Author Archives: chrissievers

Commissioner publishes ATO ID on the supply of leased commercial premises part way through a tax period

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On Friday the Commissioner published ATO ID 2013/30 “GST and the sale of commercial premises that are subject to a lease’. The Commissioner takes the view that the vendor of leased commercial premises is liable for GST on the entire prepaid rent it receives for the month when the supply occurs part-way through that month. Interestingly, the Commissioner takes this view notwithstanding that the rent is adjusted at settlement.

In the facts considered, the vendor receives pre-paid rent of $110,000 for a month and the sale takes place half-way through the month. The terms of the contract provide for the entire amount of the rent to be retained by the vendor, but under the contract the entity is obliged to allow for an adjustment to the purchase price at settlement to take into account the rent referable to that part of the month after settlement. Accordingly, at settlement the price is adjusted by $55,000.

The Commissioner notes that paragraph 7 of GSTD 2012/2 states that “the vendor of the commercial premises is not liable for GST relating to the lease where it is no longer in receipt or entitled to rent or other consideration for the lease following the sale of the reversion”. Similarly, paragraphs 9-11 of the determination are to the effect that the purchaser is liable for GST in respect of the lease to the extent that rent or other consideration is paid to it in connection with the lease.

The Commissioner takes the view that the vendor was entitled to receive all the monthly rent “and the contract contemplated that the entity would retain the entire amount of rent paid” for the month. Further, notwithstanding the rent is adjusted, the purchaser does not receive and is not entitled to receive any of the rent for the month. The Commissioner views this adjustment as a reduction to the consideration paid by the purchaser for the supply of the premises.

While I can understand the reasoning of the Commissioner, it does appear artificial to take the view that “the contract contemplated that the entity would retain the entire amount of rent paid” where half of the rent is to be adjusted on settlement. In reality, there would appear to be little difference between a contract which expressly states that the vendor will only be entitled to retain so much of the monthly rental that relates to the period before settlement and a clause that requires the rental to be adjusted at settlement.

 

 

 

Commissioner issues Draft GST Determination on second hand goods

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Yesterday the Commissioner issued Draft GST Determination GSTD 2013/D2 “Goods and service tax: What are second-hand goods and when are they acquired for the purposes of sale or exchange (but not manufacture) in the ordinary course of business under Division 66 of the GST Act”.

The  views in the draft determination  can be summarised as follows:

  • “goods” are any form of tangible personal property. However, fixtures are not goods as they form part of the real property to which they are affixed.
  • The term “second-hand” takes its ordinary meaning and requires a commonsense approach. Goods are second hand if they have been previously used or are not new. Goods do not become second-hand simply because they were sold by manufacturer or a distributor before being retailed.
  • The provisions will be satisfied where an entity acquires second-hand goods in the business of buying and selling second-hand goods. An interview that carries on business involving the leasing and selling of second-hand goods will satisfy the provisions. In this context, second-hand goods will not be acquired for the purposes of sale or exchange in the ordinary course of business simply because there is an intention that the goods will ultimately be sold after they are no longer required.

In the third.point, the Commissioner seeks to apply the reasoning of the Federal Court in Lease Plan Australia Limited v Commissioner of Taxation [2009] FCA 1309 where the Court found that the taxpayer acquired vehicles for the purpose of leasing and selling those vehicles. In that case, the contractual arrangements expressly provided for the sale of the vehicles at the end of the lease. Applying this decision, the Commissioner  considers that the section will be satisfied in the following circumstances:

  • the entity acquires second-hand goods in the ordinary course of its business:
  • the contractual arrangements under which the second-hand goods were acquired and leased contemplate that the entity will lease the goods back to the vendors for a defined term and then sell the goods at conclusion of the lease term:
  • the contractual arrangements provide that proceeds from selling the second-hand goods will be compared with a residual value agreed upon commencement of the arrangements, in order to determine the extent of any indemnity payable by the lessee, or, entitlement of the lessee to participate in profits from the sale of the goods.

The Commissioner seeks to make a distinction  with the position where second-hand goods are  acquired by an entity for use in its enterprise and those goods are ultimately sold when they are no longer required. In those circumstances, the goods are not acquired in the ordinary course of a business of selling goods. That view does not appear controversial. However, the Commissioner appears to   require that the intention to sell the goods be expressly included in the contractual arrangements. In my view, there may be cases where the contractual arrangements do not expressly provide for the sale of goods, but the intention to sell the goods as part of the ordinary course of business is nevertheless evidenced by the way the business is conducted. Support for this view  is found in the following observations of the Federal Court in Leaseplan (at [39]) (emphasis added):

“Leaving aside the legal characterisation of the composite “sale and lease back” of the vehicles,  the evidence establishes that the Leaseplan’s  business purpose in acquiring the vehicles was to lease them and to sell them at the end of the lease. So was necessary to provide the forecasted financial returns to the Leaseplan’s  business, either by returning the anticipated proceeds of sale or to trigger the lessee’s top-up obligations. I accept that the whole transaction was a composite operation, where the disposal of the vehicles for forecasted valuable consideration was  integral to Leaseplan’s business.

The question therefore, is whether the evidence establishes  the requisite business purpose of the entity. The terms of the contractual arrangements will certainly assist in providing that evidence, but in my view the scope of the enquiry should not be limited to the terms of the contract. It should be open to have regard to all of the surrounding circumstances to establish the purpose of the entity in acquiring the goods.

International cases – April 2013

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In April 2013 the following VAT/GST decisions were handed down in the UK and Canada.

Of interest is a decision of the UK Supreme Court dealing with VAT, in WHA Limited v Her Majesty’s Revenue and Customs [2013] UKSC 24 which considered the effectiveness of a scheme which was designed to minimise the overall liability to VAT of a group of companies involved in motor breakdown insurance.

This case involved a group of companies involved in motor breakdown insurance (“MBI”) and the essential question was whether, in circumstances where the repairers repaired the insured’s vehicle and WHA (a group entity) paid the repairer (or reimbursed the insured who had paid the repairer), there was a supply of repair services by the repairers to WHA instead of, or as well as, a supply to the insured. This decision provides an illustration of how the Courts in the UK seek to characterise the VAT implications of a transaction by reference to the “economic reality” of the transaction. The Supreme Court observed that the contractual position is “the most useful starting point” but is not conclusive of the taxable supplies being made between the participants in the arrangements. The position in Australia, after the decision of the High Court in Qantas is not so clear. In that case, the High Court focused on the terms of the contract between Qantas and its customers and expressly rejected the relevance of concepts such as the “essential purpose” of the transaction.

My analysis of the decision can be accessed here.

United Kingdom

Supreme Court

Upper Tax Tribunal

  • HMRC v The British Disabled Flying Association [2013] UKUT 162 – VAT – zero rating – aircraft for use by disabled persons – whether aircraft modified for use by disabled persons after manufacture are ” designed” for such use – held yes but one aircraft not so designed at time of supply – whether Respondent is a ” relevant establishment” for the purposes of Group 15 to Schedule 8 VAT Act 1994 – held no – whether Tribunal has jurisdiction to decide whether appellant had legitimate expectation – held no – appeal allowed in relation to one aircraft and dismissed in relation to the other
  • HMRC v Esporta Limited [2013] UKUT 173 – VAT –whether First-tier Tribunal erred in concluding that membership fees recovered after access to club’s facilities had been denied due to non-payment were not consideration for a supply but compensation – held yes – appeal allowed
  • Scottish Football League v HMRC [2013] UKUT 160 – Value Added Tax; supply of goods; business gift; disposal otherwise than for a consideration; supply by football association of end of season medals to league division points champion clubs; whether output tax payable on the value of such medals – yes; or whether accounted for by output on membership, sponsorship, copyright royalties, and/or broadcasting fees; no; Value Added Tax 1994 Schedule 4, paragraph 5; Principal VAT Directive 2006/112/EC Article 16

First Tier Tribunal

  • H Q Graphics Ltd v Revenue & Customs [2013] UKFTT 226 – VAT – INPUT TAX – Article 5 of VAT (Special Provisions) Order 1995 –  sale of printing machinery and office equipment to appellant not to be treated as a supply of goods on basis the seller of the machinery and equipment had transferred its business as a going concern to the appellant – – appeal dismissed
  • N & M Walkingshaw Ltd v Revenue and Customs [2013] UKFTT 269 – VAT – sale of motor car on part-exchange terms – price of part-exchange car includes ‘over-allowance’ – value of supply of replacement car – periods prior to 1 August 1992 – s 10 VATA 1983 – application of ‘open market value’ – whether such value of replacement car should reflect a discount on a cash sale equivalent to the amount of the over-allowance

Canada

Tax Court

Legislative determination on correcting GST errors, decision impact statement on Private Tutor case, ATO IDs on emission units

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On Friday a range of things issued in relation to GST.

GST and correcting errors

Legislative determination GSTE 2013/1 was published by the Deputy Commissioner of Taxation. The determination specifies the circumstances in which you may, in working out your net amount for a tax period, correct errors that were made in working out your net amount for an earlier tax period. The Commissioner has published a guide on the application of the determination, which can be accessed here.

The determination  applies to errors relating to an amount of GST, input tax credit or adjustments. However, the determination does not apply if the error relates to a matter which is the subject of compliance activity by the ATO  or if the error was made in a tax period which  is the subject of compliance activity.  The determination also does not apply if the error was the result of recklessness or intentional disregard of a GST law and if the amount of the error exceeds the value limit. The value limit is tied to the GST turnover of the entity. For example, an entity with a turnover of less than 20 million  has a value limit of $10,000 and an entity with a turnover of $1 billion or more has a value limit of $450,000.

Decision Impact Statement on The Private Tutor and Commissioner of Taxation

The Commissioner has released a decision impact statement for the decision of the Tribunal in The Private Tutor and Commissioner of Taxation [2013] AATA 136 the Tribunal accepted that taxpayer’s contention that he was carrying on an enterprise of tutoring but the Tribunal found that it was not satisfied that the taxpayer was entitled to any of the input tax credits claimed. My post discussing that decision can be accessed here.

In my post I noted the Tribunal’s 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. Notwithstanding these adverse comments, the Commissioner “respectfully maintains his view” that he is entitled to rely on s 105-65 to retain refunds in such circumstances. The Commissioner also notes that the Tribunal has reserved a decision dealing with this question in another case and he will review his position generally once the Tribunal hands down its decision in that matter.

The Commissioner also notes 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.

ATO IDs

The Commissioner has issued the following IDs dealing with the supply of options over GST-free eligible emission units:

Commissioner publishes draft Determination on reduced input tax credits and managed investment funds

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The Commissioner has published Draft GST Determination GSTD 2013/D1 “Goods and Services tax: whether item 32 of the table in subregulation 70-5.02(2) of A New Tax System (Goods and Services Tax) Regulations 1999 applies to some extent in respect of an acquisition for a single fee by a managed investment fund that is a recognised trust scheme from a Responsible Entity”. This may well be the longest title for a GST Ruling or Determination.

The draft Determination deals with the entitlement of the Managed Investment Fund to a reduced input tax credit under s 70-15 of the GST Act where the Responsible Entity (RE) charges a single fee for managing the fund which is calculated as a percentage of the total asset value of the fund. The Commissioner considers that it necessary for the Fund to determine the extent to which its acquisition from the RE is covered by Item 32 (in which case the reduced input tax percentage is 55%) and the extent to which its acquisition is covered by other reduced input tax credit items (which have a reduced input tax percentage of 75%). The basis of this view is that the Commissioner considers that the single fee is properly characterised as a payment for a “mixed acquisition” from the RE, rather than a singe “composite acquisition” of investment portfolio management services and are fully excluded from Item 32 (thereby being fully entitled to the higher reduced input tax credit percentage of 75%).

The Commissioner considers that the Fund can apply any “fair and reasonable methodology” to undertake the apportionment. For example, a “deductive benchmarking methodology” is considered to be an example.

Comments on the draft Determination are due by 5 June 2013.

Also, the Commissioner issued the following Addendums to GST Rulings:

  • GSTR 2000/30A3 – Goods and services tax: supplies that are GST-fre for pre-school, primary and secondary education
  • GSTR 2002/3A5 – Goods and services tax: prizes.
  • GSTR 2004/4A4 – Goods and services tax: assignment of payment streams including under a typical securitisation arrangement.

Commissioner publishes draft Addendum to ruling on cancellation fees and two ATO IDs

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Yesterday the Commissioner published a draft Addendum to GSTR 2009/3 dealing with cancellation fees plus two ATO IDs dealing with the supply and transport of goods into Australia and increasing adjustments for unredeemed vouchers.

Draft Addendum GSTR 2009/3DA states that it amends GSTR 2009/3 to take account of the decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41, which considered the GST treatment of fares received for flights booked but not undertaken by prospective passengers. The High Court found that the fares were consideration for a taxable supply.

The thrust of the addendum can be found in proposed paragraphs 176A and 176B, which provide as follows:

176A. When an airline ticket is issued and the terms and conditions of the ticket are accepted by the customer, the supplier (usually the entity operating the airline service) enters into a contract with the customer.

176B. Accordingly, where a fare is paid to secure an airline ticket governed by contractually binding conditions of carriage in which the airline promises (subject to exceptions) to transport the passenger, it is considered that the airline makes a supply for consideration even if the passenger is subsequently a no-show.

Comments on the draft addendum are invited by 22 May 2013.

In ATO ID 2013/20 – GST and supply of goods and the transport of those goods into Australia the Commissioner takes the view that where a non-resident supplies goods to a recipient in Australia, that entity is not making a GST-free supply of international transport under paragraph (b) of item 5 in subsection 38-355(1) when it delivers those goods to the recipient in Australia. Rather, the supplier is making a composite supply of delivered goods to the recipient in Australia.

This ATO ID provides a guide as to the Commissioner’s application of his views in GSTR 2001/8 regarding mixed or composite supplies. The Commissioner’s approach was as follows:

If the delivery services are integral, ancillary or incidental to the supply of goods, the supply is a composite supply of delivered goods. A composite supply of delivered goods is treated as a single supply and takes its GST status from the dominant part of the supply, being the goods. If this is the case then Item 5 of the GST Act will not be relevant and therefore will not apply.

However, if the supply of goods and delivery has separately identifiable parts that require individual recognition due to their relative significance in the supply, the supply is a mixed supply…If the supply is a mixed supply then the delivery services can be considered separately to determine if that part of the supply meets the requirements of being GST-free under Item 5 of the GST Act.

The Commissioner took the view that the delivery of the goods was integral, ancillary or incidental to the dominant supply of goods.

In ATO ID 2013/24 – GST and increasing adjustments for unredeemed vouchers the Commissioner takes the view that an entity has an increasing adjustment under s 100-15 where it writes back to current income the unredeemed stated monetary value of expired gift vouchers. The Commissioner found that this was the case notwithstanding that historical data showed that some of these unredeemed vouchers could have been redeemed for GST-free supplies.

News Flash! High Court allows Commissioner’s appeal in Unit Trend

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Today the High Court unanimously allowed the Commissioner’s appeal from the decision of the Full Federal Court in Commissioner of Taxation v Unit Trend Services Pt Ltd [2012] FCAFC 112. The High Court found that the phrase “not attributable to” in s 165-5(1)(b) of the GST Act is concerned with whether the GST benefit in question is not one to which the taxpayer was entitled by exercise of a statutory choice. Further, reference to the undisputed facts showed that the GST benefit in question was not attributable to the making of a statutory choice by Unit Trend provided for by the GST Act. The GST benefit was therefore negated by the anti-avoidance provisions in Division 165.

The judgment can be accessed here. My case analysis can be found here.

An expanded bench of the High Court heard the Commissioner’s application for special leave to appeal. The transcript can be found here.

Because the application was referred to a full bench, the submissions filed by the parties are available on the High Court website. They can be accessed below:

My analysis of the Full Federal Court decision in Unit Trend can be found here.

The transcript of the initial application for special leave heard by the High Court in December 2012  can be found here.

Federal Court finds that supply of tour packages to overseas tourists was taxable

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The Federal Court yesterday handed down its decision in ATS Pacific Pty Ltd v Commissioner of Taxation [2013] FCA 341 where it agreed with the Commissioner that ATS made a taxable supply to overseas travel agents where the travel agents arranged tour packages for overseas tourists in Australia comprising Products (being accommodation, goods and services) acquired and paid for by the taxpayer. The Court rejected the taxpayer’s argument that the supply was of the “booking and arranging” of the Products (for use by the tourists) and was GST-free as those supplies were not consumed in Australia. The Court did agree with the taxpayer’s alternative argument that the “margin” charged to the travel agents over and above the cost of the Products was GST-free.

The Federal Court also rejected the taxpayer’s contention that the Commissioner’s discretion to refuse to pay refunds of GST in s 105-65 of Schedule 1 to the TAA (being the form that applied prior to 1 July 2008) did not apply because the section only applied to “an actual taxable supply”.

My analysis of the decision can be found here.

ATO publishes ID on the application of the margin scheme to taxable supplies to associates for no consideration

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On Friday 12 April 2013 the ATO published ATO ID 2013/18 ‘GST and the application of the margin scheme to taxable supplies to associates for no consideration’ where the ATO confirmed that an entity could use the margin scheme to work out the GST payable on a taxable supply of real property that was held prior to 8 December 2008 and made after 24 March 2010 to an associate for no consideration where the associate will not use the real property for a fully creditable purpose.

Because the entity made a supply of “new residential premises” to an associate for no consideration, and the associate will not use the real property for a fully creditable purpose (being to rent out the premises), the supply is a taxable supply pursuant to the “associate” provisions in s 72-5 of the GST. Further, the supply of the freehold interest in real property is taken to be sale in accordance with s 72-20 (which apply to supplied made after 24 March 2010). As the parties have agreed in writing that the margin scheme is to apply, the relevant requirements of s 75-5(1) are satisfied.

The ATO ID notes that if the entity had acquired the entity on or after 8 December 2008, a subsequent supply for no consideration made to an associate would be treated as a sale according to s 75-5(1B) of the GST Act.

International cases update – March 2013

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March was a busy time in the UK for VAT decisions. In additional to the usual raft of decisions by the Tribunal, there were two notable decisions of the higher courts, being the Supreme Court and the Court of Appeal.

The first decision is Her Majesty’s Revenue and Customs v Aimia Coalition Loyalty UK Limited (formerly known as Loyalty Management UK Limited) [2013] UKSC 15 where the Supreme Court considered whether the promoter of a loyalty scheme was entitled to input tax for payments made to retailers of goods who participate in the scheme and provide goods to customers who redeem points. The Court also considered the issue of whether the principles established in the Redrow line of cases were still good law. My analysis of this decision can be accessed here.

The second decision is Vehicle Control Services Limited v The Commissioners for Her Majesty’s Revenue & Customs [2013] EWCA Civ 186 where the issue was whether parking charges were subject to VAT as being consideration for a supply or payments in the nature of damages. My analysis of this decision can be accessed here.

United Kingdom

Supreme Court

Court of Appeal

High Court of Justice

Upper Tax Tribunal

  • British Association of Leisure Parks, Piers and Attractions Ltd v Revenue and Customs [2013] UKUT 130 – Value Added Tax – claim to repayment of output tax allegedly overpaid – whether services provided by Appellant Association to its members exempt under Value Added Tax Act 1994, Schedule 9, Group 9, Item 1(d) – whether primary purpose of Association was lobbying – whether any exemption under Item 1(d) disapplied by Note 5 – whether membership of Association restricted in accordance with Note 5 – whether defence to repayment of allegedly overpaid output tax on the ground of unjust enrichment
  • HM Revenue & Customs and Ford Motor Co Ltd v Brunnel Motor Co Ltd [2013] UKUT 6 -Value Added Tax – Whether original agreement for supply of cars discharged by subsequent agreement – Question of fact remitted by the Court of Appeal for determination by the First-tier Tribunal – Whether material error of law in determination of that question by the FTT – No – Appeal dismissed
  • Reed Employment Ltd v HMRC [2013] UKUT 109 – Value added tax (VAT) – what constitutes a new claim as compared to an amended claim under VATA section 80 – whether HMRC can rely on a defence of unjust enrichment in relation to claims made after 26 May 2005 – application of EU principles of effectiveness, equal treatment and fiscal neutrality

First Tier Tribunal

  • Longridge on the Thames v Revenue & Customs [2013] UKFTT 158 – VAT – whether building intended for use solely for a relevant charitable purpose – charity with objects of educating young people in water activities – construction of training centre – whether construction services zero-rated – whether charity carrying on a business/economic activity – no – Items 2 and 4 of Group 5 of Schedule 8 to VATA 1994 – Notes (6) and (10) to Group 5 – Articles 2, 9, 132 and 133 of VAT Directive – appeal allowed
  • Sandwell Metropolitan Borough Council v Revenue & Customs [2013] UKFTT 125 – VAT – single or  multiple supply- 10 year lease of memorial in a  crematorium and right to inscribed plaque – held single supply; nature of supply – held supply of letting of immovable property
  • Systems Aluminium Ltd v Revenue & Customs [2013] UKFTT 201 – VAT – overpayment of output tax charged by Appellant to business customer registered for VAT; reimbursement arrangements with HMRC; whether arrangement a binding contract; whether reimbursement arrangements ultra vires; Appellant crediting customer with reimbursement to reduce customer’s indebtedness to Appellant; whether reimbursement made “in cash or by cheque”; assessment to recover repaid VAT on grounds of unjust enrichment; whether Appellant unjustly enriched; whether Appellant incurred loss or damage through mistaken assumptions made in his case about the operation of VAT provisions; VAT 1994 s80(1)(3), 80(4A), 80B, 80(3B); VAT Regulations 1995, regulations 43B, 43C, 43G; whether Tribunal has jurisdiction to consider public law remedy; appeal dismissed
  • Tallington Lakes Ltd v Revenue & Customs [2013] UKFTT 159 – VAT – exempt supplies – pitches for mobile homes – voluntary disclosure for periods 04/89 to 12/96 – claim to repayment of output tax – Group 1 Schedule 6 VAT Act 1983 – seasonal pitches – supplies properly standard rated –  appeal dismissed
  • The Royal College of Paediatricians and Child Health v Revenue & Customs [2013] UKFTT 202 – VAT – Whether sale of property subject to agreement for lease  TOGC –  on facts – yes – Whether assessment to tax made timeously – no – Whether vendor of property required to repay input VAT to reflect partially exempt use of property by purchaser – no – appeals allowed

European Court of Justice