Author Archives: chrissievers

Seasons Greetings and farewell to another busy year in GST – High Court refers Unit Trend special leave application to enlarged bench

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This is my last post for 2012.  I will be taking a break from chambers (and posting) and I will be back in the new year.  I would like to wish everyone a great holiday season.

The High Court has heard the Commissioner’s application for special leave to appeal from the decision of the Full Federal Court in Commissioner of Taxation v Unit Trend Services Pt Ltd [2012] FCAFC 112 – the transcript of the application has just appeared on austlii can be found here.

The application dealt 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.  The Commissioner summarised his contention as follows:

It is our submission that the division of opinion within the Full Court of the Federal Court as to the proper interpretation of the section justifies the grant of special leave.  The section applies easily enough if the taxpayer makes a single choice, or a single agreement under an express provision of the statute and confers a benefit.  The problem with the application of the section arises where the taxpayer engages in a scheme involving a series of steps or actions, which are integrated and which together combine to produce the GST benefit.

The Commissioner argued that the dissenting view of Dowsett J in the Full Federal Court was correct, namely that the test is to be applied to a discrete choice – as opposed to the majority, which found that the test could be applied to more than one choice.

The Commissioner also contended that where the scheme involves things which are not choices or agreements under the GST Act, being commercial choices or commercial actions which are necessary integers to produce the GST benefit, the question arises whether you can say that the GST benefit is “attributed” to the statutory choice.  In this context, the question was the proper meaning of the word “attributable” – being “how tight does the nexus need to be between the choice and the GST benefit”?

The High Court (French CJ and Gageler J) referred the application to an enlarged bench for further hearing – that will likely be a bench of five or seven judges.  This is an unusual course of action, but the Court took a similar approach in hearing the special leave application by the taxpayer  against the decision of the Full Federal Court in Commissioner of Taxation v  American Express Wholesale Currency Services [2010] FCAFC 122.

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

GST in 2012

It has been another busy year in GST.  We have seen a decision of the High Court on GST (Qantas), three decisions of the Full Federal Court (MTAA, Unit Trend and Cyonara Snowfox) one of which the Commissioner is applying to take to the High Court (Unit Trend) and number of Federal Court and Tribunal decisions.

In legislative issues, self assessment was introduced in July 2013 and s 8AAZLG of the TAA was introduced in the wake of the Multiflex case to allow the Commissioner to retain refunds pending verification.  Also, Treasury looks to have given up on section 105-65 of Schedule 1 to the TAA and is looking to replace the existing discretion it with Division 36 of the GST Act.

Looking overseas, we have had decisions of the highest court in Canada (City of Calgary) and New Zealand (Stiassny) on GST issues

Looking at 2013, we are looking at two Full Federal Court appeals in the February/March sittings (Yaccoub and Central Equity) and the Special Leave application in Unit Trend before an enlarged bench.  We are also awaiting the appeals in A P Group (son of holdback). More details on these appeals is set out below.

Appeals Update

The Federal Court portal provides the following information on the GST matters heading towards the Full Federal Court.

The taxpayer’s appeal in Yacoub v Commissioner of Taxation  has been set down for hearing by the Full Federal Court on 26 February 2013 before the Full Federal Court in New South Wales.

The taxpayer’s appeal in Central Equity Limited v Commissioner of Taxation has been set down for hearing on 26 February 2013 before the Full Federal Court in Victoria.

The appeal by the taxpayer and the cross-appeal by the Commissioner in A P Group and Commissioner of Taxation is awaiting a decision by the Chief Justice of the Federal Court as to whether the appeal is to be heard by a single judge or a Full  Court of the Federal Court.  Both parties have been asked to provide reasons why the matter should be heard by a Full Court.  As the Tribunal was constituted by a Presidential Member, in appropriate matters the Chief Justice can order that the matter be heard by a Full Court (where the Tribunal is constituted by a judicial member, the appeal is to the Full Court as of right – Qantas was a recent example).

Commissioner publishes three GST rulings on residential premises

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Today the Commissioner finalised its rulings dealing with GST and residential premises.  Instead of one ruling, the Commissioner has helpfully split the ruling into three separate rulings, being GSTR 2012/5 ‘Residential premises’; GSTR 2012/6 ‘Commercial residential premises’ and GSTR 2012/7 ‘Long term accommodation in commercial residential premises’.  The rulings were previously issued in draft form in GSTR 2012/D1 and GSTR 2011/D2.

Each of the rulings is summarised below, with some areas of interest highlighted.

GSTR 2012/5

This ruling deals with the application of Subdivisions 40-B and 40-C of the GST Act apply to supplies of residential premises.  It does not deal with the following issues:

  • when a sale is of “new residential premises” – that is dealt with in GSTR 2003/3
  • when premises are “commercial residential premises” – that is dealt with in GSTR 2006/6

The concept of “residential premises to be used predominantly for residential accommodation

The ruling takes the view that the requirement in section 40-35, 40-65 and 4070 that premises “be premises to be used predominantly for residential accommodation” is to be interpreted as a single test that looks to the physical characteristics of the property – there is no requirement to examine the subjective intention of, or use by, any particular purpose.  The Commissioner relies on the decision of the Full Federal Court in Suncheon Pty Ltd v Federal Commissioner of Taxation [2010] FCAFC 138 where the Court looked at the physical characteristics of the property rather than the intended use of any person.

Where premises include basic living facilities for residential accommodation, but those facilities are incidental or ancillary to the premises primary function which is not to provide residential accommodation (e.g., office buildings and hospitals), those premises are not residential premises to be used predominantly of residential accommodation.

Ancillary supplies with residential accommodation

Where a residential apartment includes a garage, car-parking space or storage area within the complex, the ruling considers that these supplies are ancillary or incidental to the dominant supply of the residential apartment – therefore there is a composite supply of residential premises.  This is the same even if these other items are separately titled, but located within the same complex. These matters may not be ancillary or incidental where they are supplied after the original supply of the residential unit, or they are located in a separate building.

Apportionment

The ruling takes the view that the supply of premises needs to be apportioned to the extent that part of the premises is not residential premises to be used predominantly for residential accommodation.  Foe example, if a house is modified so that part of it is used as a doctor’s surgery.  Looking at the ruling, whether apportionment is required will be a matter of degree in each case, and a question will also be whether the non-residential use is ancillary or incidental to the residential use (and also whether the residential use is ancillary or incidental to the non-residential use).

Vacant land

The ruling considers that vacant land cannot be residential premises.  The Commissioner relies on the decision of the Full Federal Court in Vidler v Federal Commissioner of Taxation [2010] FCAFC 59.

GSTR 2012/6

This ruling deals with the application of Subdivisions 40-B and 40-C of the GST Act apply to supplies of commercial residential premises and supplies of accommodation in commercial residential premises.

Definition of “commercial residential premises”

The ruling provides a detailed analysis of the definition of “commercial residential premises” in s 195-1 of the GST Act.

The ruling accepts that premises may still fall within the definition if they are not operating at the time of the supply – this is because such premises may be classified by their overall physical character, considered with other objective characteristics.  For example, a newly constructed hotel (although vacant) would still be commercial residential premises.

Separately titled rooms, apartments, cottages or villas

The ruling accepts that separately titled rooms, apartments or adjacent cottages or villas on adjoining or abutting land can be combined with sufficient commercial infrastructure so that, as a whole, it can be operated similarly to a hotel, motel, inn or hostel.  Further, a single supply by sale or lease of premises consisting of rooms, apartments, cottages or villas as well as commercial infrastructure, regardless of whether they are separately titled, is a supply of commercial residential premises under paragraph (a) or (f) of the definition.

However, the supply by sale or lease of part of building cannot be characterised by reference to another supply.  For example, a supply by sale of residential apartments without sufficient commercial infrastructure will not be the supply of commercial residential premises. The ruling adopts the analysis of the Full Federal Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155.

Employee accommodation

The ruling departs from GSTR 2000/20 on the treatment of accommodation provided by employers.  In GSTR 2000/20 (which was withdrawn today) the Commissioner’s view (at [39]) was that as a general proposition accommodation provided by an employer in premises controlled by them or their associate is usually residential premises.  At [39], this general proposition was modified providing that short-term accommodation provided in specific circumstances was not a supply of residential premises, nor of commercial residential premises, and the supply was subject to the basic rules.  In the current ruling, the Commissioner considers that the supply will be either an input taxed supply of residential premises or a taxable supply of commercial residential premises, depending on the circumstances.

Given this change in view, the Ruling contains transitional provisions to address those circumstances where taxpayers may be financially disadvantaged.

Boarding houses and rooming houses

The Commissioner has adopted a position consistent with the decision of the Federal Court in ECC Southbank Pty Ltd and trustee for the Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795 and notes that he previously issued advice to some members of the boarding house and rooming house industry that supplies of accommodation to residents that do not have the status of guests are input taxed supplies of residential premises.  Further, the Commissioner accepts that this previous advice created a general administrative practice for the purposes of PSLA 2011/27.

To address this change of position, the ruling provides for transitional rules to allow operators to change their systems to correctly account for GST.

GSTR 2012/7

This ruling deals with the application of Division 87 and s 40-35 of the GST Act to supplies of long-term accommodation in commercial residential premises.

The ruling considers that the supply of commercial accommodation does not need to be provided to an individual, allowing corporate entities to acquire long-term accommodation for their employees to benefit from the concessionary treatment.  In such cases, the employee is being provided with the accommodation, but the corporate entity is the recipient of the supply.  The Commissioner accepts that it is only necessary to establish that the supply of commercial accommodation is being made to an entity and is for 28 days or more and the accommodation, under the terms of the agreement, is able to be taken up by an individual.  It is not necessary that the commercial activity is actually taken up by the individual.

Commissioner issues Decision Impact Statement for SDI Group Pty Ltd

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Yesterday the Commissioner issued a Decision Impact Statement for the decision of the Tribunal in SDI Group Pty Ltd and Commissioner of Taxation [2012] AATA 763 where the Tribunal found that the applicant (vendor) and the purchaser of commercial property had satisfied the requirement that the parties agree that the sale was a supply of the going concern, notwithstanding that no such agreement was provided for in the Contract of Sale.  My post discussing the decision can be found here.

Before the Tribunal the Commissioner contended that the parties had not “agreed in writing” that the sale was the supply of a going concern, and that the tax invoice and Statutory Declaration prepared by the vendor referring to the sale being of a going concern were “unilateral documents”.  The Tribunal found in favour of the applicant on the basis that there was sufficient evidence that the applicant and purchaser agreed in writing that the supply involved a going concern.

In the Decision Impact Statement the Commissioner accepts that the finding of the Tribunal was open on the evidence and considers that the decision does not differ in principle from the requirements in GSTR 2002/5 ‘Goods and services tax: when is a ‘supply of a going concern’ GST-free.  Paragraph 181 of the Ruling states as follows:

The term ‘agreed in writing’ means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of the enterprise, is a ‘supply of a going concern’.

Before the Tribunal, the concern of the Commissioner appeared to be that the applicant could not point to a document evidencing an agreement in writing which was signed by the purchaser, the only documents available having been prepared and executed by the supplier.  The Decision Impact Statement deals with the finding of the Tribunal that the parties nevertheless “agreed in writing” that the sale was of a going concern as follows:

The ATO believes that it is the Tribunal’s view that, at the time the recipient executed the contract, the parties intended and agreed in writing that the supply was of a going concern.  Further, by the time of settlement, the parties had confirmed, through further correspondence, that intention.

We also believe that the decision does not support a view that unilateral documents are sufficient to constitute an agreement in writing as contemplated by paragraph (c) of subsection 38-325(1) of the GST Act.

I would agree with the Commissioner’s view that “unilateral documents” are not sufficient to constitute an agreement in writing.  However, what the decision of the Tribunal does appear to establish (and is arguably accepted by the Commissioner in the Decision Impact Statement) is that it is not necessary that each party actually sign a written agreement that the sale is of a going concern and that a document prepared by only one party may be sufficient to “evidence” an agreement in writing.  This may particularly be the case where such a document is provided by one party to the other party prior to settlement – for example, a tax invoice, a statutory declaration for stamp duty purposes, a settlement statement or even simply a letter of confirmation from the vendor.

Full Federal Court dismisses taxpayer’s appeal in Cyonara Snowfox

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In Cyonara Snowfox Pty Ltd v Commissioner of Taxation [2012] FCAFC 177  the Full Federal Court unanimously dismissed the taxpayer’s appeal from the decision of the Tribunal ([2011] AATA 124) where the Tribunal held that in respect of a number of sales of real property:

  • the taxpayer could not chose to use the margin scheme
  • the taxpayer had not established that a supply had been GST-free as a supply of a going concern; and
  • the Commissioner was barred from recovering the GST because it had not issued a valid notice under s 105-50 of Schedule 1 to the TAA.

The decision is long (running to some 174 paragraphs) and deals with a number of contentions raised by the taxpayer in the appeal, including two Notices of Motion seeking to restrict the Commissioner’s recovery of the GST.  My analysis of the decision can be found here.

International cases update – November 2012

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In November 2012 the following judgments dealing with GST/VAT were handed down in the UK, NZ and Canada.  It was a busy month.

I have previously published posts discussing the decisions of the UK Tax Tribunal in Borough Council of King’s Lynn and West Norfolk v Revenue & Customs [2012] UKFTT 671 (see here) and Dixons Retail plc v Revenue & Customs [2012] UKFTT 666 (see here).

I also published a post discussing the decision of the NZ Supreme Court in Stiassny and others v Commissioner of Inland Revenue [2012] NZSC 106 – see here.

Finally, the Tax Court in Canada handed down an interesting decision in Mac’s Convenience Stores Inc v The Queen [2012] TCC 393 dealing with the GST treatment of payments received by the owner of convenience stores for the provision of ATMs for a bank – some of the ATMs were owned by the bank  and some by the taxpayer.  The Court also considered the scope of the words “relate to”. Where the ATMs were owned by the bank, the taxpayer argued that the fees were consideration for an exempt supply of financial services, being “arranging” a financial service.  The Revenue argued that the dominant element of the supply was real property (i.e., the space in the stores) and the taxpayer’s conduct was “akin to the role that any landlord would play when providing space for an ATM”.  The Court agreed with the Revenue, essentially because the taxpayer took no active role in the operation of the ATMs and was largely a bystander with respect to the ATM transactions.  For the ATMs owned by the taxpayer, the issue was whether the taxpayer could claim input tax credits for the acquisition of the ATMs, notwithstanding that it was using the ATMs to make financial supplies.  The taxpayer relied on the exception which allowed entities (which are not financial institutions) to claim credits for property or services consumed “in the course of making supplies of financial services that relate to commercial activities of the registrant.  The Court rejected the Revenue’s contention that the words “relate to” require that the financial service must be incidental or ancillary to the entity’s primary business operations and must facilitate those business operations.  Adopting the ordinary meaning of “relate to” (having a very wide scope), the Court found that the taxpayer need only establish that there is “some connection” between the making of a supply of a financial service in respect of which credits are claimed and the taxpayer’s other activities. The Court noted that this is a much lower threshold than suggested by the Revenue.  The Court found that the taxpayer’s ATM operations did “relate to” its other convenience store activities.

United Kingdom

Upper Tax Tribunal

  • HMRC v European Tour Operators [2012] UKUT 377 – VAT – Exempt services – Item 1(d) of Group 9 of Schedule 9 VATA 1994 – Whether membership subscriptions of a trade association constitute exempt supplies – Case remitted to First-tier Tribunal for further findings of fact – Appeal allowed to that extent
  • Marcus Webb Golf Professional v HMRC [2012] UKUT 378 – VAT – exemption in Item 2 of Group 6, Schedule 9, VATA 1994 – whether tuition supplied by an individual teacher acting independently of an employer – relevance of principle of fiscal neutrality – appeal dismissed
  • Tanjoukian v HMRC [2012] UKUT 361 – VAT – Sale of vehicle registration marks – Whether transaction zero rated as an international supply – Place of supply in UK – Whether transaction involving a transfer or assignment of rights within para 1 of schedule 5 to VATA 1994 – Whether the DVLA a taxable person – Whether sale of registration marks by the DVLA an economic activity – Appeal dismissed
  • HMRC v Volkswagen Financial Services (UK) Ltd [2012] UKUT 394 – VAT – partial exemption special method – hire purchase transactions – taxable supplies of motor vehicles and exempt supplies of credit – whether residual cost inputs have a direct and immediate link with and are cost components of taxable supplies of motor vehicles – whether a methodology which attributes 50% of residual input tax to taxable supplies is fair and reasonable.
  • HMRC v UK Storage (SW) Ltd [2012] UKUT 359 – Value Added Tax – were storage units immovable property? – held no – was right to store goods in units exempt supply of licence to occupy land or standard rated supply of storage services? – held if units were immovable property then exempt supply of licence to occupy land otherwise standard rated supply of storage services – was single supply a supply of licence to occupy land or of storage services? – held single supply of storage services – appeal allowed

First-tier Tax Tribunal

  • Aabsolute Bond Ltd v Revenue & Customs [2012] UKFTT 672 – VAT – tax warehouse – assessment relating to goods considered to be missing – corresponding excise duty assessment withdrawn as out of time – whether VAT liability affected – no – whether assessment should have been made by reason of allegedly incomplete or incorrect return rather than under s 73(7B) VATA 1994 – no – whether a supply of goods at or before the duty point – held, on facts, goods delivered to warehouse and removed in circumstances constituting supplies – subject to adjustment, assessment confirmed and appeal dismissed
  • Borough Council of King’s Lynn and West Norfolk v Revenue & Customs [2012] UKFTT 671 – VAT – Overpayment – Whether consideration for a supply – No – No VAT charge on overpaid amounts – Appeal allowed – to see my post click here
  • Cloud Electronics Holdings Ltd v Revenue & Customs [2012] UKFTT TC02368 – VAT – input tax – professional fees incurred by holding company – whether there has been a supply of services – whether services used for business purpose
  • Dixons Retail plc v Revenue & Customs [2012] UKFTT 666 – claim for refund of VAT where retailer accounted for VAT on sales of goods for which customers fraudulently presented credit or debit cards and the retailer received payment from the card operator and retailer no obliged to repay the payments once frauds discovered – referral of question to ECJ – to see my post click here – to see my post click here
  • Mark Young (t/a The St Helens) v Revenue & Customs [2012] UKFTT TC02371 – VAT – s 49 VATA  – whether transfer of a business as a going concern where no supply by outgoing trader to new trader – yes on facts – whether legitimate expectation means not liable to VAT – stayed pending

New Zealand

Supreme Court

Canada

Tax Court

  • Mac’s Convenience Stores Inc v The Queen [2012] TCC 393 – whether service charge received for allowing the Automated Banking Machines of third party bank on the appellant’s convenience stores consideration for an exempt supply of financial services or a taxable supply of real property – whether appellant entitled to input tax credits for the purchase of ATMs – whether the ATMs “relate to” the other activities of the convenience stores
  • Tran v The Queen [2012] TCC 404 – whether acupuncture services performed by the appellant’s clinic are exempt supplies s a listed health service
  • Palangio and The Queen [2012] TCC 405 – whether taxpayer carrying on commercial activities and making taxable supplies – whether reasonable expectation of profit

Commissioner finalises four GST Determinations on telecommunication supplies

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Yesterday the Commissioner published four GST Determinations on telecommunications.  The determinations deal with four issues considered in the Telecommunications Industry Liason Group – Industry Register.  The views of the Commissioner in the Determinations are consistent with those expressed in the issues register.

While the determinations are specific to telecommunication supplies, one general point of interest flow from the views of the Commissioner is that he considers that the words “supply is provided” in subsection 38-190(3)(b) is to be contrasted with the term “made” in Item 2 of the table.  The Commissioner considers that the word “provided” is used to distinguish between the contractual flow of the supply made to a non-resident recipient and the actual flow of the service or other things provided to another entity.

NZ Supreme Court dismisses appeal by receivers for refund of GST

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Yesterday the NZ Supreme Court handed down its decision in Stiassny and others v Commissioner of Inland Revenue [2012] NZSC 106  where the Court dismissed an appeal against the decision of the Court of Appeal that the claim for a refund of GST by the receivers appointed to the partners in a GST-registered partnership should be struck out.

The case is interesting as it considers the question of whether the receivers of the partners (who were not appointed as receiver to the partnership) were personally liable to pay GST on the sale of partnership property. A similar question may arise under s 58 of the GST Act.  Secondly, the case discusses the scope for a claim based on restitution.  An outline of the facts and my analysis of the decision of the Court of Appeal can be accessed here.

Were the receivers personally liable for GST?

The Court of Appeal rejected the Commissioner’s contention that the receivers were personally liable for the GST of the partnership.  Before the Supreme Court, the Commissioner ran the same argument, being that the provisions of s 57 and s 58 (dealing with the GST consequences of “incapacitated entities”) should be given a construction which was consistent with their purpose, being to make the receivers liable for the GST of the partnership (notwithstanding that the partnership itself was not in receivership).

The Supreme Court rejected the argument for similar reasons to the Court of Appeal – essentially that the argument required words in s 57 to be ignored and additional words to be put into s 58.  The decision is another example of the limits of a “purposive” construction to statutory construction.

Can the receivers recover the GST paid?

The first argument of the receivers was that the payment of GST was made by them, rather than by the partnership.  This argument was rejected on the basis that the documents lead to the conclusion that it was simply not arguable that the GST payment was made otherwise than from a partnership bank account with funds to which it had title.

The second argument was that because the proceeds held by the receiver were insufficient to discharge the obligations owing by the partnership to secured creditors, those funds were held on bare trust for the secured creditors and, in equity the payment to the Commissioner utilised the property of the secured creditors, which can be recovered. This claim was rejected because of the effect of the introduction of the Personal Property Securities Arrangement regime which gives a creditor priority over a security interest in the funds paid to the creditor.

The third argument was that the payment had been made because of a mistake by the receivers or because they were, in practical terms, compelled to make it.  The Supreme Court agreed that the receivers were making a mistake about the law when they wrongly caused the partnership to pay the GST – they wrongly thought they were personally liable for the GST so paid it to protect their personal position. The Supreme Court also observed that it was well-settled that someone who makes a payment acting on a view of the law which a court later declares to be wrong, may be able to recover it.  In this context, the basis of the claim was to recover a payment made by mistake to the wrong creditor, to someone who would not have been paid but for the mistake.

The Supreme Court nevertheless found that the third argument failed on restitutionary principles.  This is because the partnership did owe the Crown the GST which was paid, therefore the Commissioner gave good consideration in accepting the payment in discharge of the debt.  Also, there could be no suggestion that the Commissioner induced the mistake – he made no demand for payment.  There was no unjust enrichment to the Crown at the expense of the partnership.

ATO publishes guide on Division 81 payments

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The ATO has published on its website a helpful guide to assist government agencies to determine whether GST applies to a government charge or whether the charge is exempt from GST under Division 81 of the GST Act.  The guide can be accessed here.

The current determination of the Treasurer, which lists government charges that are exempt from GST, no longer applies from 1 July 2013.  From that date, government agencies must review their government charges to self-assess whether GST is payable.

UK Tax Tribunal finds VAT not payable on retained overpayments

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In Borough Council of King’s Lynn and West Norfolk v Revenue & Customs [2012] UKFTT 671 the UK First Tier Tax Tribunal found that the Council was not liable to pay VAT on overpayments made by members of the public in respect of car parking.  The Council operated ticket vending machines which displayed sliding scale hourly parking charges and indicated that overpayments were accepted but no change was given.  The overpayments occurred where members of the public voluntarily paid more for a parking ticket than they were required to pay (for example if they did not have the correct change), which ranged between 2.25% to 3.46% of total payments per year.

The Revenue submitted that there was a supply of services by the Council and VAT was payable on “the whole consideration paid or payable”.  Further, the parking ticket confirmed the full payment as being made for the supply.

The Council submitted that the payment was ex gratia and the member of the public gets nothing in return for the payment.  There was no link between what is supplied and what is received – in the absence of the nexus, the overpayment cannot be treated as consideration for the the purposes of VAT.

In considering the issue, the Tribunal made the following statement of principle:

There must be a direct link between the supply made and the consideration given.  The supplier would normally expect something in return for a supply and will not fulfil their contractual obligation unless payment is received or forthcoming.  If there is no direct link between the supply which is made and the payment received or if a party was not obliged to pay then it cannot be said that there was consideration for the supply.  There must be some form of reciprocity between the parties.

In finding for the Council, the Tribunal observed that the fact that a party receives a sum of money does not mean that that sum represents consideration.  What was missing in this case was a direct link between what is supplied and what is paid for.

In the Australian context, the “nexus” is broader (being “in connection with” rather than a direct nexus between supply and consideration).  The question would be whether the overpayment was received “in connection with” the supply of car parking – or to use the approach adopted by the Commissioner – whether there was “a substantial relation, in a practical business sense”, between the overpayment and the supply.  The application of the nexus was recently considered by the Tribunal in AP Group Limited and Commissioner of Taxation [2012] AATA 409 dealing with the GST implications of various motor vehicle incentive payments.  The pending appeal of that decision to the Federal Court may well provide some guidance as to how the issue considered in the UK Tribunal should be dealt with in the Australian context.

UK Tribunal looks at whether retailer entitled to refund of VAT for goods paid for by fraudulent use of credit cards – is there a supply?

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In Dixons Retail plc v Revenue & Customs [2012] UKFTT 666 the UK Tax Tribunal has referred to the ECJ the question of whether a retailer is required to account for VAT on the sales of goods paid for by the fraudulent use of credit cards where the retailer has not been required to repay the payments received from the issuing banks.

This case raises the interesting question of whether the retailers made a “supply” of goods to the customers, notwithstanding that the goods were obtained by fraudulent means.  The context of the dispute has a similarity with the recent decision of the High Court in Qantas as in both cases the taxpayer received a payment in circumstances where the “intended transaction” does not proceed but is entitled to retain the funds received. If a supply is nevertheless made, VAT/GST is payable.  If a supply is not made, the taxpayer receives a financial benefit with no VAT/GST consequences.

While the Tribunal referred the question to the ECJ, it is interesting to consider the arguments put by both parties.

The taxpayer made the following submissions:

  • the presence of a legal relationship requiring reciprocal performance is a fundamental criterion to the identification of a “supply of goods”
  • the existence of a supply will primarily be determined by the terms of the agreement between the retailer and the cardholder
  • it has already been held that obtaining goods by illegal means (theft) does not equate to a transfer of a right to dispose of tangible property as owner – there is no legitimate distinction to be drawn between goods obtained illegally by theft and those obtained by credit card fraud
  • any payment received by the retailer only forms part of the “taxable amount” to the extent that there is a direct link between the goods provided and the consideration received.  In the circumstances of a fraudulent card transaction there is no reciprocal assumption of any obligation by the fraudster in connection with the payment for the goods and thus no direct link between any sum received by the retailer and the release of the goods
  • it is crucial to identify what the payment is “for”

The Commissioner made the following submissions:

  • there is plainly a supply of goods by the retailer to a customer where the customer fraudulently uses a credit card which he knew he was not authorised to use – in the course of the transaction the relevant goods were handed over to the fraudulent customer by the retailer in the same way a they would have been to any other customer
  • the transactions are not identical to the theft of goods – the latter is a unilateral undertaking by the thief, with nothing agreed and no relationship between the thief and the owner
  • the state of mind, motive or dishonest intent of a customer is not relevant to whether there is a supply – an objective approach is required.  A transaction is not prevented from being a supply because it involved some fraud and is therefore unlawful
  • the retailer received payment of the price of the goods from the third party bank – the payment was directly linked to the making of the supply of the goods to the customer – this payment constituted third party consideration for the supply of the goods

While the UK VAT system is different to here, in particular the UK requires a “direct link” between supply and consideration whereas here the link is the broader “in connection with”.  Nevertheless, the views of the ECJ on this issue may well have relevance in the Australian context.