Author Archives: chrissievers

Commissioner publishes final GST ruling on retirement villages

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Last week the Commissioner published GSTR 2012/3 ‘Goods and Services tax: GST treatment of care services and accommodation in retirement villages and privately funded nursing homes and hostels.  The ruling explains when care services and accommodation provided to residents in privately funded nursing homes, aged care hostels and serviced apartments in a retirement village are GST-free under ss 38-25(3), (4) and (4A).  The ruling was issued in draft as GSTR 2011/D5.  The transitional arrangements under the Ruling are that Fact Sheet ‘GST and serviced apartments in retirement villages”: NAT 12761 is withdrawn but for tax periods prior to the date of issue, the Commissioner will not seek to disturb the GST treatment where the taxpayer has followed and applied then news as set out in the fact sheet and also Issue 10 of the Retirement Villages Industry Partnership – issues register.

My analysis of the Ruling can be accessed here.

International Cases update – June 2012 – plus case analysis of UK decision in People’s Dispensary for Sick Animals

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In June 2012 the following decisions dealing with GST/VAT were handed down in the UK, Canada and the ECJ.

An interesting decision is The People’s Dispensary for Sick Animals (PDSA) v Revenue & Customs [2012] UKFTT 362 where the Tribunal looked at whether the taxpayer was entitled to input tax credits for veterinary services acquired in the course of operating a Pet Aid scheme whereby veterinary services were provided at no cost to qualifying members.  While the Tribunal found in favour of the Revenue, in my view there are good arguments that the matter would be decided differently in Australia and the case provides a useful example of the differences between the VAT legislation in the UK and the GST in Australia. My analysis of the decision can be accessed here.

Another interesting decision is Global Cash Access (Canada) Inc v The Queen 2012 TCC 173 where the Tax Court of Canada considered the question of characterising a bundle of supplies in the context where at least one of those supplies was an input taxed financial supply.  My previous post on this decision can be accessed here.

United Kingdom

First Tier Tribunal

  • Atchem Ltd v Revenue & Customs [2012] UKFTT 380 – VAT – property – supply of going concern – belated notification – whether appellant decided to opt to tax on or before completion – held no – appeal dismissed
  • Beds Beds Beds London v Revenue & Customs [2012[ UKFTT 353 – VAT – claim for repayment of overpaid VAT – claim made more than four years after end of accounting period in which assessment made – whether claim valid – no – section 80(1A) and (4) VAT Act 1994 – appeal dismissed
  • Bloomsbury Wealth Management LLP v Revenue & Customs [2012] UKFTT 379 – VAT – EXEMPT SUPPLIES – finance – whether appellant supplied intermediary services or services of management and advice – held, advice ancillary and predominant supply of intermediary services – whether intermediary services in relation to item 6 (exempt) or item 9 (standard rated) – held, in relation to item 6 appeal allowed
  • Cordery Build Ltd v Revenue & Customs [2012] UKFTT 384 – VALUE ADDED TAX – Reduced rate – Schedule 7A Value Added Tax Act 1994 – Group 6 Notes 2, 3,4 and 6 – qualifying conversion –  whether conversion of 36 bedsits in sheltered accommodation for the elderly into 36 self-contained flats amounted to “changed number of dwellings conversion” – No – Whether use prior to conversion was a home or other institution providing residential accommodation with personal care or an institution which is the sole or main residence of at least 90 per cent of its residents – No – Appeal dismissed
  • Finance & Business Training Ltd v Revenue & Customs [2012] UKFTT 382 – Education – Exemptions – Value Added Tax Act 1994, Sch 9, Group 6, Item 1, Note 1(b )- Exemptions – Whether the Appellant is a college of a university – Whether the Appellant is an eligible body
  • Robinson Family Ltd v Revenue & Customs [2012] UKFTT 360 – S.49 VATA and Art 5 VAT (Special Provisions) Order 1995 – creation of a sub-lease – whether there was the transfer of a business or the disposal of a new asset – Appeal Allowed
  • The People’s Dispensary for Sick Animals (PDSA) v Revenue & Customs [2012] UKFTT 362 – VAT – Input Tax – The Appellant a “not for profit” incorporated Society providing welfare and charitable services for sick and injured animals – Was the Appellant  entitled to recover VAT on veterinary fees – No – The Pet Aid scheme was a non-economic activity – the veterinary supplies made to the pet owners not to the Appellant – Appeal dismissed
  • WM Morrison Supermarkets Ltd v Revenue & Customs [2012] UKFTT 366 – VAT – supply of disposable barbecues – whether VAT chargeable at a reduced rate on the charcoal element of the supply – reduced rate of VAT on solid fuel pursuant to Schedule 7A Group 1 Item 1(a) VATA 1994 – Commission v France Case C-94/09 considered – interaction with Card Protection Plan v C & E Case C-349/96 considered – significance of charcoal being a concrete and specific aspect of the supply – appeal dismissed

European Court of Justice

  • Elsacom (Eighth VAT Directive) [2012] EUECJ C-294/11 – Eighth VAT Directive – Arrangements for the refund of VAT to taxable persons not established in the territory of the country – Time-limit within which refund applications are to be submitted – Time bar
  • Mahageben v Nemzeti (Taxation) [2012] EUECJ C-80/11 – Taxation – VAT – Sixth Directive – Directive 2006/112/EC – Right to deduct – Conditions governing the exercise of that right – Article 273 – National measures to combat fraud – Practice of the national tax authorities – Refusal of the right to deduct in the event of improper conduct on the part of the issuer of the invoice relating to the goods or services in respect of which the exercise of that right is sought – Burden of proof – Obligation of the taxable person to satisfy himself as to the propriety of the conduct of the issuer of that invoice and to provide proof thereof
Canada


Tribunal hands down decision in “son of holdback” GST case – partial wins for both sides

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Yesterday the Tribunal handed down its decision in AP Group Limited and Commissioner of Taxation [2012] AATA 409, involving the GST treatment of certain “incentive” payments by car manufacturers to dealers.  The decision follows from the earlier decision of the Federal Court in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 where car dealers successfully obtained refunds of GST paid on “holdback” payments.

A range of incentive payments were before the Tribunal.  In each case, the Tribunal had to decide whether the payments were properly characterised as consideration for supplies made the the applicant.  If they were not, an issue was whether the applicant was entitled to a refund of overpaid GST.  In this context, the operation of the Commissioner’s discretion in s 105-65 of Schedule 1 to the TAA was relevant.

The Commissioner’s first argument was essentially that by performing (or agreeing to perform) the obligations imposed by the Dealer Agreements and the various sales bulletins and incentive flyers, the applicant made a supply to the manufacturer and the incentive payments were consideration for that supply. In rejecting the Commissioner’s argument, the Tribunal noted as follows:

Given the breadth of the concept of supply – “any form of supply whatsoever”, and specifically “an entry into…an obligation to do anything” – it is not hard to see why the Commissioner submits that the Applicant made a supply to the manufacturer when it did, or agreed to so, any of those things.  But there is an air of unreality in such an outcome.  One could just as readily conclude that a retailed makes a supply to its wholesaler by taking on an obligation to pay for the goods it purchases, or that the wholesaler makes a supply not only of its goods, but also of the promise to deliver those goods in a timely fashion.  When one overlays on to the concept of “supply” the similarly broad concept of “consideration” – which includes not only payments but also any “any act or forbearance in connection with a supply” – it would follow, on this analysis, that the retailer probably makes a taxable supply to the wholesaler (of a promise to pay for the goods) and also that the wholesaler makes an entirely unexpected taxable supply of the promise to deliver goods on time.

…

In the context of the overall business relationships and contractual arrangements between the applicant on one hand, and the various manufacturers on the other we do not think that the Applicant’s acceptance of the obligations or the making of the promises is properly viewed as the making of supplies to the manufacturers.  Instead, they are part of the foundation underpinning the relationships, the background to the bargain the parties have made – in a sense, the rulebook by which the game is to be played.

If we are wrong with that, and the Applicant is to be regarded as making supplies to the manufacturers, we nevertheless do not think it is making taxable supplies to them.  The incentive payments are not made “for” or even “in connection with”, any such supplies. There is no nexus between the payment of the incentives and the making of the promises, the performance of the oblations, or the compliance with the manufacturers’ various rules and policies.  The Commissioner’s submissions do not grapple with the indisputable truth that, on his argument, the Applicant always carries on its business in a particular way (as it has agreed with the manufacturers to do), but it only gets paid for doing so in circumstances which warrant the payment of an incentive; otherwise the supply is provided for free.  We do not see how that can possibly be so.

The Commissioner’s second argument only related to some of the incentives before the Tribunal.  The argument was that these incentives (fleet rebate, run-out model support payment and retail target incentive payment) were consideration for the supply of a vehicle to the retail customer.  The Tribunal agreed with the Commissioner on the fleet rebate and run-out support payment and found that the payments were “in connection with” the supply of the vehicle to the customer.  The Tribunal found that there was not a sufficient connection for the retail target incentive payment as the incentive did not have a nexus with any one particular supply, but rather was paid in connection with supplies generally.

The result was that the applicant was successful in arguing that GST was not payable in respect for some of the payments.  This raised the issue of whether the Commissioner could rely on the discretion in s 105-65 to refuse to pay the refunds.  The Tribunal has asked the parties to provide submissions on whether the Commissioner had, in fact, made such a decision and if so, whether the Tribunal has jurisdiction to review such a decision.  This is an important development as in the past Tribunals have considered the operation of s 105-65 (see for example Luxottica Retail Australia Pty Limited and Commissioner of Taxation [2010] AATA 22).  Further, the question on jurisdiction would appear to extend beyond s 105-65, but also to the limitation provisions in s 105-50 and s 105-55.

Federal Court finds property development carried on by a partnership and applicant liable for GST

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In Yacoub v Commissioner of Taxation [2012] FCA 678 the Federal Court found that the applicants were liable for pay the whole GST liability for a property development on the basis that the entity was a partnership rather than a joint venture.  The applicants contended that they were only liable to a share of the GST liability on the basis that the entity was a joint venture.  The Court rejected this contention and as the other participant had gone into external administration, the applicants were left with the entire GST debt. The decision provides an important discussion between what constitutes a partnership and what constitutes a joint venture – as this decision shows, it is often a difficult distinction to make and getting it right (or wrong) has significant implications for the participants.

The applicants had entered into a “Syndicate Agreement” in 2005 with another entity (without legal assistance). In 2007, the parties entered a further agreement, this time with legal assistance.  In August 2007, an entity (ML) was registered for GST.  Construction of the development occurred between October 2007 and June 2009 and over that time ML lodged activity statements.  The Commissioner issued a notice of assessment to ML for the GST owing in respect of the sale of the development and the applicants paid 50% of the assessments in discharge of what they believed to be their liability.  The other entity did not pay the remaining 50% and was placed into external administration.  The Commissioner then commenced recovery proceedings against the applicants for the balance on the basis that the 2007 agreement superseded all previous agreements and made the applicants and the other entity partners for tax purposes, even if not partners in general law.

In deciding that there was a partnership, the Court looked at the “substance and reality” of the transaction. The agreements expressly stated that no partnership was being carried on, but the Court noted that while the existence of such a statement may be relevant, it did not determine the issue.  The Court found that the proper construction of the 2007 agreement was that the parties had replaced the 2005 agreement with one in which they expressly agreed to “share equally all costs, liabilities, mortgages and proceeds derived from any sale arising from the property”.  Accordingly, as a matter of substance the parties created between themselves both a partnership at general law and a tax law partnership.

 

 

 

Commissioner issues PSLA 2012/2 on liability for GST and income tax where there is a change of trustee

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Today the Commissioner issued PSLA 2012/2 ‘Change of Trustee’ outlining the approach to be taken by the Commissioner in recovering income tax and GST liabilities of a trust where there is a change of trustee following a income tax year or a tax period.  This Practice Statement has important ramifications for any trustee that ceases that role given that the Commissioner takes the view that any liability to income tax and GST remains a personal liability of the retiring trustee (although the retiring trustee may have rights to seek indemnity from the assets of the trust – to the extent that there are such assets).

In the context of GST, the Practice Statement takes the following view:

  • the trustee of a trust is taken to be an entity consisting of the person or persons who are the trustees at any given time
  • although GST is payable on taxable supplies, a discrete liability is not fixed each time a taxable supply is made.  Rather, the sum of the GST payable on all taxable supplies for a tax period is a component of the formula for working out the ‘net amount’ under s 17-5 of the GST Act – this net amount will be either a liability or an entitlement to a refund
  • it is only at the close of the tax period that amounts of GST on taxable supplies and input tax credits can be netted off so as to determine what the net amount for that period is – a liability for the net amount thereby arises at the end of the tax period and liability attaches to a trustee at that time
  • there is no basis to impose liability for GST on a trustee at a later time, e.g. at the time of assessment – the Commissioner has no rights to impose liability on the new trustee directly
  • while the matter is not free from doubt, the trust entity provisions in s 184 of the GST Act do not confer rights against a new trustee who has replaced a liable trustee

The Practice Statement refers to the following example in a GST context:

The Arnold Family Trust accounts for GST on a quarterly basis.  For the tax period ended 30 June 2011 it has a net amount payable and accordingly a tax-related liability arises at that time.  Ants Pty Ltd is the trustee of the trust at the end of the tax period, but retires on 1 July 2011, and is replaced by Aardvark Pty Ltd.  Ants Pty Ltd is the trustee liable for the net amount for the tax period ending 30 June 2011, even though the net amount is not due and payable until 28 July 2011.

The above example shows that the Commissioner considers that the liability to pay a net amount arises at the end of the tax period (presumably midnight on the night of the last day), notwithstanding that the quantum of that net amount is not determined until an activity statement is filed in the following month (s 17-5) and the net amount does not become payable until that later time (s 33-5).

This is bound to be a controversial area which will likely give rise to disputes, both between the Commissioner and trustees and also between trustees.

Some of the areas of difficulties may include the following:

  • Using the Commissioner’s example, the trustee retires on 30 June 2011 rather than 1 July 2011.  The outgoing trustee would not be liable for the net amount during that tax period notwithstanding that it was the trustee for all of those transactions – similarly, the incoming trustee would be liable for all those transactions.  Arguably a harsh result.
  • Incoming trustees would not appear to not have rights to object to assessments issued to the trust for previous tax periods, notwithstanding that the Commissioner will be seeking to effectively recover the unpaid GST from the assets of the trust (through the previous trustee’s rights of subrogation)
  • In many cases the outgoing trustee will have no assets

Full Federal Court allows taxpayer’s appeal in LVR case – 95% of the Tribunal’s reasons taken from Commissioner’s submissions

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Earlier this week the Full Federal Court handed down judgment in LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90 where the Court allowed the taxpayer’s appeal against the decision of the Tribunal to dismiss the application because the applicant failed to comply with a direction of the Tribunal.

The issue in the substantive dispute involved GST and concerned contentions by the Commissioner that the taxpayer carried on the enterprise of property subdivision and sale, was required to be registered as it exceeded the registration threshold and penalties.  The Tribunal found that the applicant had failed “within a reasonable time” to comply with the Tribunal’s directions.

What makes this case particularly unusual is that only days before the hearing of the appeal before the Full Court, the Court drew to the attention of the parties that the Tribunal’s reasons were largely copied from the Commissioner’s submissions without attribution.  This issue was not addressed before the Federal Court on the initial appeal and was not raised in submissions before the Full Court.  The judgment states and approximately 95% of the paragraphs of the reasons were taken from the Commissioner’s written submissions filed in the Tribunal and a further three or four paragraphs of the reasons were taken from the Commissioner’s reply submissions.  While the Full Court did not decide the matter on this point, it noted the following:

Of themselves, these circumstances would give rise to a serious concern that the Tribunal had failed to bring its own mind to bear on the issues before it and thus that it had constructively failed to exercise its jurisdiction.  That jurisdiction in the present circumstances would include whether or not to exercise the discretion conferred on the Tribunal by s 42A(5)(b) of the AAT  Act to dismiss the applications without proceeding to review the Commissioner’s decisions.

The Full Court was also gravely concerned that this matter was not raised with the primary judge and that the case was presented on the basis that the reasons for decision reflected the Tribunal’s own thought processes.

The Full Court allowed the appeal because it did not accept that the Tribunal had taken into account a responsive affidavit filed by the taxpayer which went to compliance with the relevant directions of the Tribunal.  The Court ordered that the matter be remitted to the Tribunal for further consideration.

Analysis of GSTR 2012/2 – financial assistance payments

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On 30 May 2012 the Commissioner published GSTR 2012/2 ‘Goods and services tax: financial assistance payments’, which replaced GSTR 2000/11.  The Ruling outlines the Commissioner’s views on when a financial assistance payment is consideration for a supply made by the recipient of the payment.

The ruling is particularly important for government, community groups and not-for-profit entities as it seeks to outline when the recipients of financial assistance may have a GST liability (which would represent 1/11th of the payment).

My detailed analysis of the ruling can be accessed here.

Tax Court of Canada decision on characterisation of a bundle supplies in the context of financial services

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In Global Cash Access (Canada) Inc v The Queen 2012 TCC 173 the Tax Court of Canada considered the question of characterising a bundle of supplies in the context where at least one of those supplies was an input taxed financial supply.  While the Canadian GST legislation is different, the approach adopted by the Court was similar to what one would expect from the Federal Court here – i.e., looking at the “substance and reality” of the transaction to identity whether there is a single supply or multiple supplies.  What is interesting from the judgment is that the Court was required to undertake this process in the context of financial transactions.

The facts of the case can be shortly stated:

  • Global provided a service to patrons of a Casino whereby they were able to use their credit cards to obtain cash for gaming purposes.  Patrons paid a fee to Global for this service (“Global Fee”) and Global in turn paid a fee to the casinos for facilitating the service (“Casino Fee”).  The question was whether the Casino Fee was consideration for an exempt (input taxed) financial service by the Casinos.
  • Under the arrangement, Global “sells” cheques to patrons which are then exchanged with the Casino for cash.  From the standpoint of patrons, the transaction is similar to a credit card used to purchase goods, save that a fee is charged (in the range of $17 per $100).
  • In a typical case, a transaction is initiated at one of several unmanned “kiosks” belonging to Global which are placed on the floor of the Casino.  Once approved, the transaction is completed at one of the Casino’s cashier cages.  Alternatively, a patron may initiate and complete the transaction at the cashier cage.
  • After the transaction is approved, the cashier prints a cheque payable by Global to the Casino, the cashier negotiates the cheque and provides cash (or gaming chips) to the patron.  The cheques are subsequently deposited by the Casinos into their bank accounts.
  • Settlement of the transactions takes place a few days later.  The card issuing bank remits to Global the amount of the cash advance inclusive of the Global Fee.  Global then settles the cheque deposited by the Casino and pays the Casino Fee separately.

Global submitted that the Casinos made only one supply, constituted by two parts, arranging for the issuance of Global’s cheques and cashing the cheques.  Each part falls within the definition of financial service.  The Revenue contended that the Casinos did not supply any financial services to Global, but rather made a bundle of supplies all of which were excluded from the definition of financial services.

The Court did not agree with either party, but found that Casinos made a bundle of supplies, and part were financial services (being the cashing of the cheques) and part were not. Further, the appropriate apportionment of the consideration applicable to the cashing of the cheques was 25%.

The Court found that there were three main aspects to the bundle of supplies made by the Casinos to Global:

  • allowing kiosks on the premises
  • providing support services at the cashier cages such as transaction procedures and initiating transactions on behalf of patrons; and
  • cashing Global’s cheques

The Court found that each of these activities fell within the definition of “financial services”.  This was because the definition extended to “the arranging for” services what are financial services (somewhat similar to Item 13 of the table under s 40-5(2) of the GST Act).  In doing so, the Court adopted a broad view of the term “arrange for”.

The Court found that the first two activities were excluded from the definition of financial services through specific exclusions which were introduced into the Act in 2010 (on a retroactive basis in response to judicial decisions).  The activity of cashing cheques was held to be a financial service.  This required the Court to consider whether the “bundle of supplies” should be viewed as a single supply or multiple supplies.  In concluding that there were multiple supplies, the Court found as follows:

  • the supplies were not so interdependent that they could be considered a single supply
  • it rejected Global’s submission that there was only one supply because each part of the supply is of no use on its own
  • none of the elements were a minor part of the supply so as to be incidental to the major supply
  • an allocation of the consideration to taxable and exempt supplies was therefore appropriate.  The cashing of cheques was an essential supply, but not the predominant supplies (which where the other activities).  Accordingly, 25 per cent of the consideration should be allocated to the cashing of cheques.

Full Federal Court dismisses taxpayer’s appeal in GST refund case

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Yesterday the Full Federal Court (Gilmour, Perram & Jagot JJ) dismissed the taxpayer’s appeal in MTAA Superannuation Fund (RG Casey) Building Property Pty Ltd v Commissioner of Taxation [2012] FCAFC 89.  The appeal was against the decision of the Tribunal (Downes P and SM O’Loughlin) which can be found at [2011] AATA 769.

The judgment discloses that following the decisions of the Full Federal Court in Commissioner of Taxation v DB Rreef Funds Management Ltd [2006] FCAFC 89 and Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115, MTAA claimed a refund of GST paid in respect of a lease between a partnership (constituted by MTAA and one other) and the Department of Foreign Affairs and Trade.

The central question in the case was whether the lease was “GST-free” pursuant to s 13 of the GST Transition Act.  The Court agreed with the Tribunal that s 13(1) of the Transition Act did not apply because, as the parties agreed to increase the rent by 10 percent on account of GST, the supplies made under the lease were not “satisfactorily identified” in the lease as it was prior to the date of royal assent.  Further, the Court found that it was open to the Tribunal to find that there was a “review opportunity” under the lease for the purposes of s 13(5) in circumstances where approximately 97 per cent of the whole consideration payable under the lease was reviewable.

A residual question agitated before the Tribunal was whether, if the lease was GST-free, the Commissioner was entitled to rely on the discretion in s 105-65 of Schedule 1 to the Taxation Administration Act.  The Court did not consider this question as no discretion had actually been exercised by the Commissioner.

Treasury releases Exposure Draft Regulation to allow credit unions retain access to reduced input tax credits

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In the 2012-13 Budget, the Government announced that it would amend the GST law to ensure that credit unions do not lose access to a reduced input tax credit for credit union services when they rebrand as banks but otherwise do not change their corporate structure.

An exposure draft regulation has been released to implement the announced change.  The draft regulation proposes to expand the definition of ‘credit union’ to also include APRA-listed banks that were APRA-listed credit unions as at 1 July 2011 and have not changed their corporate structure.
The relevant documents can be accessed here:

Submissions are due by 27 June 2012.