased premises as a going concern may not be liable for an increasing adjustment under Division 135 of the GST Act. The Commissioner is also carefully considering the other potential implications of the decision, noting that concerns have been expressed that the decision might mean that:

  • following the sale of a reversion, the incoming landlord of commercial premises is not liable for GST on the rent payable by the tenant granted by the vendor of the reversion;
  • the tenant of commercial premises would not be entitled to input tax credits in relation to rental payments after the sale of a reversion
  • an entity that grants a lease in, but later sells commercial residential premises, may remain liable for GST on rental payments received by the purchaser following the sale of the premises
  • a purchaser of leased residential premises can claim input tax credits for costs associated with the rental of the premises, so far as the lease originally granted by the vendor remains on foot and no new or further lease is granted by the purchaser
  • property owners are not able to sell leased premiss as a GST-free going concern.

The Commissioner outlines his proposed administrative treatment pending the outcome of the special leave application – essentially it appears to be status quo in that the ATO does not intend to revise its current published views about the sale of leased residential premises and leased commercial residential premises.

The Commissioner also notes that taxpayers who self-assess under the Commissioner’s current views may wish to protect their entitlement to refunds of overpaid GST (if the Commissioner is unsuccessful) by lodging a notification under s 105-55 of Schedule 1 to the TAA.

In the context of refunds, it should be noted that the Commissioner states that refunds will be subject to the restrictions under s 105-65 of Schedule 1 to the TAA and also that if refunds are paid to taxpayers prior to finalisation of the High Court proceedings, those refunds may need to be repaid – for example if the Commissioner is successful, or even if not successful, if the refund was paid on a basis that is not consistent with the Commissioner’s final views on the broad implications of the Full Court’s decision.

One matter not mentioned in the Interim Decision Impact Statement is the recent confirmation by the Government that it would re-introduce legislation to introduce Division 142 of the GST Act, which is to replace s 105-65 of the GST Act. The original legislation was to apply to tax periods from 14 August 2012. It is unclear whether the new legislation will have the same start date, but taxpayers should keep this new legislation in mind if they are looking to claim refunds.

 

 

Commissioner applies for special leave in MBI Properties

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The Federal Court website discloses that the Commissioner has lodged an application to the High Court for special leave to appeal against the decision of the Full Federal Court in in MBI Properties v Commissioner of Taxation [2013] FCAFC 112 where the Full Court allowed the taxpayer’s appeal against the decision of the Federal Court in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56.

The Full Court agreed with the taxpayer that it did not have an increasing adjustment pursuant to Division 135 of the GST Act where it acquired, as a going concern, residential premises which were leased. This was because the supply was made on the grant of the lease and that while the lease (being the subject of the supply) may have continued, the supply made on the grant did not. The Full Court also agreed that on its proper statutory construction, s 135-5(1)(b) only applied to supplies made by the acquirer of the enterprise.

My analysis of the decision of the Full Court can be accessed here.

International Cases Update – September/October 2013

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In September and October 2013 the following decisions were handed down in NZ, the UK and the ECJ, and Canada dealing with VAT issues.

There were a number of cases of interest, two of which are discussed below.

In Casa Blanca Homes Ltd v The Queen [2013] TCC 338 the Tax Court of Canada considered whether GST was payable on the entire fee received by a purchaser of land in respect of the assignment of the contractual rights to a third party, or whether GST was only payable on the amount received over and above the deposit initially paid by the purchaser. An issue was also whether the assignment of the deposit was a separate exempt supply of a financial security. The Court agreed with the taxpayer that there were two separate supplies, being the supply of the interest in the land (for which the assignment fee was received) and the supply of the deposit (for which the purchaser was reimbursed the deposit paid). The Court found that the deposit was a “debt security” and an exempt financial supply.

In A N Checker & Service Engineers v Revenue & Customs [2013] UKFTT 506  the issue was whether the supply of energy saving materials (taxed at a reduced rate) together with the installation of boiler and other central heating products (standard rated) was a single supply subject to differing rates of VAT. While the Tribunal had considerable sympathy for the position of the applicant, it agreed with the Revenue’s contention that the entire supply was standard rated. The First Tier Tribunal noted that the legislation provided for a reduced rate for a “supply” and to read the provisions as applying the reduced rate to elements within a supply would be to depart from the unambiguous meaning of the words used. This can be compared with s 9-80 of the GST Act which expressly provides for the circumstance where a single supply has taxable components and also GST-free or input taxed components.

New Zealand

Trustees of the B Trust v Commissioner of Inland Revenue [2013] NZTRA 5

  • whether taxpayer carrying on a taxable activity in respect of the purchase, development and sale of homes which were used as principal place of residence for short periods of time

United Kingdom

Upper Tax Tribunal

Loughborough Students Union v HMRC [2013] UKUT 517

  • VAT – exemptions – cultural services – bodies managed and administered on an essentially voluntary basis – student union governed by council – salaried sabbatical officers of executive committee as voting then non-voting members of council – whether FTT entitled to find student union not managed and administered on an essentially voluntary basis – yes

First Tier Tribunal

A N Checker & Service Engineers v Revenue & Customs [2013] UKFTT 506

  • Value Added Tax – reduced rate – energy saving materials supplied as part of a supply of the whole or part of a domestic central heating system – whether a single supply subject to a single rate of VAT, a single supply subject to two or more different rates of VAT or two or more separate supplies subject to different rates of VAT

Chubb Ltd v Revenue & Customs [2013] UKFTT 579

  • VALUE ADDED TAX – “Fleming Claim” by company who became the representative member after the original group member had received the input supply – recipient not a member of the group at time of input supply – whether representative member could sustain the claim – On facts – No – Appeal dismissed

Khoshaba (t/a Cinnamon Cafe) v Revenue & Customs [2013] UKFTT 481

  • VAT – pre-registration input tax – whether invoice for a single supply – yes – whether the supply was of goods or services – services – whether other input tax reclaims allowable – appeal dismissed save in respect of petrol

Lane v Revenue & Customs [2013] UKFTT 521

  • VAT – Compulsory registration – Supplies of cleaning services to owners of holiday cottages – Contract between owners of cottages and appellant – Whether appellant supplying cleaning services itself or engaging cleaners as agent of owners – Appeal dismissed

McCann v Revenue & Customs [2013] UKFTT 632

  • Value Added Tax – zero-rate –  construction of a dwelling – swimming pool – external but connected to dwelling – whether zero-rate applicable to construction of swimming pool – Value Added Tax Act 1994 s. 30, Schedule 8

MJ Fenwick Consultancy v Revenue & Customs [2013] UKFTT 598

  • VAT – Exemption – Provision of services by private addiction therapist not registered or enrolled on register or roll of health professionals included in paragraphs (a) to (d) of Item 1 Group 7 of Schedule 9 Value Added Tax Act 1994 – Whether services supplied are directly supervised by such a health professional – No – Appeal dismissed

North Weald Golf Club Ltd v Revenue & Customs [2013] UKFTT 491

  • Value added tax – Exemptions – Sport and physical education – whether Appellant an eligible body for the purposes of VAT exemption – whether assessments out of time – application for late amendment grounds of appeal

Planet Sport (Holdings) Ltd v Revenue & Customs [2013] UKFTT 639

  • After-school sports clubs – whether fees exempt or standard-rated – whether taxpayer a ‘state-regulated institution’ – whether sports clubs ‘welfare services’ – VATA 1994 Sch 9, Grp 7 Notes 6 & 8 – appeal dismissed

Rosen v Revenue & Customs [2013] UKFTT 466

  • VALUE ADDED TAX – whether appellant should be allowed to amend her grounds of appeal to raise the issue of whether she was the correct taxable person to assess rather than her husband – decided that the amendment should be allowed – appellant registered for VAT in respect of the business – whether the appellant or her husband ought to have been the person registered – whether the appellant or her husband owned and carried on the business – evidence considered – found that the appellant owned and carried on the business – whether the assessments on the appellant which had been made to the best judgment of the assessing officer were nonetheless in too high an amount – found on the evidence that they were – amount assessed reduced – appeal allowed in part accordingly

TLLC Ltd v Revenue & Customs [2013] UKFTT 467

  • VAT – recovery of input tax on professional fees relating to the sale of shares in subsidiary companies – Skatteverket v AB SKF – whether sale of shares constituted an economic activity – yes – if so, whether an exempt supply – yes – if an exempt supply, whether input tax recoverable – no  – whether sale of shares a transfer of a going concern – no – if so, whether input tax recoverable – no – whether discharge of indebtedness by subsidiary companies on completion of sale comprised part of consideration for the supply of the shares – no – appeal dismissed

Victorangle Ltd v Revenue & Customs [2013] UKFTT 607

  • VAT – analysis of the facts and on those facts finding there was no taxable supply and no consideration – appeal allowed

Wendy Lane v Revenue & Customs [2013] UKFTT 521

  • VAT – Compulsory registration – Supplies of cleaning services to owners of holiday cottages – Contract between owners of cottages and appellant – Whether appellant supplying cleaning services itself or engaging cleaners as agent of owners – Appeal dismissed

Why Pay More For Cars Ltd v Revenue & Customs [2013] UKFTT 497

  • VAT – motor vehicles – demonstrator bonus paid by manufacturer to dealer – whether VAT received on bonus and accounted for – silent periods – Elida Table and line of supply – appeal dismissed

Wosem Communities Development Ltd v Revenue & Customs [2013] UKFTT 609

  • VAT – appeal against refusal of input tax claim and de-registration for VAT –has appellant established that it is engaged in business activities – no – is the appellant entitled to recover input tax – no – appeal dismissed.

European Court of Justice

Le Credit Lyonnais v Ministre du Budget, des Comptes public et de la Reforme de l’Etat [2013] EUECJ C-388/11

  • Value added tax – Sixth Directive 77/388/EEC – Articles 17 and 19 – Deduction of input tax paid – Use of goods and services for both taxable and exempt transactions – Proportional deduction – Calculation of the proportion – Branches established in other Member States and in third States – Not taking their turnover into account

Canada

Casa Blanca Homes Ltd v The Queen [2013] TCC 338

  • whether GST payable on fees received by purchaser of real estate for assignment of contracts to third parties – whether fee payable for assignment of deposit an exempt supply of a financial service

Commissioner publishes Decision Impact Statement for AP Group

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Today the Commissioner published his Decision Impact Statement for the decision of the Full Federal Court in AP Group v Commissioner of Taxation [2013] FCAFC 105 which considered the GST treatment of various incentive payments made by motor vehicle manufacturers to dealers. The Full Federal Court heard an appeal by the taxpayer and a cross appeal by the Commissioner against the decision of the Tribunal in AP Group Limited and Commissioner of Taxation [2012] AATA 617 (decision on principles [2012] AATA 409).

The majority of the Full Federal Court (Edmonds and Jagot JJ) dismissed both appeals on the basis that they did not raise an error of law because the Tribunal properly applied the statutory test in s 9-5. Bromberg J dismissed the taxpayer’s appeal for the same reason, but dismissed the Commissioner’s cross-appeal for different reasons. The Full Court made detailed obiter statements and it is clear that the Court agreed with the Tribunal’s decision and would have confirmed those decisions if the appeals had raised an error of law.

The Decision Impact Statements states that the Commissioner is giving further consideration to what impact the decision has on his existing public views on “supply” and “consideration”. The preliminary views of the Commissioner are as follows:

  • The Commissioner’s existing views on nexus to the effect that there must be a “sufficient” connection are not inconsistent with the Court’s observations on the term “for” in the phrase “supply for consideration”.
  • Caution is required when determining whether the one set of actions give rise to more than one supply, but that does not necessarily require a change to GSTR 2006/9.

The Commissioner also notes as follows with respect to incentive payments:

  • He is giving further consideration as to how the decision applies to other types of motor vehicle incentive payments
  • He considers that the decision supports the view in GSTD 2005/4 that wholesale motor vehicle holdback payments are not consideration for supplies. However, the decision raises doubt as to whether retail holdback payments should continue to be treated as ‘out of scope’. On balance, the Commissioner considers that they remain out of scope.

My analysis of the decision of the Full Court can be accessed here.

Tribunal finds product GST-free as the supply of a medical aid or appliance

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Today the Tribunal handed down its decision in Snugfit Australia Pty Ltd and Commissioner of Taxation [2013] AATA 802 where the Tribunal found that the supply of a product known as a “SnoreBeGone” sleep positioning system was GST-free under s 38-45(1) of the GST Act as a supply of a medical aid or appliance.

The Tribunal applied the “essential character” test, which was the test applied to the classification of goods under sales tax legislation. The Tribunal considered that the test was equally applicable to the GST Act. The principle was stated as follows:

…the task…is to determine the essential character of the goods, what essentially the goods are, not some characteristic that the goods might have. Essential character derives from the basic nature of the goods, from what they are, though composition, function and other factors necessarily play a part.

The Tribunal agreed with the applicant’s contention that the product fell within the description “night time positioning equipment modifications” in Item 82 of Schedule 3. The Tribunal found that the product modified the shape of a mattress (being the night time positioning equipment) to accommodate the particular requirement of a person with a disability. As noted by the Tribunal:

A mattress is properly described as “night time positioning equipment” as it provides a surface which holds a person in a horizontal position, commonly for the purpose of sleeping at night. The essential purpose of the product is to modify that horizontal surface by changing its shape so that the person’s torso is held in an inclined position and the head is elevated from the mattress.

The Tribunal rejected the applicant’s alternate contentions that the product fell within the items described as “bed restraints”, “backrests, leg rests and footboards for bed use” and “cushions specifically designed for people with disabilities”. The Tribunal found that the essential character of the product was a device to position the body to prevent snoring.

I believe this is the first decision of a Tribunal or a Court dealing with s 38-45 and the classification of items in Schedule 3 listing items which are GST-free as the supply of medical aids and appliances. There have been decisions dealing with the items in Schedules 1 and 2 (food and beverages) – see for example JMB Beverages Pty Ltd v Commissioner of Taxation [2010] FCAFC 68.

The decision illustrates that the approach to the classification of products under the wholesale sales tax regime remains relevant in the context of the classification of products under the GST Act.

Treasury to proceed with previously announced measures to restrict GST refunds

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Yesterday the Treasurer announced that it would be proceeding with the previously announced measures to restrict GST refunds. 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. Due to the federal election being called the Bill lapsed.

Importantly, the Treasurer has also announced that amendments to the measures will address the recent finding in Naidoo and Commissioner of Taxation [2013] AATA 443 that the Tribunal does not have jurisdiction to consider refund matters.

The start date for the proposed legislation is 17 August 2012, which was the same start date in the Bill introduced into Parliament. Save for the amendment to address the Naidoo case, one would expect the legislation to be in a similar form.

Earlier this year I completed 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. My paper can be accessed here.

 

Federal Court finds taxpayer not entitled to input tax credits pursuant to a litigation funding arrangement

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On Friday the Federal Court handed down its decision in Professional Admin Service Centres Pty Ltd v Commissioner of Taxation [2013] FCA 1123 in which it found that the applicant was not entitled to input tax credits for the payment of legal fees of third party pursuant to a litigation funding arrangement.

This case involved a litigation funding arrangement involving the provision of legal services to a Michael Felson (formerly known as Nikytas Nicholas Petroulias) for the defence of his criminal proceedings. The Court (Edmonds J) considered that there was no doubt that the lawyers supplied legal services to Mr Felson and that he acquired those services under a taxable supply. However, unless the applicant also acquired those services under a taxable supply from the lawyers concerned, the Court considered that did not make a creditable acquisition and the applicant was not entitled to an input tax credit notwithstanding its payment of the relevant invoices.

The Court accepted that, in certain circumstances, one set of acts may constitute two or more different supplies of services and may give rise to two or more different acquisitions: referring to Secretary, Department of Transport (Vic) v Commissioner of Taxation [2009] FCA 1209; on appeal [2010] FCAFC 84 (“DoT”). However, the Court found that on the evidence, it was unable to comprehend how the payments made by the applicant to Mr Felson’s legal representatives were for the “acquisition” of anything by the applicant. Put another way, the lawyers engaged by Mr Felson made no supply to the applicant. The terms of the litigation funding deeds clearly stated that Mr Felson’s lawyers would be paid by the applicant but retained by the client. Mr Felson’s evidence was that he engaged the lawyers. There is no evidence of any arrangement between the applicant and the lawyers pursuant to which legal services would be provided to the applicant. Those services were provided to Mr Felson alone.

My analysis of the decision can be accessed here.

In other news, on Thursday the Tribunal handed down its decision in Zarev and Commissioner of Taxation [2013] AATA 777 where the Tribunal affirmed the decision of the Commissioner to partially disallow the applicant’s claim for input tax credits. In this case, the Commissioner initially determined that the applicant was not carrying on an enterprise and was not entitled to any credits. However, after receiving further information from the applicant the Commissioner accepted that the applicant was carrying on an enterprise but was only entitled to some of the credits claimed as a number of the acquisitions had no connection with the enterprise and were private or domestic in nature. The Tribunal found that the applicant did not substantiate those claims. The Tribunal also affirmed the Commissioner’s decision to impose a penalty of 50% on the basis that the applicant’s conduct was reckless.

Commissioner issues ATO ID on GST refunds and reimbursement

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Today the Commissioner published ATO ID 2013/56 ‘GST refund and reimbursement by a journal entry’ where the Commissioner takes the view that he will not be satisfied that an amount of overpaid GST has been reimbursed to a recipient when a supplier merely makes a journal entry in its accounts acknowledging a debt owed to the recipient.

The ATO ID addresses the operation of s 105-65 of Schedule 1 to the TAA, which he says gives him a discretion to refuse to pay refunds of overpaid GST, save in certain circumstances. However, the discretion will not apply where the entity has overpaid GST and “the Commissioner is satisfied that you have reimbursed a corresponding amount to the recipient”.

The Commissioner considers that the concept of “reimbursement” takes its ordinary meaning, and refers to the definitions in the Macquarie Dictionary of  “to make repayment to for expense or loss incurred” or “to pay back; refund; repay”. The Commissioner considers that where a journal entry is made, he is not satisfied that the reimbursement has actually been made. However, if the recipient has a pre-existing liability owed to the entity, the Commissioner states that he would be satisfied that a reimbursement has occurred if a journal entry is made. While not expressly saying so, the Commissioner appears to accept that in such circumstances there would be a “set-off” of liabilities between the parties.

The concept of “reimbursement” is a difficult one. A mere journal entry may be at one end of the spectrum and the payment of cash at the other. The Commissioner appears to accept that a “set off” of liabilities will be sufficient. However, based on some private rulings issued by the Commissioner, his does not appear to accept that the following circumstances are sufficient:

  • where the entity proposes to reimburse recipients by way of a face value voucher (FFV) redeemable through your website or a credit note which may be applied as a discount against future purchases – click here for the private ruling
  • where the parties enter into an arrangement where the entity pays any refund into a trust account for the benefit of the recipient and those funds would be paid to the recipient (save for an administration fee charged by the entity) – click here for the private ruling

The Commissioner appears to require that the supplier actually reimburse the overpaid GST to the recipient before any refund can be claimed. This of course exposes the entity to the commercial difficulties of having to effectively fund the repayment of the GST to the recipient before getting any certainty that a refund will ultimately flow from the Commissioner. In contrast, if the Commissioner pays out GST refunds on the basis that the refunds will ultimately flow to the recipient, it appears that the Commissioner has some concerns about whether that will occur – these concerns are disclosed in the second private ruling referred to above. There is no easy answer.

Full Federal Court allows taxpayer’s appeal in MBI Properties – does Division 135 work?

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On Friday the Full Federal Court handed down its decision in MBI Properties v Commissioner of Taxation [2013] FCAFC 112 where it allowed the taxpayer’s appeal against the decision of the Federal Court in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56.

The Full Court agreed with the taxpayer that it did not have an increasing adjustment pursuant to Division 135 of the GST Act where it acquired, as a going concern, residential premises which were leased. This was because the supply was made on the grant of the lease and that while the lease (being the subject of the supply) may have continued, the supply made on the grant did not. The Full Court also agreed that on its proper statutory construction, s 135-5(1)(b) only applied to supplies made by the acquirer of the enterprise.

The decision is an important one and it will be interesting to see whether the Commissioner seeks special leave to appeal to the High Court.

My analysis of the decision can be accessed here.