Author Archives: chrissievers

International cases update – September 2012 – single vs multiple supplies and possible impact of Qantas

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In September 2012 the following cases dealing with VAT issues were published in the UK.  From my research there were no significant cases published in New Zealand or Canada.

It is notable that two of the decisions of the Tribunal involved the perennial question of whether a transaction involved a single supply or multiple supplies for VAT purposes.  My analysis of these decisions can be found here.  Also, as discussed in my analysis, one wonders whether the recent decision of the High Court in Qantas will impact on how Australian Courts will approach this question going forward.

United Kingdom

First Tier Tribunal

  • Chipping Sodbury Golf Club v Revenue & Customs [2012] UKFTT 557 – VAT – sporting exemption for golf clubs – Article 13A(1)(m) Sixth Directive – members’ subscriptions – single supply or multiple supplies – Card Protection Plan considered – held single supply – profit making proprietary clubs – whether entitled to exemption – no – appeals dismissed
  • Colin Summers & Christopher Summers v Revenue & Customs [2012] UKFTT 590 – VALUE ADDED TAX — registration — whether appellants trading as single partnership or as two differently constituted partnerships — on the evidence, two separate partnerships — appeal allowed
  • Goals Soccer Centres plc v Revenue & Customs [2012] UKFTT 576 – VAT – Single or multiple supplies; five-a-side football; Pitch hire agreements and management services of sports leagues; whether single supply or multiple supplies, whether artificial to split or artificial to combine; tests to be applied and factors to be taken into account; relevance of the principle of fiscal neutrality
  • Goodman Equine Ltd v Revenue & Customs [2012] UKFTT 565 – VAT – input tax claim refused – horse trading – is business test satisfied – no
  • JIB Group Ltd v Revenue & Customs [2012] UKFTT 547 – VAT – INPUT TAX – was professional independent trustee of pension schemes entitled to deduct VAT on services of third party advisers relating to schemes? – held yes – are amounts paid by schemes in relation to advisers’ services consideration for supplies of services by trustee? – held yes – do principles of legitimate expectation, fiscal neutrality and equal treatment lead to different result? – held no – appeal allowed
  • Lakeside Collector Cards v The Commissioners Revenue & Customs [2012] UKFTT 563 – VALUE ADDED TAX – Input tax – Change from cash accounting – Return submitted 2½ years late – Capping provisions – Whether input tax capped as from time return due or from time received by Respondents – Status of Respondents’ manual published on Internet considered
  • Lok’nstore Group Plc v Revenue & Customs [2012[ UKFTT 589 – VAT – INPUT TAX – partial exemption – whether standard method and special method produce fair and reasonable attribution of input tax – held yes – whether special method proposed by Appellant produces fairer and more reasonable result than standard method – held yes – appeal allowed
  • Nathaniel David Roden and Rebecca Catherine Roden v Revenue & Customs [2012] UKFTT 586 – VAT –  let of hotel accommodation by undisclosed agent – deemed supply by and to agent under s47(3) VATA – whether deemed supply to agent necessarily has same VAT status as deemed  supply by agent – no – whether Item 1(d) of Group 1 to Schedule 9 VATA only exempts supplies to physical user of accommodation – no – appeal allowed in principle
  • Westminster College of Computing Ltd v Revenue & Customs [2012] UKFTT 579 – VAT – EXEMPT SUPPLIES – education – whether appellant school – held no – whether appellant college of institution of UK university– held no – appeal dismissed

High Court allows Commissioner’s appeal in Qantas

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Today the High Court handed down its decision in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41.  By a majority of 4:1 (Heydon J dissenting) the Court allowed the Commissioner’s appeal and found that Qantas was liable to pay GST with respect to fares for travel which was not taken by passengers.

In summary, the view of the majority was that upon entry into the contract with passengers, Qantas made a taxable supply for consideration (being the fare) and GST was payable and attributable to the tax period in which the fare was received.  At [33] the majority said as follows:

The Qantas conditions and the Jetstar conditions did not provide an unconditional promise to carry the passenger and baggage on a particular flight.  They supplied something less than that.  This was at least a promise to use best endeavourrs to carry the passenger and baggage, having regad to the circumstances of the business operations of the airline.  This was a “taxable supply” for which the consideration, being the fare, was received.

My initial comment is that while this case involved the GST implications of a transaction which did not proceed to completion, the majority’s conclusion would appear to apply to all contracts, regardless of whether those contracts complete or not.  Accordingly, whenever a party enters into a contract and receives consideration (or provides an invoice), that party makes a taxable supply, with the supply being the entry into the obligations and or the provision of rights to the recipient.  This may raise a number of difficulties going forward.

In his dissenting judgment, Heydon J essentially approved of the reasons given by the Full Court.  In doing so, his Honour found that the expression “supply for consideration” connoted a bargained-for exchange of value for performance and identified the flight as what the passenger paid for. His honour also found that an interpretation of s 9-5 fastening on the latter supply (ie, the flight) conforms more closely to practical reality.

News Flash! High Court to hand down Qantas decision on Tuesday morning

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The High Court email notification service shows that the Court will hand down its decision in the Qantas case on Tuesday morning at 10.15am.  The decision involves the GST treatment of fares paid by passengers who did not show for the flight.  The Commissioner appealed against the decision of the Full Federal Court that no GST was payable (the Full Federal Court having allowed Qantas’ appeal against the decision of the Tribunal that GST was payable).

The decision should appear on the High Court website and austlii during the day.

 

ATO ID issued on charitable institutions making GST-free supplies

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On Friday the ATO published ATO ID 2012/78 ‘GST and supplies made by endorsed charitable institutions for nominal consideration’ which determined that an endorsed charitable institution can include the cost of acquiring capital items when calculating the cost of making a supply under sub-paragraph 38-250(2)(b)(ii) of the GST Act, being a supply (other than of accommodation) that is for consideration less than 75% of the consideration provided for acquiring the thing supplied.

The facts used in the ID relate to an entity which operates a zoo and makes supplies of zoo admissions for consideration.  The entity acquires a number of things such as the animals, the enclosures, the parks and gardens.

The ID acknowledges that the section has an easy operation where the entity supplies the same thing as acquired (eg, a blanket).  However, it is more difficult where the entity “uses” acquisitions in making supplies, including capital items.  On “a strict literal interpretation” the sub-paragraph would only apply where the same thing is supplied as was acquired, however the ID accepts that the phrase “acquiring the thing supplied” should be interpreted to include both things acquired and on-supplied and things that are acquired and ‘used’ in combination in making a supply of something else.

In the context of the zoo, the things used to make the supply include recurring (revenue) items such as animal feed and the services of zoo keepers, and capital items such as buildings, or plant and equipment.

A further issue with capital items is that they are not generally consumed in making supplies in the period in which they are acquired – they have an effective life and are used by the entity to make supplies over a number of periods.  To reflect this, the ID takes the view that the consideration used to make supplies is a proportion of the price paid, generally equal to the portion of the effective life of the item. The ID considers that entities must use methodology outlined in the Goods and Services tax Industry Issues: Charities Consultative Committee Resolved Issues Document (the consideration provided for the capital item in that period) or an amount equivalent to the decline in value for the capital item for that period consistent with Division 40 of the ITAA 1997.

Addendum issued to MT 2010/1 on s 105-65 and GST refunds

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Yesterday the Commissioner issued Addendum MT 2010/1A1 to MT 2010/1 Miscellaneous tax: restrictions on GST refunds under s 105-65 of Schedule 1 to the TAA.

The Addendum amends the Ruling to reflect the decision of the Federal Court in International All Sports v Commissioner of Taxation [2011] FCA 824.  In that case the Court found that the restriction on GST refunds in s 105-65 did not apply where there was an overpayment of GST because of a miscalculation of GST using Division 126 of the GST Act (dealing with gambling supplies).

Importantly, as envisaged in the Decision Impact Statement to the decision, the Addendum acknowledges that s 105-65 does not apply in cases where the supply is always correctly characterised and treated by the supplier as taxable, but an overpayment of GST arises from a mere miscalculation.  Examples include:

  • a supplier correctly characterises a supply as taxable but merely miscalculates the GST for that supply in the calculation of their net amount;
  • supplies are treated as taxable under the margin scheme where there was an error in the calculation of the margin;
  • GST on supplies of real property has been calculated under the ordinary provisions, when in fact the margin scheme applied;
  • Division 72 of the GST Act applies but an overpayment of GST arises from an error in the calculation of market value;
  • a supplier chooses to apply Division 87 of the GST Act to a supply of long term accommodation in commercial residential premises, but the supplier then fails to apply the concessional rate when calculating the value of the supply
  • GST is overpaid due to a miscalculation of GST which arises when a taxpayer fails to pay LCT on a luxury car; or
  • GST on a taxable supply of an insurance policy is overpaid as a result of an error when working out the value of the taxable supply pursuant to s 78 of the GST Act

The Addendum is welcome, but there may be no victory for taxpayers because on 17 August 2012 the Assistant Treasurer released draft legislation to repeal s 105-65 and replace it with Division 36 of the GST Act, which would remove the Commissioner’s discretion and taxpayers’ entitlement to a refund in each of the cases outlined above. The amendments are to apply from monthly tax periods starting 1 September 2012 and quarterly tax periods starting 1 October 2012, so the effectiveness of this Addendum is questionable (on the assumption that the amendments proceed, of course).

My analysis of the proposed new refund provisions can be accessed here.

Tribunal hands down decisions finalising Wynnum Holdings and “son of holdback” cases

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On Friday the Tribunal handed down its decisions in Wynnum Holdings No 1 Pty Ltd and Commissioner of Taxation [2012] AATA 616 and AP Group Limited and Commissioner of Taxation [2012] AATA 617

Wynnum Holdings

On 5 May 2011 the Tribunal handed down an interim decision ([2011] AATA 296) dealing with two preliminary matters, being whether the Commissioner’s claim was made out of time (“the timing issue”) and whether the Commissioner was prevented from recovering because of a ruling previously made in the Applicant’s favour (“the ruling issue”.  The Tribunal found against the Applicant on both these matters and found it necessary to decide the remaining issues of whether the Applicant was carrying on an enterprise at the time it purchased a property in 2003, or whether it was acting as bare trustee of joint venture parties (“the enterprise issue” and whether the property is properly characterised as “commercial residential premises” or “residential premises” (the commercial residential premises issue”).

The Tribunal found in favour of the Commissioner on both the remaining issues.  My analysis of the decision can be accessed here.

AP Group Limited

Also, the Tribunal handed down its final decision in AP Group Limited and Commissioner of Taxation [2012] AATA 617, finding that the taxpayer’s objection was partially allowed, on the basis that certain incentive payments were not consideration for a supply.  The Tribunal handed down its interim decision in July 2012, [2012] AATA 409 and my post discussing that decision can be accessed here.

The decision confirms that adjustments for three of the incentives were to be made for the May 2007 and March 2008 tax periods (being the sample months for testing), thereby reducing the taxpayer’s net amounts for those tax periods.  In the interim decision, the Tribunal raised the the issue of whether the Commissioner could rely on the discretion in s 105-65 to refuse to pay the refunds and whether the Tribunal has jurisdiction to review such a decision.  The Tribunal did not appear to consider this issue.

ECJ denies refund application for VAT paid between 1973 and 1977

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In Grattan plc v The Commissioners of Her Majesty’s Revenue & Customs [2012] EUECJ C-310/11 the European Court of Justice has found that the taxpayer does not have a directly effective right to treat the basis of a VAT assessment as retrospectively reduced where, after the time of the supply, the recipient received a credit from the supplier.  The decision illustrates the scope of VAT refund claims still being agitated in the UK.  These claims were restricted to VAT paid between 1973 and 1977 (as from 1978 the issue was dealt with by adjustment provisions which allowed for a subsequent reduction in assessments).

The decision was in response to the following question referred by the First Tier Tax Tribunal:

In relation to the period before 1 January 1978, does a taxable person have a directly effective right under Article 8(a) of the Second Directive and/or the principles of fiscal neutrality and of equal treatment, to treat the basis of assessment of a supply of goods as retrospectively reduced where, after the time of that supply of goods, the recipient of the supply received a credit from the supplier which the recipient elected either to take as a payment of money, or as a credit against amounts owed to the supplier in respect of goods to the recipient that had already taken place.

The issue before the Tribuanl was whether credits subsequently given to “agents” in respect of goods purchased through mail order companies had the effect of reducing the consideration received by the companies (and therefore the VAT liability previously paid).  The question directed to the ECJ was whether this subsequent credit allowed the company to retrospectively claim a refund of the VAT paid.

The ECJ found that the crucial factor was how much the taxable person has ‘actually received’ at the time when the basis of the assessment is to be determined.  Further, the possibility of repayments of parts of the consideration after the supply has taken place has no bearing on the determination of the assessment and the amount of the tax debt accrued.  Finally, while an adjustment procedure was introduced from 1 January 1978, there is no scope to read such an adjustment procedure into the legislation prior to that time, or to give it a retrospective operation.

 

 

 

Case analysis of Unit Trend Services v COT – Division 165 and anti-avoidance

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On 19 August 2012 the Full Federal Court handed down its decision in Unit Trend Services Pty Ltd v Commissioner of Taxation [2012] FCAFC 112.  This was an appeal by the taxpayer from the decision of the Tribunal in The Taxpayer and Commissioner of Taxation [2010] AATA 497. In a majority decision (2:1), the Full Court allowed the taxpayer’s appeal and found that Division 165 did not apply because the GST benefit was “attributable” to a choice, election, application or agreement that is expressly provided for in the GST law.  The taxpayer did not appeal the finding of the Tribunal that obtaining the GST benefit was the dominant purpose (and principal effect) of entering into the scheme.

My analysis of this decision can be found here.

International cases update – August 2012; NZ decision on enterprise; decision of South Africa’s highest court

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In August 2012, the following decisions relating to GST and VAT were handed down in New Zealand, the UK and Canada.

A decision of note is XXX and the Commissioner of Inland Revenue [2012] NZTRA 07 where the NZ Tribunal found that the taxpayer was entitled to be registered for GST as a property developer and to claim an input tax credit for the cost of acquiring land and associated costs with respect to a property development which did not proceed.  The decision provides a helpful insight into the approach of the NZ Courts on the difficult question of when an entity will be conducting a “taxable activity” in the context of the subdivision and sale of land. My analysis of the case can be accessed here.

Also, at the end of this post I briefly discuss a decision of the Supreme Court of Appeal of South Africa in Commissioner for South African Revenue Services v De Beers Consolidated Mines Ltd [2012] ZASCA 103 which touched on the difficult issue of the “attribution” of input tax credits in the context of acquisitions directly used for non-taxable purposes but used indirectly for making taxable supplies.  The approach of the Court may have some relevance to the construction of s 11-15 of the GST Act and the meaning of “creditable purpose”.

New Zealand

Taxation Review Authority

United Kingdom

Upper Tax Tribunal

  • HMRC v GMAC UK Plc [2012] UKUT 279 – VAT Bad debt relief – Insolvency Condition, Property Condition – whether valid under EU law – No; whether repayment claim resulted in a windfall contrary to EU law – need for reference – Yes; Time limit for making claims – whether time-barred as a result of overriding provisions of EU law

Tax Tribunal

  • Hope in the Community v Revenue & Customs [2012] UKFTT 499 – VAT – supply – whether funds received by the Appellant were grant monies outside the scope of VAT or consideration for a taxable supply of goods and services within sections 4 and 5 VATA 1994 – held taxable supplies – appeal disallowed
  • Skinner Ltd v Revenue & Customs [2012] UKFTT 525 – VAT – whether appellant’s dog food was pet food – meaning of “meal” in expression “biscuits and meal” in zero rating schedule – appeal allowed in part
  • Ward v Revenue & Customs [2012] UKFTT 499 – VAT  – exemptions – accommodation- whether the appellants supply of studio flats to the local authority was excluded from the exemptions within Group 1 of Schedule 9 of the Value Added Tax Act 1994 because they were operating a hotel or similar establishment – appeal dismissed

Canada

South Africa

In June 2012 the South African Supreme Court of Appeal handed down its decision in Commissioner for South African Revenue Services v De Beers Consolidated Mines Ltd [2012] ZASCA 103.  The question in this case was whether the acquisition of foreign advisory services (in respect of a proposed corporate restructure) were consumed by De Beers “for the purpose of making taxable supplies” so that input tax could be claimed.  The Tax Court sitting below found in favour of De Beers on the basis that the services were utilised and consumed by it for the purpose of making taxable supplies (i.e. in the course or furtherance of its enterprise of mining and selling diamonds).

The Supreme Court allowed the appeal by the Revenue.  In doing so, the Court considered the primary question to be whether the services were acquired “for the purpose of making taxable supplies”.

De Beers put its argument in the following way:

It was contended on behalf of DBCM that the provision of the services by NMR were necessarily attached to and according a concomitant of appellant’s mining or commercial enterprise as a public company.  As the appellant had chosen to conduct its business as a public company which, while conducting its operations, had certain statutory obligations, it was submitted that these services were directly linked to its making of ongoing supplies.  Thus, so it was argued, since these supplies can rightly be said to have been wholly utilised or consumed in the making of supplies, in the course or furtherance of appellant’s mining or commercial enterprise, they did not fall within the definition of imported services.  It was submitted that the Commissioner’s attitude embodied a restrictive approach in construing DBCM’s enterprise, limiting it to the nuts and bolds of the operational diamond business and excluding statutory duties imposed on the company in the interest of shareholders.  Put simply it was contended that NMR’s services were acquired in the furtherance of DBCM’s mining and diamond business.

The Revenue argued the following:

On behalf of the Commissioner it was submitted that the purpose in question is the purpose of the acquirer of the service and that, by its nature, the test is subjective.  DBCM’s reason for engaging NMR, so it was contended, was to acquire advice in relation to a take-over by parties to which it was related.  Accordingly, its board had a duty to report to the independent unit holders a to whether the offer was fair and reasonable and to obtain independent legal advice in that regard…The fact that this was the reason for DBCM’s engagement of NMR, rules out, as a relevant purpose, any of the incidental benefits which DBCM thought it might derive from the transaction.  

The Court agreed with the Revenue.  Also, the Court distinguished two tax cases (including the Australian decision in FCT v The Swan Brewery Co Ltd (1991) 22 ATR 295) where it was held that certain expenditure on services relating to corporate restructures was deductible for income tax purposes.

GST private rulings for August 2012 – focus on Executors Commission and GST refunds

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In August 2012 the Commissioner published over 40 private rulings on the Private Rulings Register dealing with GST issues.  A list of the rulings can be accessed here.

Of particular interest were private rulings dealing with the GST implications of Executors Commission and the perennial issue of GST refunds.

Private Ruling No.1012201810746 dealt with the question of whether GST was payable on executors commission to be received by an executor appointed to administer an estate. The Private Ruling found that GST was payable because the executor was carrying on an enterprise (he was already registered in respect of a farming business) and GST was payable.  While accepting that the appointment was a “one off”, the ruling found that the activity had the characteristics of a business deal and fell within the definition of “enterprise” in the GST Act.

This ruling has important implications for any person who takes an appointment as executor and seeks to recover executors commission.  Where a person is not registered for GST, there will only be an issue where the turnover threshold of $75,000 is exceeded.  However, where a person is registered (albeit in respect of a totally unrelated enterprise – in the case of the private ruling, the applicant was registered as a farmer), that person will be potentially exposed to a GST liability of 1/11th of the Commission.  This also raises the question of whether the Commission can be “grossed up” for the GST liability and whether the Estate should (or can) be registered for GST so that it can claim an input tax credit in respect of the GST.

Private Ruling No.1012202126278 dealt with the GST treatment of an out of court settlement payment and whether the Commissioner would exercise its discretion in s 105-65 of Schedule 1 to the TAA to refund the overpaid GST.  In the private ruling, the Commissioner confirmed that the payment was not subject to GST and that “on balance” the Commissioner would exercise the discretion to pay a refund of GST because he was satisfied that the settlement amount was set without taking GST into account and the applicant made a later decision to treat the amount as consideration for a taxable supply, meaning that the overpaid GST was not passed on to the recipient and the burden of the GST was borne by the applicant.

Last month the Treasurer released a controversial exposure draft for introduction of Division 36 into the GST Act, which is to replace s 105-65 of Schedule 1 to the TAA.  My post on the exposure draft can be accessed here and my analysis of the new provisions can be accessed here.  Under the new provisions, the same result would occur because the Commissioner accepted that no part of the overpaid GST was passed on to the recipient.

It is interesting that in the private ruling, no tax invoice was given to the recipient.  Under the proposed changes, if a tax invoice had been provided (which the applicant would have been required to do under the GST Act if required by the recipient), this would have provided “prima facie evidence” of the GST being passed on to the other entity.  In these circumstances, it is difficult to see how the mere fact of the provision of a tax invoice can potentially convert a situation where GST is not passed on, to one where GST is passed on.