Author Archives: chrissievers

Tribunal finds de-registered taxpayer not entitled to a decreasing adjustment under Division 129

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In GOL-HUT Pty Ltd as trustee for the Helensvale Unit Trust and Commissioner of Taxation [2013] AATA 199 the Tribunal affirmed the decision of the Commissioner that the applicant, who had deregistered for GST, was not entitled to a decreasing adjustment for change of use under Division 129 when it sold a retirement village that had been used to make input taxed supplies.

The facts of the case are unusual.

  • The applicant had acquired land in June 2000 on which a retirement village was constructed. The retirement village commenced operation in 2003 and in 2006 the trustee sold the village for $26,276,000. At the time of the sale, the independent living units in the village would have been classified as new residential premises.
  • The trustee (who was registered for GST from 1 July 2000) did not claim any input tax credits for the costs relating to the construction and operation of the village – apparently because the trust was making input taxed supplies. The trust then de-registered for GST in 2006 and did not account for GST on the supply of the village – the village was simply sold without GST applying.
  • In 2011 the trustee notified the Commissioner of a claimed entitlement to a “decreasing adjustment” of $2,074,179 and a request for a private ruling was lodged. The claim was essentially that the trustee was entitled to a decreasing adjustment because of the change of use in the village (ie, it was sold as a taxable supply, rather than the input taxed supply of the lease of residential premises). The ruling was not granted and the applicant objected to the ruling and sought review of the objection decision before the Tribunal.

The claim of the applicant appears to have been that because of the change in use of the retirement village, the applicant was entitled to a decreasing adjustment under Division 129 to reflect the fact that it was entitled to claim input tax credits for the acquisitions relating to the construction of the village. As observed by the Tribunal, such an adjustment is ordinarily made in a subsequent tax period, rather than by a revision of the original BAS.

The issue before the Tribunal was whether the applicant had further tax periods (and therefore adjustment periods) applying to it after it cancelled its GST registration (It should be noted that it was not contended that the applicant was at any time after cancellation, required to be registered for GST). The applicant contended that the effect of Division 138 (which is about cessation of registration), in particular ss 138-17(2) and (3), give continued operation to Division 129 after cancellation. The Commissioner contended that Division 129 could not operate unless there was a tax period – and post-cancellation there was no tax period and hence, no adjustment period.

The Tribunal did not accept the applicant’s argument. The Tribunal found that Division 138 did not have a stand-alone effect. Further, the Tribunal observed that such an operation would be contrary to the scheme of the GST Act and also inconsistent with the Explanatory Memorandum introducing s 138-17. The Tribunal concluded that Division 129 could not have any application to an entity that was neither registered nor required to be registered – the division cannot operate to create a tax period independent of the operation of the Act.

ATO releases internal training materials on retention of GST refunds; legislative instruments released on tax invoices

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In a positive move, the ATO has released an internal training presentation on the retention of refunds. The presentation can be accessed here.

The presentation addresses the following issues:

  • the law and the ATO practices before the decision in Multiflex;
  • the decision in Multiflex and its consequences
  • the legislation introduced after the decision in Multiflex.

The ATO should be commended for providing access to this document. The retention of GST refunds by the ATO is a controversial and complex issue. Hopefully publishing this document will provide taxpayers and practitioners with a greater insight into the mind of the ATO then it acts to stop the payment of refunds.

Also, on Friday the following legislative instruments were released. The Instruments waive the requirements for recipients to comply with the requirements for tax invoices in certain circumstances:

The Legislative Instruments are made by the Deputy Commissioner of Taxation under s 29-10(3) of the GST Act. Each of the Legislative Instruments commence on 1 July 2010 and apply to net amounts for tax period commencing on or after 1 July 2010.

The Legislative Instrument dealing with the sale of a reversion in commercial premises is interesting. The Explanatory Statement at [17] states as follows:

The purchaser of a reversion in commercial premises (the current owner in the context of this instrument) makes a supply to the lessee under paragraph 9-10(2)(g) by way of entering into an obligation to honour the terms of the lease. Where the requirements of section 9-5 are satisfied, this supply is a taxable supply. [4].

[4] Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461. See also Goods and Services Tax Determination GSTD 2012/2 Goods and services tax: what are the goods and services tax consequences following the sale of commercial premises that are subject to a lease? for the Commissioner’s views on the GST consequences following the sale of commercial premises that are subject to a lease.

This part of the Explanatory Statement appears to be in direct conflict with the decision of the Full Federal Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155, where each of the three judges found that the sale of three apartments subject to a lease did not constitute a new or a further supply (see Finn J at [3], Emmett J at [34], Edmonds J at [76]). Edmonds J was the only judge to refer to the early decision of the Full Federal Court in Westley Nominees (in which he sat). These findings were adopted by Griffiths J in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56 which dealt with a subsidiary issue arising out of South Steyne (the taxpayer has appealed that decision to the Full Federal Court).

While this paragraph in the Explanatory Statement does not impact on the Legislative Instrument, it does appear to reflect the continued view  of the Commissioner that the view of the Full Federal Court in Westley Nominees reflects the legal position where an entity acquires a reversionary interest in commercial premises, notwithstanding the clear findings of three judges of the Full Federal Court in a later decision.

Tribunal decision on whether a supply of a going concern; ATO issues draft Practice Statement on Division 81 of the GST Act

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In Brookdale Investments Pty Ltd and Commissioner of Taxation [2013] AATA 154 the Tribunal agreed with the Commissioner that the sale of land by the applicant was not GST-free as the supply of a going concern because there was no evidence that the parties so agreed in writing prior to the supply being made (ie, prior to settlement). The Tribunal also found that the notice issued by the Commissioner under s 105-50 of Schedule 1 to the TAA was valid and that Commissioner may have treated the acquisition by the purchaser as GST-free was not relevant to the application. That view is undoubtedly correct, although it does appear strange that the Commissioner could maintain a different GST treatment for the parties. It may be that the purchaser was out of time to recover input tax credits. My analysis of this decision can be accessed here.

The ATO has released ATO Practice Statement PSLA 3618 (GA) (draft) “GST treatment of Australian taxes, fees and charges under Division 81 of the A New Tax System (Goods and Services Tax) Act 1999 from 1 July 2013.

The practice statement sets out the administrative approach the ATO will take where Australian government agencies determine the GST classification of supplies that they make for which Australian fees and charges are received as consideration.

The ATO’s approach is as follows:

  1. subject (3) below, Australian fees and charges covered by the Treasurer’s determination that satisfy the requirements of s 81-10(1) and/or regulation 81-15.01 are exempt
  2. if an entity classifies Australian fees or charges as being ‘exempt’ in accordance with the Treasurer’s determination, the Commissioner will not disturb the treatment retrospectively
  3. those Australian fees and charges that are listed on the Treasurer’s determination that are regarded as being consideration for a supply will not be eligible to receive this treatment
  4. if an Australian fee or charge that receives this treatment is subsequently considered not to be exempt, the Commissioner will require the treatment to be changed prospectively.

The draft has been published for comments, which are due by 19 April 2013.

Tribunal decision on GST and use of industry benchmarks; ATO ID on input tax credits for employee reimbursements

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On Friday the Tribunal handed down its decision in Carter and Commissioner of Taxation [2013] AATA 141 and on Thursday the Commissioner issued ATO ID 2013/3 “Amount of input tax credits relating to employee reimbursements”.

In Carter and Commissioner of Taxation the Tribunal affirmed the Commissioner’s assessment for income tax and GST in respect of the applicant’s florist business. The basis of the assessment was that the BASs and income tax returns lodged by the applicant were based on a Cost of Goods Sold (COGS) of 83% of her reported business income, which was outside the COGS industry benchmark of between 44% and 54%. The Tribunal found that the applicant had failed to discharge her burden of showing the assessments were excessive. The Tribunal also rejected an argument by the applicant that the use of benchmarks by the Commissioner breached s 99 of the Commonwealth Constitution (which prevents the Commonwealth from giving preference to one State over another State). The applicant contended that the use of benchmarks were in appropriate for Western Australia as the costs of flowers and other items are more expensive than the eastern States. The Tribunal found that there was no factual basis for the contention, but found that it did not have jurisdiction to consider the question.

In ATO ID 2013/3 the Commissioner takes the view that the amount of input tax credit available under s 111-10 of the GST Act is reduced under s 11-30 if the acquisition is partly creditable. The issue was considered in the context of a financial institution where an employee is reimbursed for an expense that is related directly to his activities as an employee and is for an acquisition that was a taxable supply to the employee.

The basis of the Commissioner’s view is that while s 111-10 provides that the amount of the input tax credit is 1/11th of the reimbursement, and the section expressly overrides s 11-25 (which is about the amount of input tax credits for creditable acquisitions), s 111-10 does not override s 11-30 (which is about partly creditable acquisitions) so therefore, to the extent that the acquisition for the reimbursement relates to making input taxed supplies, the acquisition is not creditable. Having regards to the words of the various sections, while I can understand the reasoning behind the Commissioner’s view, in my view this approach may be doubted.

Section 111-10(3) states that s 111-10 has effect despite s 11-25 (and makes no express reference to overriding s 11-30). However, in my view it can be argued that s 111-10, by implication, also overrides s 11-30. The basis for that view is as follows:

  • s 11-25 states that “The amount of input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only *partly creditable.” (emphasis added). The underlined words shows that s 11-30 operates to reduce the input tax credit otherwise available under s 11-25.  Accordingly, if s 111-10(3) excludes s 11-25, it also (by implication) excludes s 11-30.
  • S 111-10(2) provides a stand alone mechanism whereby the input tax credit deemed by s 111-10(1) can be reduced – the Commissioner’s view is that s 11-30 operates as a further mechanism whereby that input tax credit may be reduced. If the intent of Parliament was to provide for the further reduction of the input tax credit on that basis, it could easily have said so.
  • The Explanatory Memorandum introducing Division 111 states that “the input tax credit is generally  equal to 1/11th of the actual reimbursement” and refers to the scope for reduction in s111-10(2) – no reference is made to a further scope for reduction under s 11-30.
  • Section 45-5 provides that the special rules (which includes Division 111) override the provisions of Chapter 2 “but only to the extent of any inconsistency”. In my view it can be argued that the provisions in s 111-10 are inconsistent with s 11-25 and s 11-30.

The effect of this construction is that the financial institution referred to in the ATO ID would be entitled to an input tax credit equal to 1/11th of the amount of the reimbursement, notwithstanding that the financial institution would be entitled to a lower recovery threshold for acquisitions made directly.

News Flash! – High Court reserves decision on special leave application in Unit Trend

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Today an expanded bench of the High Court (5 judges) heard the Commissioner’s application for special leave to appeal the decision of the Full Federal Court in Commissioner of Taxation v Unit Trend Services Pt Ltd [2012] FCAFC 112. The High Court reserved its decision – the transcript has just appeared on Austlii and can be found here.

The application deals with the proper construction of the anti avoidance provisions in Division 165 of the GST Act and particularly the “choice provisions” providing that the provisions do not apply if the GST benefit arises because of a choice, agreement, election etc arising under the GST Act. Central to the issue is the meaning to be given to the word “attributable”. As noted in the Commissioner’s submissions, the construction of this term may also impact on the operation of the anti-avoidance provisions in Part IVA of the Income Tax Act.

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.

Tribunal finds private tutor carrying on enterprise but not entitled to input tax credits – also concludes the Commissioner’s actions in issuing assessments were unsatisfactory

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Today, 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.

The taxpayer lodged BASs for each tax period whereby input tax credits exceeded GST. The Commissioner formed the view that the taxpayer was not carrying on an enterprise and had not done so during the previous four years – the Commissioner then cancelled the taxpayer’s GST registration. The Commissioner nevertheless issued assessments to the taxpayer showing a positive GST amount. For each tax period in question, the assessments reflected an adjustment of the taxpayer’s net amount from a negative to a positive tax position.

What is interesting about this case is the Tribunal’s adverse comments on the Commissioner’s conduct in issuing assessments to the taxpayer for a positive net amount.

Deputy President Frost observed that it was “surprising” that the Commissioner assessed the taxpayer to a positive net amount for each tax period in question, given that the Commissioner’s central proposition was that the taxpayer was not at any stage carrying on an enterprise. The Commissioner’s explanation for making the assessments was to give effect to the Commissioner’s discretion to withhold refunds pursuant to s 105-65 of Schedule 1 to the TAA – the Deputy President stated that the Commissioner’s approach and explanation were unsatisfactory. The comments of the Tribunal are reproduced below:

[15]. As mentioned above, s 17-5 of the GST Act defines the “net amount” for a tax period as the difference between the GST payable on taxable supplies and the ITCs available in respect of creditable acquisitions…

[16] Section 17-15 speaks directly to taxpayers. It does not speak for the Commissioner. It tells taxpayers that they may choose to work out their net amount in the way specified in an approved form, and if they make that choice, then the amount that they work out in that way is their net amount, no matter what the net amount might have been if it had been worked out under s 17-5.

[17] The taxpayer evidently chose, as virtually all taxpayers do, to work out his net amount in the way specified in an approved form – namely, the quarterly BASs that he lodged. To take his BAS for the April to June 2007 quarter as an example, the amount that he “worked out” by using the way specified in the BAS was minus $311. Because of s 17-15, that amount became his net amount. (It does not seem to matter that the “way” of working out the net amount as specified in the BAS and the “way” of working out the net amount as specified in s 17-5 are exactly identical, and it also does not seem to matter that the figures that the taxpayer used in that “working out” exercise may have been wrong: see Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142 at [25].)

[18] Now, as the Full Court pointed out in Multiflex at [26], that amount of minus $311 can be “superseded” as the net amount if, for example, the Commissioner makes an assessment of the taxpayer’s net amount under the power that is available to him in s 105-5 in Schedule 1 to the TAA. That is what the Commissioner did here. But in arriving at the taxpayer’s net amount (under s 17-5, since s 17-15 has no relevance to the calculation of net amount by the Commissioner), the Commissioner used, as one of the integers in the calculation, the “GST payable” figures that the taxpayer reported in his BAS. The only apparent reason for doing so was that it was one of the integers that the taxpayer used when he worked out his net amount in the way that s 17-15 says he can. The Commissioner clearly did not think that was the correct amount of “GST payable”, because by the time of making the assessment, he had formed the view that the taxpayer was not carrying on an enterprise. The Commissioner was therefore bound to conclude, based on that view of the facts, that s 9-5(b) was not satisfied, and so the taxpayer could not have an amount of “GST payable”. The Commissioner should have applied the reasoning set out in [12]above, and assessed a net amount of zero.

[19] Instead, and for the presumed purpose of creating an opportunity to claw back the $79 declared by the taxpayer on what the taxpayer thought were taxable supplies, the Commissioner assessed the taxpayer for that amount, namely $79. In doing so, he committed at least two errors. First, he assessed a net amount which, on his view of the facts, cannot possibly satisfied the requirements of s 17-5 of the GST Act. And secondly, he sought to invoke s 105-65 (a provision dealing with restrictions on refunds to a taxpayer) as authority for recovering an amount from a taxpayer. Section 105-65 is neither designed nor drafted to play that role.

The above paragraphs appear to reflect an attempt by the Commissioner to utilise the provisions of s 105-65 of Schedule 1 of the TAA to underpin a recover of “over-recorded” GST in the taxpayer’s BAS (but not overpaid by reason of the taxpayer’s claim for input tax credits) – rather than “over-paid” GST. The words of s 105-65 are clear – the section applies if “you overpaid the amount”.

Taxpayer lodges appeal to Federal Court in Bayconnection Property Developments; Commissioner applies to wind up company

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On 1 February 2013 I reported the decision of the Tribunal in Bayconnection Property Developments Pty Ltd and Ors and Commissioner of Taxation [2013] AATA 40 where the Tribunal affirmed the view of the Commissioner that the applicants were not entitled to input tax credits they had claimed.  This was because it was clear that none of the applicants were carrying on an enterprise, even taking into account the extended definition of “carrying on” that includes “doing anything in the course of the commencement or termination of the enterprise”. The Tribunal also upheld the imposition of penalties of 75% for intentional disregard of the taxation laws, plus an increase in penalties by 20%.

On 20 February 2013 the taxpayer lodged an appeal to the Federal Court.

Yesterday, in a further twist, in Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd (No.2) [2013] FCA 208 the Federal Court ordered that the taxpayer be wound up and a liquidator be appointed. In April 2012, the Federal Court had adjourned the Deputy Commissioner’s application to wind up the taxpayer until after the Tribunal determined the review proceeding (see [2012] FCA 363). The taxpayer sought similar orders adjourning the application until after the Federal Court had heard the appeal from the Tribunal’s decision – submitting that there were irreversible consequences if the corporations were not allowed to proceed with the appeal and there was no public interest in winding up the taxpayer.

The decision provides a helpful illustration of the difficulties facing taxpayers where recovery proceedings have been issued but the taxpayer wishes to fight the assessment through the review procedure in Part IVC of the Taxation Administration Act. In the judgement Robertson J observed the following points of principle (at [15]):

I take into account that it is the taxpayer which bears the onus of persuading the Court that a stay ought to be granted in the particular circumstances; that great weight must be given to the clear legislative policy which gives priority to the recovery of taxation revenue notwithstanding that the taxpayer has a Pt IVC proceeding on foot; that it is too narrow a view of the discretion to grant a stay merely because Pt IVC proceedings are pending or because on review of those proceedings there appears to be an arguable case; that in cases where the Court considers that it is in a position to assess the merits of pending Pt IVC proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relative strengths of the merits but the taxpayer needs to have more than merely an arguable case; that irrespective of the merits of pending Pt IVC proceedings, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid liability to pay the tax; and that more weight would be given to the merits factor if the case is one where the Deputy Commissioner has abused his position.

Robertson J then reviewed the judgment of the Tribunal and the grounds in the Notice of Appeal filed by the taxpayer, noting that the grounds were necessarily limited to questions of law. His Honour concluded that the grounds were not reasonably arguable and the clear legislative policy outweighed any merits of the appeal. The application to adjourn the winding up application was refused and the taxpayer was ordered to be wound up.

Federal Court hands down the first decision on promotor penalties – a win for the taxpayer

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In Commissioner of Taxation of the Commonwealth of Australia v Ludekens [2013] FCA 142 the Federal Court dismissed the Commissioner’s claim that the respondents were subject to penalties as “promoters” of a tax exploitation scheme pursuant to Division 290 of the Taxation Administration Act 1953 (Cth). This is the first case where the Federal Court has heard an application by the Commissioner for the imposition of penalties under the “promoter penalty regime”. This decision is relevant to GST, because the regime extends to schemes involving GST.

In a blow to the Commissioner, the Federal Court found that while there was a “tax exploitation scheme”, the respondents were not a “promoter” of the scheme within the elements of the definition. This was because not all of the conduct of the respondents necessary to satisfy the definition occurred within the last four years.  Further, the Commissioner failed to establish that the respondent received (either directly or indirectly) consideration in respect of the marketing or encouragement of the scheme.

This is an important decision with significant implications on the scope and application of the “promoter penalty regime”.  The judgment is extensive, running to over 300 paragraphs. My analysis of the decision will follow soon.

International Cases Update – February 2013

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In February 2013 a number of VAT/GST decisions were handed down in the UK and Canada. Of particular interest is the decision of the UK Court of Appeal in BAA Ltd v Revenue & Customs [2013] EWCA 122. The issue in this case was whether the BAA VAT Group was entitled to an input tax credit claim for VAT charged on the acquisition of professional and advisory services by a company known as ADIL in respect of a take-over bid by ADI for BAA. At the time ADIL made the acquisitions, it was not registered for GST and it was not part of the BAA VAT Group. At first instance, the First Tier Tribunal found that credits could be claimed – [2010] UKFTT 43. On appeal, the Upper Tax Tribunal allowed the Revenue’s appeal – [2011] UKUT 258. The Court of Appeal dismissed the appeal by the taxpayer. My analysis of the decision can be found here.

United Kingdom

Court of Appeal

  • BAA Ltd v Revenue & Customs [2013] EWCA 122 – VAT – whether representative of VAT Group entitled to input tax credits for services received by member entity at the time when the member entity was not part of the group – whether member company carrying on an economic activity at the time it acquired the services – whether there was a “direct and immediate” link between the acquisition of services and the outward taxable supplies by the VAT Group – case analysis

Upper Tax Tribunal

  • Birmingham Hippodrome Theatre Trust Ltd v HMRC [2013] UKUT 57 – VAT – claim for repayment of overpaid output tax where irrecoverable repayments had been wrongly made of input tax attributable to other fiscal years – claim denied and appeal dismissed
  • HMRC v Abdul Noor [2013] UKUT 71 – VAT – whether first-tier Tribunal had jurisdiction to consider legitimate expectations to recover pre-registration input tax on supply of services – No- decision of First-tier Tribunal allowing taxpayer’s appeal reversed

First Tier Tribunal

  • Antiques Within Ltd v Revenue & Customs [2013] UKFTT 89 – Value Added Tax – antiques centre supplying stallholders with space and a sales service – whether one single exempt supply of a right over land or one single standard rated supply of a sales service – neither – two distinct individually rated supplies – Appeal allowed in part
  • Chi Drinks Ltd v Revenue & Customs [2013] UKFTT 94 – VAT – zero rating – food – coconut water – is it a beverage? – yes – supplies held to be standard rated – Group 1, Schedule 8, VAT Act 1994
  • Massey (t/a The Basement Restaurant) v Revenue & Customs [2013] UKFTT 102 – VAT– Transfer of going concern – Restaurant premises reverting to Landlord on termination of tenancy – purchase of  assets by the Landlord – was there a transfer of a going concern – yes – Appeal dismissed
  • Westinsure Group Ltd v Revenue & Customs [2013] UKFTT 114 – VAT – exemption for provision of services of an insurance intermediary – whether exemption applies to services provided to facilitate insurance brokers obtaining better terms and  related benefits from insurance companies and other insurance related services – Article 135 (1)(a) Directive 2006/112 EC- Schedule 4 Group 2 Value Added Tax Act 1994

Canada

Federal Court of Appeal

Tax Court

  • GF Partnership v The Queen  2013 TCC 53 – whether builder and developer of residential subdivisions liable to GST on consideration including development charges – or whether development charges payable directly by purchaser and therefore not included in the price
  • FP Newspapers Inc v The Queen 2013 TCC 44 – whether partner in partnership entitled to input tax credits for services acquired for own benefit – whether partner carrying on commercial activities of the Partnership therefore entitled to input tax credits

Appeals Update: Taxpayer appeals to Full Federal Court in MBI Properties; Unit Trend Special leave to be heard on 6 March

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The Federal Court portal shows that on 27 February 2013 the taxpayer filed an appeal to the Full Federal Court from the decision of in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56 where the Griffiths J found that the applicant had an increasing adjustment under Division 135 in respect of the acquisition of a going concern, being the acquisition of residential premises subject to a lease. The callover for the appeal will be heard on 17 April 2013. My analysis of the decision can be found here.

On Wednesday 6 March 2013 the Full Bench of the High Court will hear the Commissioner’s application for special leave from the decision of the Full Federal Court in in Commissioner of Taxation v Unit Trend Services Pt Ltd [2012] FCAFC 112 . In December 2012 the High Court (French CJ and Gageler J) referred the application to an enlarged bench for further hearing. A transcript of the application can be found here. My analysis of the Full Federal Court decision can be found here.