Author Archives: chrissievers

Commissioner issues Taxpayer Alert on acquisition of intangible right for inflated consideration

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Today the Commissioner issued Taxpayer Alert TA 2012/5 ‘Acquisition of intangible right for inflated consideration which is financed by supplier’.  The arrangement described in the Alert is where an entity claims an input tax credit on a purported acquisition (on non-commercial terms which has an inflated or commercially unrealistic price) of an intangible right from a supplier, with the provision of vendor finance under which payments are contingent on a future event.  The vendor issues a tax invoice for the stated purchase price, irrespective of whether the conditions requiring payment have been met.  The purchaser accounts on an accruals basis and claims an input tax credit.  The vendor accounts on a cash basis and does not remit GST.

The aspects of the arrangements which concern the Commissioner are stated to be:

  • whether the purchaser has made a creditable acquisition at all;
  • whether the purchaser is entitled to attribute any input tax credits before the contingency for payment is satisfied – this raises the question of whether the purchaser is “liable to pay” consideration at this time;
  • whether the anti-avoidance provisions in Division 165 of the GST Act apply, as it appears artificial and contrived in its design;
  • whether the arrangement, or certain steps within it,  constitute a sham at general law.

The Alert also states that the Commissioner will consider the income tax and GST implications for the vendor.

My thanks to Rhys Penning of Greenwoods & Freehills for alerting me to the publication.

Taxpayer appeals to Full Federal Court re decision that liable to pay entire GST as a partnership

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The taxpayer has filed an appeal to the Full Federal Court from the decision of the Federal Court in Yacoub v Commissioner of Taxation [2012] FCA 678.  The Federal Court found that the taxpayer was liable for pay the whole GST liability for a property development on the basis that the entity was a partnership rather than a member of a joint venture.  My post on that decision can be found here.

The decision provides an opportunity for the Full Federal Court to consider the often difficult distinction between a joint venture and a partnership.  This has significant implications for taxpayers in a GST context because a partnership may (as the Federal Court found here) leave the taxpayer “holding the bag” for the whole GST where the other entity has gone into liquidation.

The Federal Court Portal shows that the Callover for the appeal will be held on 24 October 2012 in Sydney.

Federal Court finds student accommodation is the supply of “commercial residential premises”

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In ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795 the Federal Court accepted the taxpayer’s contention that the supply of shared and studio style apartments was the supply of “commercial residential premises” and therefore taxable, rather than the input taxed supply of residential premises (as contended by the Commissioner).

The central question was whether the complex, as a whole, fell within paragraph (a) of the definition of “commercial residential premises”, being “a hotel, motel, inn, hostel or boarding house” or paragraph (f) as “anything similar to residential premises described in paragraph (a)”.

The Commissioner contended that none of the words “hotel”, “motel”, “inn”, “hostel” or “boarding house” described accommodation “similar to that which would be expected for those who own or rent a house or apartment”.  The Commissioner contended that a resident of the premises in question rented his or her accommodation in much the same way as a person would rent any apartment for the purpose of exclusive or shared residence.  The policy of the GST legislation was that “those renting a house or apartment are to be on the same footing as person who own their own homes – neither is to pay GST in connection with such occupation”.

The Court considered whether the premises in question were similar to each of the types of establishment referred to in the definition of commercial residential premises.  The Court found as follows:

  • there were a number of features which distinguished the premises from a hotel or motel
  • the premises bear a much closer resemblance to a hostel than a hotel.  While meals were not provided to residents as they might be in the case of a more traditional hostel, the Court found that this did not mean that the premises could still be fairly described as a hostel, or at least similar to a hostel.
  • the premises were not similar to an inn or boarding house.

The Court also placed weight on the attributes specified at para 15.12 of the Explanatory Memorandum to the 2006 amendments to the definition as normally found in commercial residential premises (the Court also noted that Greenwood J referred to these attributed in Meridien Marinas Horizon Shores Pty Limited v Commissioner of Taxation [2009] FCA 1594 at [74]):

  • are run by a controller for a commercial purpose;
  • have multiple occupancy;
  • are held out to the public as such;
  • have a central management;
  • provides services in addition too commercial accommodation;
  • are used for the main purpose of accommodation.

The Court found that the premises met all of these requirements.  In doing so, the Court noted as follows:

It is true that in comparison with some other types of establishment referred to in the relevant definition, the level of services provided in addition to accommodation may seem slight.  But the services provided by staff to residents through the reception desk are by no means insignificant and, considered along with all other relevant matters, confirm my view that the Urbanest premises are properly regarded as commercial residential premises for the purposes of the GST Act.

The Court also noted that the fact that accommodation is the principal place of residence of the individual concerns does not mean that the supply is not taxable as commercial residential premises.  In such circumstances, the Court noted that the value of the supply may be substantially reduced for GST purposes by Division 87.

It will be interesting to see whether the Commissioner appeals the decision to the Full Federal Court.

GST Determination issued on second hand goods

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Yesterday the Commissioner published GSTD 2012/6 ‘Goods and Services tax: when an entity makes a taxable supply of second hand goods by way of lease before making a taxable supply of the goods by way of sale (or exchange), are both taxable supplies taken into account to quantify and attribute input tax credits under Subdivision 66-A of the GST Act’.

The Commissioner’s view is yes, with the effect that both taxable supplies (i.e., the lease and the sale) are taken into account in quantifying and attributing input tax credits under s 66-10(1) and 66-15(1) of the GST Act.  This is a view beneficial to taxpayer as it ensures that the entitlement to credits is not unduly limited to the GST payable on the sale of the asset where that asset is first subject to a lease.

Division 66 applies where second hand goods are acquired for the purposes of sale or exchange (but not manufacture) in the ordinary course of business: s 66-5.  The Division was considered by the Federal Court in Leaseplan Australia Limited v Commissioner of Taxation [2009] FCA 1309 and it is now settled that the provision can apply where the purpose of sale or exchange is one of a number of concurrent purposes – for example, where goods are purchased for the dual purpose of lease followed by sale at the expiration of the lease.  See also the ATO Decision Impact Statement here.

The effect of the Determination is as follows:

  • The amount of the input tax credit is limited to the lower of 1/11th of the consideration for the goods and the aggregate of the GST payable on the taxable supply of the goods through the lease and the subsequent sale of the goods: 66-10(1)
  • An input tax credit will be attributable in respect of the taxable supply of the lease to the tax period in which consideration is received or an invoice is issued: s 66-15(1)
  • Any remaining input tax credit will be attributable in respect of the taxable supply of the sale to the tax period in which consideration is received or an invoice is issued.

The Determination includes the following helpful example:

  • Finance Co makes a creditable acquisition of  second-hand vehicle from an unregistered vendor for the cost of $5,500.
  • Finance Co then leases the vehicle for a total consideration of $4,400, including GST of $400
  • After the lease expires, Finance Co sells the vehicle for $2,200, including GST of $200.
  • Finance Co can claim input tax credits for the acquisition of the vehicle capped at $500 (being 1/11th of the acquisition cost) – as this is less than the total GST on taxable supplies of $600.
  • Finance Co attributes $400 of the credits to the tax period in which any consideration is received for the lease.  The balance of $100 is attributed in the tax period in which any consideration is received for the sale of the lease.

The Commissioner applies a construction of paragraph 66-10(1)(b) which would appear to benefit taxpayers.  That paragraph refers to “the amount of the GST payable on a taxable supply of the goods that you make”.  The Commissioner acknowledges that the word “taxable supply” is singular but takes the view that the context of the legislation supports the conclusion that the words should be read plurally so as to encompass situations where more than one taxable supply is made (e.g., a supply by lease and by sale).

The contrary construction would arguably be that the words “a taxable supply” refer to the “sale or exchange” of the goods envisaged in the threshold test in s 66-5 – i.e., the amount of the credit is limited to the GST payable on the taxable supply of the eventual sale of the goods and any other taxable supplies are disregarded.  Using the example outlined above, that construction would mean that Finance Co would only be entitled to an input tax credit of $200 (being the GST payable on the sale of the vehicle) and also that the credit would not become attributable until the vehicle was sold.

While the matter is not free from doubt, I feel the the Commissioner’s construction is consistent with the context and purpose of Division 66, which is to recognise that there is GST embedded in the cost of acquiring the second hand goods.  The Commissioner’s construction ensures that taxpayers can recover full credits on those acquisitions, albeit remaining subject to the limitation that the amount of the credits cannot exceed 1/11th of the cost of acquiring the goods in the first place.

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Tribunal finds applicant unable to substantiate input tax credits for horse racing enterprise

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Yesterday the Tribunal handed down its decision in Trnka and Commissioner of Taxation [2012] AATA 492.  The Tribunal dismissed the application and found that the applicant could not substantiate input tax credits claimed in respect of a horse racing and breeding enterprise the applicant had claimed was carried on.  At the hearing the Commissioner accepted that the penalties should be reduced from 75% (intentional disregard) to 50% (reckless) and that an additional penalty of 20% for obstruction should not be imposed.

This case is yet another example of the hurdles faced by taxpayers in challenging assessments.  The Tribunal found that the following principles applied in the income tax context apply equally to a GST assessment:

  • The taxpayer bears the onus of establishing that the assessments were excessive: McCormack v Federal Commissioner of Taxation (1978) 143 CLR 248;
  • The Commissioner does not need to show that the assessments issued can be sustained or supported by evidence: Gauci v FCT (1975) 135 CLR 81
  • The Commissioner is entitled to rely on any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment: FC of T v Dalco (1990) 168 CLR 614 at 624.

The applicant was unable to produce documentary evidence to substantiate the claims for input tax credits, in particular tax invoices.  In this context the Tribunal referred to the following statement of the Tribunal in Huynh & Nguyen and Commissioner of Taxation [2008] AATA 305 at [32]:

“The tax invoice is the cornerstone of the GST regime.  A tax invoice is a document that substantiates a creditable acquisition”

Given its finding on the input tax credits, the Tribunal did not consider it necessary to deter me whether the applicant was carrying on an enterprise.  However, the Tribunal adopted the following factors listed in Sackville J in Woods v Deputy Commissioners of Taxation [1999] FCA 1589 as those to be considered when assessing whether an entity is carrying on an enterprise:

  • whether the activities were carried on as a commercial enterprise with the purpose of making a profit;
  • whether the activities were engaged in on a continuous and repetitive basis;
  • whether the activities were carried on in a businesslike manner;
  • whether ordinary commercial principles were applied to the conduct of the undertaking
  • whether the scale and volume of the undertaking was substantial, especially where the question is whether the taxpayer was conducting a business or was engaged in a hobby or recreational activity

In the context of penalties, the Tribunal found that the taxpayer was reckless.  The Tribunal accepted the Commissioner’s contention that the claiming of input tax credits without having tax invoices or records to substantiate the claims “demonstrates a degree of indifference or risk-taking that no reasonable person would assume”, consistent with the principle established in Hart v Commissioner of Taxation [2003] FCAFC 105.

NZ Supreme Court grants leave to appeal from decision that receiver liable to pay GST; AAT decision on enterprise

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In Richard Grant Simpson and Timothy Wilson Downes as Receivers v Commissioner of Inland Revenue [2012] NZSC 62 the New Zealand Supreme Court yesterday granted leave to appeal from the decision of the Court of Appeal in Simpson v Commissioner of Inland Revenue [2012] NZCA 126.  The Court of Appeal allowed an appeal against the decision of the High Court ([2011] NZHC 490) that receivers of a mortgagee who sold the mortgagor’s real property were “personally liable” for the GST.  However, the Court nevertheless ordered that the receivers pay the GST to the Commissioner (in preference to the secured creditor of the mortgagee) as the GST properly represented a cost of the sale of the property.

My discussion of the decision of the Court of Appeal can be accessed here.

In other news, in Campbell and Commissioner of Taxation [2012] AATA 473 the Tribunal found that the applicant was not entitled to claim input tax credits in relation to an enterprise claimed to be carried on.  The Tribunal also upheld the administrative penalty of 50% on the basis that the applicant was reckless.

The essence of the dispute was whether the applicant was carrying on an enterprise.  The case is a classic example of the applicant being unable to substantiate the claim that an enterprise was being carried on, whether by documentary or oral evidence.  The applicant contended that she and a friend carried on a business of software development, or at least were in a start-up phase for that business.  The problem for the applicant was that the evidence was that her house was burgled and all the business records and computer records were stolen.  This meant that she was unable to substantiate her claims by producing documentary evidence.  Also, the applicant did not call her business partner (or a business mentor who was said to be assisting the start-up phase).  Also, during evidence, the applicant was unable to clearly outline the types of activities that were carried on during the start-up phase.  In light of these matters, the Tribunal found that there were insuperable obstacles to a finding that the applicant was carrying on an enterprise.  The Tribunal also accepted that the actions of the applicant in claiming input tax credits were reckless.

Commissioner publishes new draft Ruling on Tax Invoices

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Today the Commissioner published Draft GSTR 2012/D3 ‘Tax invoices”.  This draft ruling replaces Draft GSTR 2011/D1, which has been withdrawn.

The draft Ruling sets out the minimum requirements for a tax invoice under ss 29-70(1) of the GST Act and explains the circumstances under ss 29-70(1A) when a recipient can treat a document as a tax invoice even though it does not meet all of the tax invoice requirements.

When finalised, the Ruling is proposed to apply from 1 July 2010.

Commissioner issues final PSLA on GST classification of food and beverage

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Last week the Commissioner issued PSLA 2012/2 (GA) – ‘GST classification of food and beverage items’.  The Practice Statement sets out the following matters:

  • arrangement between the ATO and GS1 Australia to ensure that food and beverage items shown on the GS1net are correctly classified for GST purposes.
  • the administrative approach the ATO will take for past years or periods where manufacturers and other suppliers have applied the ATO confirmed GST classification on GS1net
  • the procedure for tax officers to follow and matters to take into account when considering a change in the GST treatment of food or beverage item listed on GS1net.

The ATO had previously entered into an arrangement with GS1 Australia, which ensured that food and beverage items were correctly classified for GST (see Fact Sheet NAT 7162 ‘Simpler GST accounting for the food and grocery industry) which apple from 1 July 2002.  This Practice Statement outlines the Commissioner’s administrative approach in respect of that arrangement from 1 July 2010.

GS1 Australia is an organisation that administers a system of number, bar coding and electronic messaging.  GS1 Australia numbers and barcodes are on most food and beverage items sold in retail stores.  Manufacturers and other suppliers register with GS1 Australia.

The arrangements in the Practice Statement are intended to provide certainty and to minimise compliance costs for suppliers that rely on the GS1 net system to determine the GST classification of their products.  This certainty will be provided by the ATO undertaking that, where suppliers have relied on an ATO confirmed classification in GST1, changes to that GST classification will only be applied prospectively.  In determining this prospective date, the statement acknowledges that industry practice will generally require a minimum of 30 days from the notification of the change to implementation through the supply chain.

The ATO classification in the GS1 system does not have the legal status of a ruling.  Where a manufacturer or supplier disagrees with the classification, it can seek a private ruling, which has review rights attached.

The PSLA was issued in draft form as Draft PSLA 3541: GST classification of food and beverage items and my post on the draft can be accessed here.

The Practice Statement must be followed by tax officers unless doing so creates unintended consequences or is considered incorrect, upon which tax officers must follow their business line’s escalation process.

Commissioner issues ATO ID on GST and redemption of redeemable preference shares

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On Friday the Commissioner published ATO ID 2012/66 ‘GST and redemption of redeemable preference shares’ where he confirmed that an entity makes a financial supply when it redeems redeemable preference shares from its shareholders.

The view in the ATOID does not appear controversial.  The basis for the view is that redeemable preference shares are “securities” for the purposes of Item 10 in the table under sub regulation 40-5.09(3) of the GST Regulations so that the acquisition of an interest in redeemable preference shares (an acquisition-supply) is a financial supply.  Further, the ATOID considers that the GST Regulations do not require that, following the acquisition, the interest must be enduring and it is not relevant that the entity cancels the shares after it acquires them.

Tribunal finds taxpayer fails to substantiate GST returns; GST private rulings for June 2012

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In Baini and Commissioner of Taxation [2012] AATA 440 the Tribunal has found that the taxpayer failed to substantiate his claims that GST assessments issued by the Commissioner in respect of his taxi business were excessive.  The assessments were issued on the basis that the taxpayer had understated the amount of GST and income tax payable.  The activity statements lodged by the taxpayer contained figures less than those predicted by the benchmark figure for taxi enterprises.  The case provides an example of the operation of the onus provisions.  It is not sufficient for the taxpayer to establish that the Commissioner made an error in making the assessment.  The taxpayer must also establish, by reference to the evidence, what the correct assessment should have been.  The case is also unusual because the Commissioner put on evidence, which also included expert evidence.

Also, in June 2012 the Commissioner published over 40 private rulings dealing with GST issues on the Private Rulings Register.  My list of the rulings can be accessed here.  As usual, real property issues and refunds of overpaid GST feature heavily.