Author Archives: chrissievers

Commissioner issues two ATO IDs on GST issues – going concerns and Division 81

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Today the Commissioner issued two ATO IDs on GST issues, one relating to supplies sold independently from supplies of  going concerns and the other relating to Division 81

ATO ID 2012/54 – Supplies of things being used in an enterprise that are not necessary for the continued operation of that enterprise, and which do not form part of the ‘supply of a going concern’.

The Commissioner considers that an entity can supply something that is being utilised in its enterprise, which is not necessary for the continued operation of the enterprise, independently of the supply of the going concern, notwithstanding that both supplies are to the same recipient.

ATO ID 2012/55 – Goods and services tax and Division 81: registration of a community plan, deposited plan or strata plan

The Commissioner considers that the payment to an Australian government agency for a pre-examination of a community plan, deposited plan or strata plan is the provision of consideration under s 81-10(2) because it is a fee that is prescribed by paragraph 81-10.01(e) of the GST Regulations.

Tribunal finds applicant liable to pay GST in respect of property seminars

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Yesterday the Tribunal handed down its decision in Climo and Commissioner of Taxation [2012] AATA 350. The Tribunal found that the applicant was liable to pay GST in respect of consideration received for the supply of the introduction of would-be purchasers of the services of a company operated by the applicant’s wife.  The applicant was unable to produce sufficient evidence to substantiate his claims that he carried out his activities without any reward but purely to assist companies associated with his wife.

The applicant presented at “seminars” for members of the public who wished to invest in property.  The applicant would then introduce those investors to companies associated with the applicant’s wife and those companies would be engaged to construct property on land purchased by the investors.  The applicant engaged people to assist him in his activities and rented rooms to hold the seminars.  There was no documentary evidence to support the applicant’s assertion that he was reimbursed for this expenditure.  Also, the Tribunal was not satisfied that the payments made to the applicant by the companies did not pass to the applicant rather than, as maintained by the applicant, passed to companies associated with his wife.

The decision is an example of the difficulties faced by taxpayers, in the absence of documentary evidence, in discharging the onus of showing that a GST assessment is excessive.

GST Private Rulings May 2012 and International Cases update

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In May 2012 the Commissioner published over 30 private rulings on the Register dealing with GST issues.  A full listing of the rulings can be accessed here and through the menu on this site.

This month I focus on a private ruling which finds that the sale of farming land to a property developer will be GST-free pursuant to s 38-480 of the GST Act, notwithstanding that the purchaser’s intention was to develop the land.

Private Ruling No.1012128336865 – GST and the sale of farm land

The facts of the application can be shortly stated:

  • the vendor entered into a contract of sale to sell its farming property to the purchaser.  The vendor acquired the land prior to 1 July 2000 and carried on a farming business for the land five years and will continue to carry on the farming business until completion of the sale.
  • the purchaser is a property developer and the contract of sale is dependent upon Council’s approval of the purchaser’s subdivision plans.  Completion of the sale is 14 days after the plan of subdivision is registered
  • the purchaser is required under the contract of sale to grant to the vendors a licence to allow the vendors to continue to occupy the property after completion of the sale and to continue their farming business.  Either party may terminate (for any reason) the licence by giving 60 days notice in writing.

The private ruling finds that the sale will be GST-free because “the recipient of the supply intends that a farming business be carried on, on the land”.  The ruling found that the licence agreement indicates the purchaser’s intention to continue the farming business (it not being necessary that the purchaser carry on the farming business themselves).

The ruling is interesting because it accepts that it is sufficient that the purchaser’s intention to carry on farming need only be one of a number of concurrent intentions, and arguably a secondary intention (to the purchaser’s main intention of developing the property).  There is also no timing requirement in s 38-480. Accordingly, taken to its extreme, it would arguably be sufficient that the vendor have a licence agreement to carry on farming for one day after settlement. Of course, the anti-avoidance provisions in Division 165 may have a role to play in such circumstances.  Nevertheless, the stamp duty savings to the purchaser under this arrangement would likely be significant (as well as potential reductions in finance costs of the GST component of the price).

The ruling does note the potential scope of the adjustment provisions in Division 129 and Division 135 if the purchaser ultimately uses the land for input taxed purposes (i.e., residential leases).  However, if the land is developed for sale, those adjustment provisions should not arise.

International Cases Update – May 2012

In May, the following decisions relating to GST/VAT were published in New Zealand, the UK and Canada.

New Zealand

Court of Appeal

United Kingdom

Upper Tax Tribunal

  • Benridge Care Homes Ltd v HMRC [2012] UKUT 132 – VAT returns lodged claiming refund of input tax but understating output tax – whether open to Revenue to reduce the input tax to nil in the returns
  • Matthew Davies Special Occasions 2XL Limos v HMRC [2012] UKUT 130 – Value Added Tax – whether transport supplies rendered with stretched limousines, originally designed to carry 10 people, but adapted to carry only 9 people, were zero-rated – Appeal dismissed
  • Vehicle Control Services v HMRC [2012] UKUT 130b – VALUE ADDED TAX – supply of parking control services – whether parking charges collected and retained by operator were consideration for a supply – whether outside the scope of VAT as damages for trespass or damages for breach of a contract between the operator and the motorist – whether additional consideration payable by landowner for provision of parking control services – appeal dismissed
  • Wrag Barn Golf and Country Club v HMRC [2012] UKUT – VALUE ADDED TAX — option to tax land — whether option survived partnership changes — whether one partnership or two — First-tier Tribunal apparently decided only one — whether tribunal’s findings of fact supported by evidence — unclear — appeal remitted to First-tier Tribunal for re-hearing

Tax Tribunal

  • Martisan Developments Ltd v Revenue & Customs [2012] UKFTT 283 – VAT;  joint venture;  written agreement;  whether written agreement truly reflected arrangements between individuals and companies they controlled;  acquisition and sale of development land;  supply of services;  identification of supplier;  nature of services;  whether activities of joint venturers constituted supply of services;  contribution to capital of joint venture; consideration;  nature of consideration; whether distribution of one half share of net profits amounted to consideration for supply of services; no;  appeal allowed.
  • Norwich Airport Ltd v Revenue & Customs [2012] UKFTT 277 – VAT – fee paid by passengers to appellant – whether consideration for a supply – yes – whether supply zero rated as “making of arrangements” for the supply of transport of passengers in an aircraft designed to carry at least 10 passengers – no – whether exempt as a supply to meet the direct needs of aircraft or its cargo – no – appeal dismissed
Canada
Tax Court of Canada
  • Global Cash Access (Canada) Inc v The Queen 2012 TCC 173 – whether fees paid by patrons to taxpayer for “cash access services” (who in turn pays a fee to the casinos for facilitating the service) are consideration for an exempt financial service provided by the casinos – whether fees consideration for single supply of financial service or separate taxable supply

Qantas High Court appeal heard this week – transcript now available

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On Monday 4 June and Tuesday 5 June the High Court heard the Commissioner’s appeal in the Qantas case, arguably the most important GST case to date.  The appeal was heard in Brisbane by a bench of 5 Justices (Gummow, Hayne, Heydon, Kiefel and Bell JJ). Judgment was reserved.

The transcript can be accessed here: Day 1  Day 2

The Commissioner appealed against the decision of the Full Federal Court in Qantas Airways Limited v Commissioner of Taxation [2011] FCAFC 113 where the Full Court unanimously allowed Qantas’ appeal against the decision of the Tribunal ([2010] AATA 977) and found that GST was not payable in respect of fares paid by passengers where those passengers did not show for the flight – because there was no taxable supply. My post on that decision can be accessed here.

The submissions filed by the parties are available on the High Court website and can be accessed here:

Commissioner issues GST Determination and four draft Determinations

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Yesterday the Commissioner issued a final GST Determination on retail foreign exchange transactions and four draft GST Determinations on telecommunications supplies.

In GSTD 2012/5 Goods and Services tax: are acquisitions related to an entity’s retail foreign currency exchange transactions with customers in Australia made solely for a creditable purpose under section 11-5 of the GST Act, the Commissioner has retreated from his draft position that suppliers of currency on “outbound transactions” would only be entitled to partial input tax credits.

The Determination provides guidance on the creditable purpose of acquisitions relating to currency exchange transactions, in light of the decision of the High Court in Travelex Ltd v Commissioner of Taxation [2010] HCA 33.

The Determination distinguishes between “outbound transactions” (where the the currency is intended for use outside Australia) and “inbound transactions” (where the currency is intended for use in Australia).  For both transactions, the entity is regarding has having made two supplies, being currency in exchange for currency (FX in exchange for AUD – outbound; AUD in exchange for FX – inbound) and also an input taxed financial supply (an acquisition supply) of the interest in the AUD and FX respectively.

The treatment of each transaction is outlined as follows:

Outbound transactions

4. The entity’s supply of FX is a financial supply, and is also a supply that is made in relation to rights.  Hence, the supply is GST-free where the customer’s intention is to use the FX outside Australia.

5. When the entity supplies FX in exchange for AUD, it also makes an input taxed financial supply (an acquisition-supply) of the interest in the AUD.

6. To the extent that acquisitions made by the entity relate to outbound transactions, they relate solely to the GST-free supply of the FX.  Consequently, to this extent, these acquisitions are made solely for a creditable purpose.

Inbound transactions

7. The entity’s supply of AUD is an input taxed financial supply.  It is also a supply made in relation to rights, but to the extent that the rights are not intended for use outside Australia, it will not have the additional character of a GST-free supply.

8. When the entity supplies AUD in exchange for FX, it also makes a financial supply (an acquisition supply) of the interest in the FX.

9. To the extent that acquisitions made by the entity relate to inbound transactions, they relate solely to the input taxed supply of the AUD.  Consequently these acquisitions are not made for a creditable purpose.

The Determination was issued in draft as GSTD 2011/D5 and my post on that draft can be accessed here.  Importantly, the Commissioner has retreated from his draft view that for outbound transactions, acquisitions by the supplier relating to those transactions “relate equally” to the GST-free supply of the foreign currency and input taxed “acquisition supply” of the interest the AUD.  The effect of this view was that suppliers’ input tax recovery on foreign exchange transactions of the type considered in Travelex would have been halved.  Those suppliers will now get a full recovery of credits.

Draft determinations on telecommunication supplies

The Commissioner has issued four draft Determinations involving telecommunication supplies:

Commissioner issues final GST ruling on financial assistance payments

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Today the Commissioner issued GSTR 2012/2 – Goods and services tax: financial assistance payments.  The Ruling replaces GSTR 2000/11 Goods and Services Tax: grants of financial assistance.

The Ruling was previously issued in draft as GSTR 2011/D4. For my analysis of the draft ruling, click here.

In my analysis of the draft Ruling, I considered the following issues to be noteworthy:

  • the draft ruling helpfully seeks to deal with matters not directly covered by GSTR 2000/11, such as sponsorship and tripartite agreements;
  • the draft ruling appears to take a narrower view on what constitutes a taxable supply for a financial assistance payment than in GSTR 2000/11; and
  • the draft ruling sets out detailed transitional rules which appear to envisage the potential for refund claims for those taxpayers who have relied on the broader scope of taxable supply in GSTR 2000/11.

A more detailed analysis of the Ruling will follow next week, as at present preparation for the High Court appeal in the Qantas case (which is being heard on Monday 4 June 2012 in Brisbane) is occupying my time.  However, based on a preliminary review of the Ruling it appears that the comments in my analysis of the draft Ruling remain relevant and there is scope to seek refunds of GST, which seems to be acknowledged by the Commissioner, given paragraphs 88-91 of the Ruling which state as follows:

88. As this final ruling can apply before its date of issue, where there is a discrepancy between GSTR 2000/11 and this Ruling, taxpayers can choose to apply this Ruling.

89. Where entities have relied on GSTR 2000/11 to treat a supply as a taxable supply before the date of issue of this Ruling and the supply is not a taxable supply under the views expressed in this Ruling, they may choose to seek a refund for past overpaid GST if it is within relevant time limits and the payer is first refunded the overpaid amount.

90. Where entities have relied on GSTR 2000/11 to determine that they did not make a taxable supply and the supply is a taxable supply under the views expressed in this Ruling, they may choose to pay GST on that supply.  If GST is paid on the supply the payer may be entitled to an input tax credit.

91. Where, entities rely or have relied on this Ruling or GSTR 2000/11 to determine that there is no GST payable on that supply, there is no input tax credit available to the entity making the payment.

UK VAT Tribunal finds VAT payable on passenger “levy” imposed by airport operator

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In Norwich Airport Ltd v Revenue & Customs [2012] UKFTT 277 the Tribunal found that VAT was payable by an airport operator in respect of a levy imposed on departing passengers.  The purpose of the levy was to raise funds to enable the airport operator to carry out improvements and enhancements to its infrastructure and passenger facilities at the airport. While the Tribunal found that there was not a relevant nexus between the levy and the improvement works, there was a relevant nexus between the levy and the ability to pass through the gates (permitting access) and to proceed through the security check and thereafter be in a position to take the flight. As permitting access to land is a supply, that supply was subject to VAT.

The case provides an analysis of the “nexus” rules in the UK, which require a “direct” nexus between supply and consideration.  In finding that there was not a sufficient nexus between the levy and the improvements to the airport, the Tribunal stated:

There was no direct link because the benefit of the improvement words would be for airlines and passengers generally and the payment of the levy by each individual passenger had no direct relationship to the level of benefit, if any, he might receive.  A person could pay the levy and never use the airport again and therefore entirely fail to benefit from any of the improvements. As a matter of English law, there was not even a contract for the improvement works because the explanation of what the ADF would be used for was no more than a statement of intent by NAL and far to vague to amount to an enforceable contract with the passengers paying the ADF.

The above statement has some similarities to the Commissioner’s approach  to Funding Arrangements in GSTR 2011/D4, where the existence of a “sufficient connection” between the payment and some action to be taken by the recipient would appear to depend on whether the recipient enters into an obligation to take that action (see example 3 at paras 28-30).

The case also provides an illustration of how Courts look at the actual legal relationship between the parties, rather than the labels put on transactions.  The airport operator argued that the payment was a fund raising levy, equivalent to the imposition of a levy by a statutory body. The Tribunal noted that the airport operator did not have any statutory revenue raising powers and posed the question “So why did passengers pay the levy?”.  In answering that question, the Tribunal found that the passengers did not pay a levy, they bought a ticket which entitled them to pass through the automatic gates and ultimately on their journey.

UK Upper Tribunal hands down decision on VAT and penalty parking charges – “triangulation” of obligations under a tripartite arrangement

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Earlier this month the UK Upper Taxation Tribunal handed down its decision in Vehicle Control Services v The Commissioner for Her Majesty’s Revenue & Customs [2012] UKUT 130. The Upper Tribunal dismissed the taxpayer’s appeal from the Tax Tribunal and found that the penalty parking charges were not damages in trespass and, as there was no contract between the parking operator and the motorist, the penalty charges could not constitute damages for breach of contract.  However, the Upper Tribunal found that the parking charges were received by the taxpayer as consideration for the parking control services provided by the taxpayer to the landowner.

The case provides an interesting analysis of a tripartite arrangement and how, as found by the Upper Tribunal, two sets of obligations are said to be “triangulated” into a single supply.

Facts

The facts of the case can be simply stated:

  • The taxpayer entered into contracts with landowners to provide “parking control services” to the landowners.  Under those agreements, the taxpayer’s obligations included erecting warning signs, issuing parking permits for authorised vehicles, inspecting the car parks and taking enforcement measures which included the issue of parking charges, vehicle immobilisation and towing, with consequent fees for release.  The taxpayer was to collect and could retain all parking enforcement charges.
  • In return for the services, the landowner agreed to pay a registration fee (on signing the contract) and an annual fee for each of the warning signs, plus ensure that all vehicles authorised to use the car park clearly displayed the permits on their windscreens
  • The warning signs set out the requirements for valid permits or tickets to be displayed, various other rules and charges that were imposed for failure to comply with the rules – the signs also stated “You are entering into an a contractual agreement.  Do not park in this area unless you fully understand and agree to the above contractual terms”.
  • If a car was parked in contravention to the rules, the taxpayer could issue a “parking charge notice” which was placed on the windscreen of the car.  The notice was enforced by the taxpayer who retained the charges.
  • The issue was whether the taxpayer was required to account for VAT on those charges.

The trespass issue

The First-tier Tribunal concluded that the charges were not damages for trespass because the taxpayers had not been given the right to occupy the land.  Rather, the taxpayer had been given a licence to enter the land for the purposes of the agreement but had not been given any rights of possession.  Accordingly, the taxpayer could not bring an action for trespass as principal but could only do so as agent for the client.  The Upper Tribunal agreed.

The contract issue

The First-tier Tribunal found that the arrangements constituted a contract between the taxpayer and the motorise, but that the parking charges were not damages for breach of contract, but rather were paid as a condition of the contract and therefore constituted consideration for a supply of services.

On appeal, the taxpayer contended that the Tribunal was correct to find that there was a contract wt, but that it should have found that the charges were outside the scope of VAT as they were either a penalty or damages.

Interestingly, both parties agreed that, if there had been a contract between the taxpayer and the motorist, the parking charges would not have been payment for a supply made under the contract – reference was made to a decision of the VAT Tribunal, Bristol City Council (No 17665, 15 May 2002) in which, on the facts of that case, a contract between the Council and motorists entering a Pay and Display car park had been held to have been created, but that the excess charges were not consideration for the supply of parking services under that contract – the excess charges did not arise until the right to park had been lost.  One can see similarities with that approach in the judgment of Emmett J in American Express International Inc v Commissioner of Taxation [2009] FCA 683  (at [52]-[58]) where his Honour found that “late payment fees” on credit cards were not “in connection with” the provision, acquisition or disposition of the credit – but were payable by reason of a novas actus interveniens, namely the card holder’s breach of the credit card terms and conditions.

The Upper Tribunal disagreed with the First-tier Tribunal and found that there was no contract between the taxpayer and the motorist.  This was because the taxpayer was not in a position, by virtue of its limited licence and notwithstanding the words in the warning statements about the motorists entering into a contractual agreement, to make any offer of a right to a park.  Accordingly, the penalty charges could not constitute damages for breach of such contract.

The Upper Tribunal then found that the only relevant contract was between the taxpayer and the landowner, and, in finding that the parking charges were consideration to the taxpayer for providing parking control services to the landowner, the Upper Tribunal said as follows:

…there are two sets of obligations that are being “triangulated”.  The first set of obligations is between the client (acting through its agent, VCS) and the motorist, and the second is between VCS and the client.

The legal analysis is that VCS collects the various parking charges as agent for the client, which represents damages for trespass, or for breach of a contract between the landowner and the motorist.  Such payments are outside the scope of VAT.

By allowing VCS to collect and retain the charges, the client was giving consideration, or further consideration, to VCS for its parking control services under the contract.  That was consideration for the standard-rated supply by VCS to the client.

As far as I am aware, the concept of “triangulation” of obligations is yet to find its way into the Australian GST system.  A search of austlii and the ATO legal database registered no hits.

NZ Supreme Court grants leave to appeal in Stiassny case, plus hands down decision in de-registration case

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On 8 May 2012 the NZ Supreme Court granted leave to the taxpayer to appeal the decision of the Court of Appeal in Commissioner of Inland Revenue v Stiassny [2012] NZCA 93 where the NZ Court of Appeal allowed the appeal by the Commissioner and found that the claim for a refund of GST by the receivers appointed to the partners in a GST-registered partnership should be struck out.  To see my post on the decision of the Court of Appeal, click here.

In a matter which has implications for restitution and insolvency law, as well as GST, the approved grounds are appeal are:

  • whether the GST payment was a “debtor-initiated payment” in terms of s 95 of the Personal Properties Securities Act 1999 so as to confer priority to the Commissioner over any claim to those moneys by any respondent;
  • whether any of the appellants can recover the amount of GST so paid from the Commissioner on the basis that it was paid by the receivers under a mistaken belief that they were personally liable to pay it or on any other basis.

In further news, the Supreme Court today handed down its judgment in Lewis G H Thompson v Commissioner of Inland Revenue [2012] NZSC 36 upholding the decision of the Commissioner to re-register a taxpayer who had de-registered for GST before disposing of real property.  The case provides an interesting insight into the “turnover threshold” provisions in the NZ legislation, which are focused solely on the future operations of the enterprise and include the disposal of capital items in the test.  This can be compared to the provisions in Division 188 of the GST Act, which have both a “pre” and “post” test and exclude the disposal of capital items from the “post” test.

Commissioner publishes ruling on administrative penalties and voluntary disclosures

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Yesterday the Commissioner published Miscellaneous Taxation Ruling MT 2012/3 Administrative penalties: voluntary disclosures, which outlines the Commissioner’s interpretation of s 284-225 or Schedule 1 to the TAA.  This Ruling relates to all taxes, including GST, and provides an important resource for taxpayers and their advisers who form the view that GST may have been underpaid.  The ruling was issued in draft form as MT 2011/D3.

The Ruling outlines the circumstances where the penalties otherwise imposed under Schedule 1 to the TAA will be:

  • reduced to nil – where the entity voluntarily tells the Commissioner before being told by the Commissioner that an examination of its affairs is to be conducted (or before the day the Commissioner, in a public statement, requests voluntary disclosures with respect to the matter) and where the shortfall amount is less than $1,000 or there is no shortfall amount;
  • reduced by 80% – where the entity voluntarily tells the Commissioner before being told by the Commissioner that an examination of its affairs is to be conducted (or before the day the Commissioner, in a public statement, requests voluntary disclosures with respect to the matter)
  • reduced by 20% – where an entity voluntarily tells the Comissioner after being told by the Commissioner that an examination of its affairs is to be conducted.

The Ruling also outlines the Commissioner’s views on the a number concepts which are important concepts in s 284-255 of Schedule 1 to the TAA, including

  • what constitutes an ‘examination…of your affairs’;
  • when an entity will be taken to have been told that an examination is to be conducted of its affairs;
  • the words ‘voluntarily tells’;
  • the principles regarding the making of a voluntary disclosure.