Author Archives: chrissievers

New GST Ruling and Determination published today plus international cases update for March 2012

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Today the Commissioner issued his first GST ruling for the year, GSTR 2012/1 – Goods and services tax: loyalty programs and a GST Determination, GSTD 2012/4 – Goods and services tax: what is ‘hospital treatment’ for the purposes of section 38-20 of the GST Act.

The GST Ruling considers the GST implications of certain loyalty programs, which are particularly complex.  Paragraph 2 of the Ruling states that its particular focus is on the following issues:

  • whether it is necessary to apportion some consideration to the supply of points, when a member pays the consideration to purchase goods or services and as a consequence has points allocated to them;
  • whether a payment from a program partner to the loyalty program operator is consideration for a supply;
  • to the extent that such a payment is consideration for a supply, how is that supply characterised? and the implications of such characterisation in determining whether the supply is to any extent GST free or input taxed.
  • whether the provision of a reward to the member (upon redemption of points by them) is a supply to the member for consideration.
  • whether any payments made by the loyalty program to a redemption partner is consideration for  a supply made by the redemption partner to the loyalty program operator, or is instead consideration for the supply of the reward made to the member; and
  • whether the redemption partner makes a supply to the program member, even if it also makes a supply to the loyalty program operator.

INTERNATIONAL CASES UPDATE – MARCH 2012

The following cases were handed down in the UK (some of the first tier tribunal cases were only published in March), by the ECJ and the NZ Court of Appeal.

New Zealand Court of Appeal

United Kingdom

High Court

Upper Tax Tribunal
  • HMRC v Pendragon Plc [2012] UKUT B1 – VALUE ADDED TAX — margin scheme for second-hand goods — arrangement by which motor dealer raised finance and became able to sell demonstrator cars within margin scheme — whether abusive — yes — appeal allowed

First Tier Tribunal

  • Chan v Revenue & Customs [2012] UKFTT 155 – VAT – Regulation 34 VAT Regulations 1995 – whether Appellant could recover VAT deliberately overpaid in earlier period by adjusting subsequent returns without making voluntary disclosure – no – HMRC’s  assessment also subject to time limits under Schedule 39 Finance Act 2008 – overpaid tax not recoverable
  • El Flood & Sons Partnership v Revenue & Customs [2012] UKFTT 147 – Value Added Tax  –  whether work in replacing a damaged plasterboard ceiling with a lath and plaster ceiling in a Grade II listed building, the change of fabric resulting from insistence by the planning authority, qualified as an alteration to the fabric of a listed building, and thus to be zero-rated  –  Appeal allowed
  • Gosling Leisure Ltd v Revenue & Customs [2012] UKFTT (TC) – Value Added Tax  –  Whether capital costs, incurred by the Appellant, were directly and immediately related to supplies made by the Appellant, so as to rank as deductible input tax  –  how supplies under a licence, rather than a lease or sub-lease were treated for VAT purposes  –  how to deal with a relatively minor category of supplies made by the Appellant to its parent company  –  decision in principle  –  Appeal allowed
  • Macaw Properties Ltd v Revenue & Customs [2012] UKFTT 170 (TC) – VALUE ADDED TAX – whether tax on supplies was input tax on the basis that it was tax on goods or services to be used for the purpose of a business to be carried on by the Appellant – whether (and when) the Appellant had formed the intention of carrying on a business – Rompelman v Minister van Financïen considered and applied – declared intention by the Appellant that it had formed the intention on the acquisition of an historic estate – whether (and from when) there was objective evidence to support such declared intention – evidence considered – appeal allowed in part
  • Majid v Revenue & Customs [2012[ UKFTT 144 – VAT – registration – whether Appellant liable to register in respect of earnings from part-time judicial appointment in absence of earnings from practice as barrister – classification previously for income tax purposes as self-employed – EC Directive 2006 arts 9, 10 – held, not a taxable person so not liable to register – appeal allowed

European Court of Justice

GST Private Rulings published in March 2012

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In March 2012 the ATO published over 70 private rulings dealing with GST issues.  The full listing of the private rulings can be accessed here.

The highlights of the published rulings discussed below involve the perennial issue of GST refunds and the Commissioner’s discretion in s 105-65.

GST refunds

Ruling No.1012063484502

This ruling raises a central issue with the Commissioner’s current view on the application of his discretion in s 105-65 of Schedule 1 to the TAA. In this ruling, the Commissioner accepted that the applicant (a corporate advisory entity) had overpaid GST in respect of services provided to a client, who was not registered nor required to be registered for GST.  The issue was that the applicant had not actually reimbursed the overpaid GST to the client, but rather had provided a written undertaking to do so, without delay, as soon as the refund was received.  The applicant had not reimbursed the client because it was felt that the ATO may not pay the refund (thus leaving the applicant out of pocket) and also, there was a risk that the client may subsequently register for GST, thus giving the ATO a further ground not to pay the refund.

The ATO’s ruling was that no refund would be paid, because the amount of the overpaid GST had not been reimbursed to the recipient.

One might think this was a harsh result. Given the uncertainty around the Commissioner paying refunds of overpaid GST, it is not be surprising that taxpayers may seek to defer the actual reimbursement of customers the overpaid GST until some sort of comfort is provided by the ATO (e.g., a positive private ruling).

It also raises the interesting question of whether the word “reimbursement” in s 105-65 requires the actual payment of money, or simply the entry into a legal and binding obligation to do so.

Ruling No.102071100659

This is another private ruling relating to GST refunds and this ruling arguably provides a better mechanism for the Commissioner to deal with the question of whether an applicant must first reimburse the recipient for the overpaid GST.  In this case, GST was paid and recovered from the recipient, but the recipient’s claim for input tax credits was subsequently disallowed and the BAS was amended. The applicant informed the ATO that it would refund the GST to the recipient.

The private ruling deals with the reimbursement issue in the following manner:

As the other party (a registered recipient) is unable to claim the relevant ITC, the Commissioner would pay a refund to you provided that you first reimbursed the other party.  The mechanism of how to reimburse the other party (cash remittance, book entries etc) can be arranged between you and the other party as long as the reimbursement is to be completed prior to the refund claim as required under paragraph 105-65(1)(c) and paragraph 115 of MT 2010/1.

One would think that a similar paragraph could have dealt with the issue in the first ruling considered above, rather than the ruling being simply denied.

Ruling No.1012077683062

This private ruling is of interest because it provides an example of where the ATO accepts that the refund should be paid, even though there has been no reimbursement of the overpaid GST to the recipient.

Over 5 years, the applicant’s software treated supplies of its product as taxable supplies, which resulted in transactions being documented as taxable supplies even though no GST was included in the price.  The mistakes were not detected but were having an adverse effect on the profitability of the business.

The ruling states that the Commissioner will pay the refunds, even though the taxpayer had not reimbursed the overpaid GST to the recipients. The basis of the decision was that it was fair and reasonable to refund the overpaid GST, because the overpayment was due to a mistake  in the accounting software. In my experience, this is one of the few circumstances where the Commissioner has accepted that the taxpayer has not (at least indirectly) passed on the cost of the overpaid GST.

New paper on GST and “enterprise” in the context of property subdivision and development

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On 31 March 2012 a paper of mine was presented at a Property Law Conference titled “GST and “Enterprise” in the context of the sub-division and sale of real property”.  The focus of the paper is the ATO’s views on what constitutes an “enterprise” and when an entity is required to “register” for GST, through looking at the ATO’s public rulings and at some recent private rulings published by the ATO.

The paper can be accessed here and under the “My Articles” menu of the site.

ATO publishes Administrative Treatment of amendments to GST Act re new residential premises

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On 21 March 2011 the legislation amending the GST Act to ensure that sales of residential premises under “developmental lease arrangements” received Royal Assent.  On 29 March the ATO published its proposed administrative treatment of the amendments.

The purpose of the amendments is stated on the ATO website to be:

The government has amended the goods and services tax (GST) law to ensure that sales by developers of residential premises constructed under certain arrangements, sometimes called development lease arrangements, will be taxable supplies of new residential premises. This will be the case even though, under the terms of the arrangement, there may have been an earlier ‘wholesale supply’ of the newly built premises to the developer.The amendments also clarify that the subdivision or strata-titling of new residential premises, on its own, does not mean that the premises are no longer new residential premises. Similarly the subdivision or strata-titling of existing residential premises, on its own, does not cause the premises to become new residential premises.Other than the amendment to subsection 40-75(1) of the A New Tax System (Goods and Services Tax) Act 1999 which applies from 21 March 2012, the changes are retrospective from 27 January 2011 subject to certain specific transitional provisions.
The ATO’s administrative treatment is stated to be as follows:
From 21 March 2012, the day of royal assent, each taxpayer will need to review their positions and do one of the following:

  • revise their impacted activity statements lodged since 27 January 2011 (the date of effect of the amendments) if they did not anticipate the changes to the law correctly
  • revise their impacted activity statement lodged since 27 January 2011 (the date of effect of the amendments) if they lodged it in accordance with the law as it was before 21 March 2012
  • do nothing if they anticipated the changes correctly and lodged their activity statements in accordance with the amendments.

Taxpayers who revise their activity statements within 28 days of 21 March 2012 (that is, before 19 April 2012) will not be liable for any penalty or general interest charge (GIC) that may result from the revision. After this time, the normal ATO administrative treatment of penalties and GIC will apply.
To access my page outlining the legislation, its history and background – here.

Two ATO IDs published on Division 81 of the GST Act

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Yesterday the ATO published two ATO IDs dealing with the transition from the former Division 81 to the current Division 81 of the GST Act in the context of “daily hearing fees” payable to a State Tribunal.

ATO ID 2012/21 – GST and Division 81 of the GST Act: fee imposed before 1 July 2012 that was specified in the final Determination

In this ID the ATO confirmed that the payment of a fee, imposed before 1 July 2012 and specified in the final Determination made under former Division 81 of the GST Act (now replaced by a new Division 81), was excluded from being the provision of consideration under the grandfathered former subsection 81-5(2) of the GST Act.  The fee in issue was a “daily hearing fee” payable to a Tribunal established under a State Act of Parliament.

ATO ID 2012/22 – GST and Division 81 of the the GST Act: judicial system daily hearing fee imposed after 30 June 2012

In this ID the ATO confirmed that the payment of a “daily hearing fee” to a State Tribunal, imposed after 30 June 2012, does not meet the requirements of a fee that satisfies s 81-10(4) of the GST Act (the new Division 81) and is accordingly consideration for a taxable supply.

Commissioner issues PSLA on GST implications of dividends paid to creditors

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Today the Commissioner issued Practice Statement Law Administration PSLA 2012/1 (GA) “How to calculate input tax credits and bad debt adjustments when a dividend is paid to creditors”

The purpose of the statement is to assist representatives of incapacitated entities in calculating input tax credits and bad debt adjustments when a dividend is paid to creditors.  The statement does not deal with the GST consequences for creditors who receive dividends.

Broadly, the statement deals with the following calculations:

  • a bad debt increasing adjustment arising from a final dividend payment;
  • a bad debt decreasing adjustment arising from an additional dividend payment; and
  • an input tax credit entitlement arising from the payment of a first and final dividend.

The formulas in the statement were previously contained in GSTB 2003/1, which referred to Division 147 (which was repealed and replaced by Division 58).  The formulas in this practice statement remain unchanged, but they have been revised to reflect the provisions of Division 58.

 

NZ Court of Appeal strikes-out claim by receivers for refund of GST

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In Commissioner of Inland Revenue v Stiassny [2012] NZCA 93 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.  The decision of the High Court appealed from can be found here – Stiassney v Commissioner of Inland Revenue [2010] NZHC 1935

The case is interesting as it considers the question of whether the receivers of the partners (who were not appointed as receiver to the partnership) were personally liable to pay GST on the sale of partnership property. A similar question may arise under s 58 of the GST Act.  Secondly, the case discusses the scope for a claim based on restitution.

The Facts

  • The respondents traded in a forestry partnership.  Funding for the partnership was provided by a syndicate of banks for which security was held over the assets of the partnership and the individual assets of the partners.
  • Receivers were appointed in respect of the assets secured and while the partners were each placed in receivership, the partnership was not.  However, the partners appointed the receivers to the management board of the partnership and the receivers effectively controlled the management of the partnership
  • The partnership entered into an agreement where it agreed to sell its assets for USD$621m plus GST of NZ$127.5m.  The partners, in their capacity as partners of the partnership, were names as vendors in the agreement.  As happens in a number of these types of cases, the proceeds of the sale were insufficient to pay in full the secured amounts and the GST payable to the Commissioner on the sale.
  • The partners and the lenders entered into a deed whereby funds sufficient pay the GST debt would be placed into the partnership’s bank account
  • The sale was completed and the GST was paid because the receivers were of the view that they were personally liable to pay the GST
  • The receivers brought proceedings in the High Court, in which it was asserted that, contrary to their earlier view, they were not personally liable to pay the GST and that the GST was paid under a mistake of law.
  • The Commissioner sought to strike out the proceedings
  • In dismissing the strike out application, the High Court found that the receivers were not personally liable to pay the GST and that the issue of mistaken payment should go to trial (also at issue were various “priority” issues with regards to the respective claims of the Commissioner and the creditors-that discussion is beyond the scope of this post).

Were the receivers personally liable for the GST

It was clear that the sale of assets was a taxable supply. The issue of whether the receivers were liable depended upon consideration of the NZ provisions dealing with the registration of entities such as partnerships and also the “incapacitated entity” provisions (ironically found in Section 58, which is the same number as the equivalent provisions in our GST Act).  The Court of Appeal agreed with the High Court that the receivers were not personally liable for the GST. When regard is had to the provisions of Division 58 in the GST Act, it would appear likely that the same result would apply here.

With respect to partnerships, like the Australian provisions, it is the partnership that is carrying on the enterprise and is to be registered for GST.  The members of the partnership may not be registered for GST.  However, the statutory provisions ensure that partners effectively have a secondary liability for the obligations of the partnership – this reflects the common law position.

The issue was whether the receivers were personally liable in circumstances where the partnership was not placed into receivership, as the partnership was not an “incapacitated person” within the meaning of s 58.  The Commissioner unsuccessfully sought to run a number of arguments which appear similar to those unsuccessfully run by our Commissioner in Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] FCA 1886 where Logan J found that Division 147 of the GST Act simply did not work.  The reasons of the Court of Appeal in rejecting these arguments also shows that the concept of “purposive construction” of statutes such as the GST Act can only go so far.  The arguments were:

  • the combined relevant purposes of the provisions were to achieve administrative efficiency and to ensure that a receiver pays the registered person’s GST liability during a receivership, and the finding of the High Court was inconsistent with that purpose.  The Court rejected this argument on the basis that it would require the notional insertion of words into the legislation which are not there.  Also, the approach would directly conflict with the provision which provided that partners shall not be registered persons – the Commissioner’s approach would be to effectively make partners registered persons if they went into receivership
  • the receivers should be treated as “members” of the partnership on the basis that they participated in the taxable activities of the partnership.  It was submitted that it would be anomalous if the receivers would become personally liable if they had been appointed in respect of the assets of the partnership but were not liable, where they were appointed only in respect of the assets of the partners

Can the receivers, the secured creditors or the partnership recover under a mistake of law

The Court of Appeal found that the secured creditors and the receivers had not right to seek recovery of the GST.  The claim by the secured creditors was denied because the Commissioner received the GST payment in priority to their claims.  The claim by the receivers was denied because they could have no greater right to recovery than the secured creditors

The claim by the partnership involved the question of whether a claim based on mistake of law could be maintained in circumstances where the payment discharged a debt due to the commissioner.  This can be compared to a case where the payment was never due, but was paid by mistake – for example, see the recent decision of the UK Court of Chancery in Investment Trust Companies v HM Revenue and Customs [2012] EWHC 458 where the Court found that rights in restitution may arise.  For my post on that decision, see here.

The Commissioner submitted that the payment discharged the partners liability (albeit a secondary liability to that of the partnership).  The receivers contended that the Commissioner had been unjustly enriched because, but for the mistake made by the receivers, the GST would not have been paid and the funds would have been available to the secured creditors.  In finding for the Commissioner, the Court of Appeal based its decision on the simple footing that “if the defendant is entitled to the money, then it cannot be said to be unjust, or against conscience, to require payment”.  The Court acknowledged that an exception to this rule could be where it is shown that the recipient of the funds was not acting in good faith.  However, this was not alleged in this case.

Draft Practice Statement released on GST classification of food and beverage

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Yesterday the Commissioner released Draft PSLA 3541: GST classification of food and beverage items.

The purpose of the draft statement is to set out the following matters:

  • the arrangement the ATO has with GS1 Australia to ensure food and beverage items shown on 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 relied on the ATO confirmed GST classification for GST purposes
  • the procedures for tax officers to follow and matters to take into account when considering a change in the GST treatment of a food or beverage item listed on GST1net.

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

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.

Comments on the draft Practice Statement are invited by 13 April 2012.

 

 

 

UK High Court hands down decision on restitution claim by consumer for overpaid VAT

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Cases involving claims for refunds of VAT or GST are not unusual.  What is unusual is a refund claim made by the ultimate consumer (who bore the economic burden of GST).  Earlier this month, in Investment Trust Companies v HM Revenue and Customs [2012] EWHC 458 the UK High Court of Chancery handed down a decision involving such a case.  At the end of the day, the claim was not successful, but the judgment did make some interesting findings on restitutionary rights which consumers may have against the Revenue.

The facts can be simply stated:

  • the claimant had for many years been charged VAT by the supplier of goods and services – the claimant paid the GST and the supplier accounted for the VAT to the Revenue
  • as a result of a court decision, the supplies were at all material times exempt from VAT, with the consequence that the VAT was unlawfully charged
  • the supplier recovered the overpaid VAT to the maximum extent possible under the VAT legislation and passed the benefit onto the customer
  • the supplier was unable to recover all of the overpaid VAT because of the statutory 3 year limitation period on refunds and also that refunds were limited to the “net amount” actually paid by the supplier (i.e., the VAT less input tax credits claimed).

The question for the Court was whether the claimant, who had borne the full economic burden of the unlawful VAT, could bring a direct claim against the Revenue to recover the balance of the tax it paid to the supplier.  The Court considered this question from an English law and an European law perspective.  The comments below are restricted to the English law issues, as they give rise to matters which could impact on the position in Australia.

The essential question was whether the English law recognised a right to restitution in favour of the claimants. This involved the consideration of the following questions:

  1. Was the Revenue benefited, in the sense of being enriched?
  2. Was the enrichment at the claimant’s expense?
  3. Was the enrichment unjust?
  4. Are there any defences?

Was the Revenue enriched?

The Court found that the Revenue was enriched by the payments of VAT.  Also, the enrichment was the full amount of the VAT, notwithstanding that the supplier only paid a lower amount (after claiming input tax credits).

Was the enrichment at the expense of the claimants?

The Court noted that common sense might be thought to suggest that the answer to the question was obvious – the full economic burden of the unlawful tax was borne by the claimants.  As noted at [47]:

This entirely accords with the fundamental nature of VAT as a tax on the supply of goods or services, the burden of which is borne by the final consumer.  Equally clearly, it is HMRC who ultimately benefited from the imposition of the tax: that is the very purpose of taxation, to transfer money from the taxpayer to the Crown.  How, then, can it seriously be disputed that the enrichment of HMRC was at the expense of the claimants, who actually paid the tax, and were unable to pass it on to anybody else?

The Court then accepted “at a fairly high level of generality”, that for the purposes of VAT the final consumer is properly to be regarded as the taxpayer, and that the role of the intermediate taxable persons in the chain of supply is to collect the tax and account for it to the tax authorities.  However, the Court considered that there were dangers in pressing this point too far, because the claimant was not the taxpayer and was not liable, vis-a-vis, the Revenue, for the VAT.  The Court rejected any argument that the supplier was a “conduit” for the VAT or that there was any relationship of agency, or anything resembling agency.

Nevertheless, the Court found that the absence of a “direct” relationship or liability did not prevent there being a sufficient relationship.  In doing so, the Court recognised that one should look at whether “in reality” it was the claimant’s money and that this was not confined to strict legal reality, but could in appropriate circumstances include a broader underlying commercial or economic reality (at [65]).

In conclusion, the Court found that the enrichment was at the expense of the claimants, and stated as follows (at [72]):

In other woods, VAT is a tax on the consumer, collected by the supplier, and paid or accounted for to HMRC. Viewed in this way, the nexus between the consumer and HMRC could hardly be closer or stronger, and in economic terms the person at whose expense unlawful VAT is paid to HMRC is indubitably the consumer.  I remind myself at this point that “at the expense of” is not a statutory requirement, and (as the subrogation cases show) it can be satisfied by reference to the underlying commercial reality of a transaction.  To recognise that the test is satisfied in the present case would not, as Mr Swift submitted, be to dismiss the structure of the VAT legislation as mere formalism, but rather to give due weight to the economic reality which explains and underpins that structure.

In the end, I come back to where I started.  In my judgment there is no convincing answer to the common sense proposition that the enrichment of HMRC was indeed at the expense of the claimants, and I would therefore so hold.

Was the enrichment unjust?

On the basis that the payments were made by mistake, and that if the true legal position had been appreciated, the payments would not have been made.  The enrichment was therefore unjust.

Conclusion on restitution claim

The Court concluded as follows (at [87]) “all the basic ingredients of a restitutionary cause of action by the claimants against HMRC are made out, and that subject to any available defences the claims should succeed as a matter of English domestic law“.

Were there any defences to the claim?

The only defence relied on by the Revenue was the statutory provision relating to refunds of VAT.  It was common ground that this provision provided a code for the recovery of VAT and that the code was exhaustive and excludes other remedies (such as common law claims for restitution).  Under the terms of the section, only the supplier could seek to recover under those provisions, and the critical question for the Court was whether the exclusion of other remedies applied only to the suppliers (being the only parties entitled to claim under that section) or it had a wider application which extended to the restitutionary rights of the claimants.

The issue was one of literal vs purposive construction of the section.  The literal construction favoured a limited exclusion which did not extend to the claimants.  The purposive construction favoured a broad exclusion which covered all potential claims for a refund of VAT, regardless of who the claimant was.  The Court favoured the purpose view at stated as follows (at [104]):

At this point, purposive considerations appear to me to be decisive.  The evident purpose of section 80, so far as taxable persons are concerned, is to provide exhaustive and exclusive machines for the recover of undue VAT, subject to a relatively strict time limit for the making of claims.  It is thus common ground that the [supplier] could not make restitutionary claims against HMRC in respect of VAT overpaid by them…although in the absence of section 80 there would be nothing to prevent them from advancing such claims, with the benefit of the usual six year limitation period and mistake-based extensions to it pursuant to section 32(1)(c) of the Limitation Act 1980.  Given that Parliament has decided to enact this limited regime in relation to the taxable persons by whom the undue VAT was paid or accounted for to HMRC, it seems to be inconceivable that Parliament could have intended a more generous regime to be available to end customers buy whom the economic burden of the unlawful tax was actually borne.  It would make no sense to limit recovery by the tax collector, but to expose the Exchequer at the same time to far more extensive claims by the “real” taxpayer.  Furthermore, it could not plausibly be suggested that the position of end customers was somehow overlooked, because the section contains a defence of passing on, and…regulations make elaborate provision for the benefit of repayments to suppliers to be passed on to their customers.  It would be wholly inconsistent with this limited and carefully regulated scheme if claims by the end customers fell outside its scope.

In Australia, it is unclear whether a Court would find that an “ultimate consumer” had a right in restitution to recover over-paid GST directly from the Commissioner of Taxation. The world of restitution is fluid and complex. Nevertheless, I would expect that the Commissioner would strongly defend any contention that consumers had recovery rights against the Commissioner.

At the end of the day, that question may be academic, given that a Court may find that there is a ready defence to any such claim through the provisions of s 105-55 and s 105-65 of Schedule 1 to the TAA, on the basis that those provisions provide an exclusive code for the recovery of overpaid GST.


Commissioner publishes GST Determination 2012/3 – whether there is a Division 129 adjustment where a proposed M&A transaction does not eventuate or proceeds in a different manner

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Today the Commissioner published GST Determination GSTD 2012/3 “Goods and Services tax: does an adjustment for a change in extent of creditable purpose necessarily arise for services acquired in relation to a proposed merger and acquisition transaction that does not eventuate, or that does not proceed in the manner contemplated at the time the services were acquired?”

The Determination is the finalisation of Draft GST Determination GSTD 2011/D3.

The short answer in the Determination is “No”.  In taking this view, the Commissioner is of the view that an adjustment under Division 129 cannot be determined simply by reference to the outcome of the transaction.  Rather, the focus is on how the particular services have been used (or are intended to be used).  As noted at paragraphs [4] – [6] of the Determination:

Services acquired in the context of proposed M&A transactions typically include due diligence and other advisory services.  In many cases, those services are applied in evaluating or preparing for a proposed transaction.  If there has been no change in the extent to which those services relate to an input taxed supply between the time they are acquired, and the time they are used in evaluating or preparing for a transaction, the intended use of the services and their actual use are the same.  Accordingly, there is no change in the extent of creditable purpose of the services.

One the other hand, there may be a change in creditable purpose if the services are applied or reapplied at a time when there has been a change in the intended transaction.

The termination of a proposed transaction would not ordinarily give rise in itself to a Division 129 adjustment because services are not applied or reapplied for a different purpose once the transaction is terminated.

In summary, if the intended transaction is by way of a share transaction (an input taxed supply), input tax credits will not be available for services acquired in relation to that transaction if it proceeds and also, no adjustment will be available if the transaction does not proceed.

To understand the impact of the Determination (and the scope for dispute) it is useful to have regard to the “Alternative views” section at paragraphs [52]-[58].  If the matter went before a Court, the resolution may well come down to whether  the literal construction is to be observed (favouring the “alternative view”) or the purposive or substantive view (favouring the Commissioner’s view).

In considering the competing views, it is helpful to reproduce paragraphs [53]-[55] of the Determination:

[53] An alternative view argues that an entity should not be denied input tax credits on acquisitions relating to intended input taxed supplied that do not in fact eventuate.  On this view Division 129 should operate to ensure that an enterprise that otherwise makes only taxable supplies does not incur irrecoverable GST on its inputs.  This view is concerned with judging creditable purpose by reference to supplies that are actually made, rather than by the use to which an acquisition is put.  On this view:

(a) where an intended input taxed supply is not in fact made, there has been no application of the thing to a non-creditable purpose, and Division 129 may operate to produce a decreasing adjustment; and

(b) where the acquisition is used in contemplation of a taxable supply or a GST-free supply, but an input taxed supply is ultimately made, Division 129 may operate to produce an increasing adjustment.

[54] This view is said to be supported by the difference in wording of the ‘creditable purpose’ test in paragraph 129-50(2)(a) (which uses the term ‘are input taxed’) compared to the test in paragraph 11-15(2)(a) (which uses the term ‘would be input taxed’ and incorporates nexus to intended supplies).  The difference in terminology is treated as significant and an ordinary reading of the words of paragraph 129-50(2)(a) is said to lead to a conclusion that it must refer to supplies that are in fact made.  This view argues that whilst Division 11 is concerned with the hypothetical, Division 129 is concerned with what has actually happened, and that if the test in the two divisions were meant to be the same, the same words would have been used.

[55] We think that the better view is that the tests in Division 11 and Division 129 are not intended to be inherently different, but merely that one is judged at the time of acquisition, and the other at the time of application. Although the definition of creditable purpose in Division 129 refers to supplies that are input taxed, in our view this merely reflects the fact that application of a thing will typically be contemporaneous with supplies made using the thing.  Further, as noted in paragraph 48, subsection 129-50(3) refers to supplies being treated for paragraph 129-50(2)(a) purposes as supplies that ‘would be’ input taxed.


I can see arguments in favour of both sides.  The Commissioner quite properly refers to the comments of Hill J in HP Mercantile Pty Ltd v FCT [2005] FCAFC 126 (at [46] and [48) as being consistent with his approach.  However, one only has to consider decisions such as Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] FCA 1886  and Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 to see the effect of a literal construction of the words of the GST Act.