Author Archives: chrissievers

International cases update – February 2012

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In February 2012 the following VAT decisions were handed down in the UK and the ECJ (some of the First Tier Tribunal decisions were handed down in January 2012 but were only recently published).  My research did not disclose any decision of note in New Zealand or Canada.

The most interesting decisions were Aberdeen Sports Village (VAT on financial assistance payments) and David Peters (whether goods not delivered were nevertheless supplied).  I have already published my thoughts on these decisions.

Upper Tribunal

  • Powa (Jersey) Ltd v HMRC [2012] UKUT 50 – VALUE ADDED TAX – input tax – MTIC and contra-trading – whether connection to fraudulent trading as condition of denial of right to deduct input tax requires privity of contract with fraudulent trader – test in Kittel and Recolta Recycling – whether English mistranslation of French text of the judgment – whether to refer question to ECJ – application of Court of Appeal judgment in Mobilx

First Tier Tribunal

European Court of Justice

  • Eon Aset Menidjmunt [2012] EUECJ C-118/1 – VAT – Directive 2006/112/EC – Articles 168 and 176 – Right of deduction – Condition relating to use of goods and services for the purposes of taxed transactions – Origin of the right to deduct – Motor vehicle leasing contract – Financial leasing contract – Vehicle used by employer to transport free of charge an employee between his home and his workplace
  • Van Laarhoven [2012] EUECJ C-594/10 – Sixth VAT Directive – Right to deduct input tax – Limitation – Use of goods forming part of the assets of a business for the private use of the taxable person – Fiscal treatment of private use of goods that are assets of the business
  • Varzim Sol [2012] EUECJ C-25/11 – Sixth VAT Directive – Deduction of input tax – Article 17(2) and (5) and Article 19 – ‘Subsidies’ used for the purchase of goods and services – Restriction of the right to deduct

Treasury receives a raft of submissions on the Exposure Draft of legislation allowing the Commissioner to retain refunds pending verification

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On 15 February 2011 Treasury released an Exposure Draft of legislation allowing the Commissioner to retain refunds of GST (and other taxes) pending verification.  My initial analysis of the Exposure Draft can be accessed here.

The date for submissions has closed and notwithstanding the very short time period to make submissions, some 12 public submissions were made (many of them taking issue with the short time period in which to respond). A review of the submissions shows that the proposed legislation is viewed by taxpayers as being very controversial and that changes need to be made to the proposed legislation.

The submissions are outlined below and each can be accessed by clicking on the name:

 

 

UK Tribunal finds that there was a “supply” of goods which were paid for but not delivered

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In David Peters Ltd v Revenue & Customs [2012] UKFTT 124, the First Tier Tribunal found that the taxpayer was entitled to an input tax credit where it had paid for goods but those goods were not delivered.  The essential issue in the case was whether there was a “supply” of the goods to the taxpayer, notwithstanding that delivery never occurred.  While we usually think of GST or VAT as a “transactions tax” or a “practical business tax”, this case is an example of how the law (in this case constructive ownership) can sometimes intrude.

The facts of the case are simple.  The taxpayer entered into a contract to purchase a number of pieces of equipment.  The price included VAT and payment was made, an invoice was provided and the taxpayer claimed input tax credits.  Not all of the equipment was delivered and the Commissioner contended that the taxpayer was not entitled to input tax credits for the goods which were not delivered.  The Commissioner’s argument was that there was no supply of goods where, though payment was made, the goods were never physically supplied.

In finding for the taxpayer, the Tribunal referred to section 18 of the Sale of Goods Act and found that where there is an unconditional contract for the sale of specific goods, which are in a deliverable state, the property in the goods passes to the buyer when the contract is made.  Further, the Tribunal found that there was constructive delivery of the goods, which was to say that while there was no change in the physical possession of the goods, the buyer acquired the immediate right to possession on payment.  The completion of the sale was therefore separate from the physical delivery of the goods.  The seller became a bailee of the goods for the buyer, who was the owner of the goods.  As noted by the tribunal at [44]:

Thorneycroft, while in physical possession of the goods, were not the owners of the goods.  Rather the owners were the Appellant.  A distinction is made in English law between ownership (the Appellant) and possession (Thorneycroft) and that distinction is appropriate in this case.  The owners will take priority to the title of the goods since on payment for the goods they acquired an immediate right to possession and an attendant right to sue in conversion.  Thorneycroft therefore held the goods for the buyer, the Appellant.

Based on this reasoning, there was a supply of the goods and the taxpayer was entitled to the input tax credits.

It is unclear how such a case would be treated in Australia.  The GST Act does not have “time of supply” rules, but some guidance can be found in s 6(2) of the GST Transition Act which provides that “a supply or acquisition of goods is made when the goods are removed“.  The word “removed” is not defined, and it is unclear whether it is referring to removal of the goods in a physical sense, or in a constructive sense.  If the focus is on physical delivery of the goods, this may conflict with section 22 and 23 of the Sale of Goods Act 1958 (Vic) (other jurisdictions have similar provisions, I believe) which are to the effect that, unless the contract otherwise states, where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made.

The case can also be distinguished from cases involving the provision (or non-provision) of the supply of services, such as the domestic air travel at issue in the Qantas matter (the Commissioner’s appeal from the decision of the Full Federal Court is to be heard by the High Court later this year).

ATO GST private rulings – February 2012

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During February 2012, the ATO published nearly 40 private rulings dealing with GST.  These rulings can be accessed here.

An interesting highlight from this month’s list is the number of private rulings addressing claims for GST refunds.  There were 5 such rulings. Unfortunately, in each case the rulings register provides no guidance as to the nature of these applications – this is because in each case, in order to protect confidentiality, only the following summary is provided “this ruling concerned GST and the refund of overpayments as a result of a change in the ATO view.  The Commissioner has rules on each of the specific questions“.

Given the current uncertainty surrounding GST refunds, particularly in the context of Division 105-65 of Schedule 1 of the TAA and the application by the Commissioner of his views in MT 2010/1, it would have been helpful if some details were disclosed in the rulings register.

Legislation to implement GST self-assessment regime introduced into Parliament, Draft GST Ruling issued on GST treatment of fees and charges payable on exit by residents of a retirement village

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Today the Indirect Tax Laws Amendment (Assessment) Bill 2012 was introduced into the House of Representatives.  The Bill introduces a self-assessment regime for GST and other indirect taxes.  The legislation is to operate from 1 July 2012.

The Bill can be accessed here.

The Explanatory Memorandum can be accessed here.

Also, the Commissioner published Draft GST Ruling GSTR 2012/D2: GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis.  Comments are invited on the draft ruling by 16 April 2012.

The draft ruling states that exit payments are treated as supply of residential premises, except to the extent that an objective assessment in all the circumstances indicates that they are consideration for some other supply or supplies.  Supplies of residential premises in a retirement village by way of lease or licence are input taxed unless the supply of the premises is a supply of services apartments that are GST-free under s 38-25(4A).

An exit payment will be consideration wholly for supplies that would be input taxed where:

  • the operator does not provide services other than incidental services; or
  • the operator provides non-incidental services, but the resident is liable to provide separate consideration for them and the value of that consideration is not significantly less than the market value of the services.

An exit payment will be treated as consideration wholly or partly for supplies that would be taxable where:

  • the operator provides non-incidental services (which are non GST-free), but the resident is not liable to provide any separate consideration for those services; or
  • the value of the separate consideration provided is significantly less than the market value of the services.

Where an exit payment is consideration for both non-taxable (input taxed or GST-free) and taxable supplies, or consideration for a mixed supply, the exit payment should be apportioned on a reasonable basis.

The draft ruling also refers to the types of supplies which may be input taxed, GST free or taxable:

  • input taxed supplies to the resident may include supplies of the residential premises by way of lease or licence, and services which are integral, ancillary or incidental to the lease or licence – the ruling contains a non-exhaustive list of incidental services
  • GST-free supplies include supplies of care services and services apartments by an operator when ss 38-25(3) and 28-24(4A) apply
  • taxable supplies may be made to the resident including services which are non incidental services and are not GST-free – this may include optional services which have not necessary connection to the resident’s ability to enjoy residential premises under the lease or licence – the ruling contains a non-exhaustive list of non-incidental services

Commissioner issues ATO ID 2012/11 on RITC and investment banking services acquired by a takeover target

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Yesterday the Commissioner issued ATO ID 2012/11 “Goods and Services Tax: Reduced input tax credit acquisitions and investment banking services acquired by a takeover target.

The issue dealt with in the ID is whether the target entity is acquiring a reduced credit acquisition under item 9 of sub-regulation 70-5.02(2) of the GST regulations when it acquires investment banking services to assist in considering a takeover bid by way of a scheme of arrangement proposal under s 411 of the Corporations Act 2001, and the subsequent implementation of the scheme so that the target entity shareholders dispose of their shares to the bidder entity – the ID considers that the answer is yes.

Under the scenario considered by the ID, the target entity makes ongoing input taxed supplies so that the target entity will be entitled to reduced input tax credits in respect of the acquisition of the services from the investment bank.

Under the scheme of arrangement the disposal of the shares is directly from the shareholder to the bidder and there is no disposal by the target entity.  In considering this issue, the ID considers that Item 9 of the GST regulations only identifies the supplier of the service and it does not identity who the recipient must be – therefore it is not relevant that it is the target entity shareholders, rather than the target entity, who are disposing of the shares.  Rather, it is a question of assessing if the supplier is in fact a financial supply facilitator and if its serviees can be characterised as arranging for the disposal of the target shareholder’s shares.  In the present case, the target entity has engaged the investment bank to assist in the intended disposal of the shareholder’s shares because a takeover bid has commenced and this is sufficient to meet the requirements.

Commissioner issues two new GST Determinations and a Draft GST Ruling – all dealing with residential and commercial premises

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Today the Commissioner issued two GST Determinations and one GST draft ruling – they all deal with residential and commercial premises.  The publications are:

GSTD 2012/1

This Determination seeks to confirm the Commissioner’s view in the Decision Impact Statement published following the decision of the Full Federal Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155.

The background to the Determination states that it concerns the following issues:

  • whether a supply of residential premises by way of lease remains an input taxed supply under s 40-35 of the GST act following the sale of a reversion: the Determination states that following the sale, there is a continued supply of the premises by way of lease which remains an input taxed supply.
  • whether the purchaser of the reversion is entitled to input tax credits in connection with their acquisition of the reversion and other acquisitions: the Determination states that the purchaser is not entitled to an input tax credit to the extent that it is intended that the lease will continue following the completion of the sale
  • whether the purchaser of a reversion has an increasing adjustment under Division 135 if the sale of the residential premises is, or is part of, the sale of a going concern: the Determination states that the purchaser has an increasing adjustment.

The Determination is interesting because the Commissioner contends that the judgments of the Full Federal Court in South Steyne and in Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 both indicate that, upon the sale of a reversion, the supply by way of lease continues.  However, the Commissioner acknowledges that he cannot fully reconcile the conclusion in Westley Nominees that the purchaser of the reversion makes a supply by tolerating the lessee’s occupation of the premises with the conclusion in South Steyne that there is no supply by the purchaser of the reversion.

What he does say is:

It would be extraordinarily anomalous if the GST treatment of leases were to change because of a mere change in ownership of the reversion and it would be expected that, if the Court intended such improbable outcomes, it would have referred to them in its judgments.

Having two decisions of the Full Federal Court in apparent conflict on an everyday issue such as the purchase of a reversionary interest in a lease is unfortunate.

GSTD 2012/2

Similarly to GSTD 2012/2, this Determination deals with the GST implications of the sale of a reversionary interest in a lease, but with regards to commercial premises.  The Commissioner’s view is that following the sale of commercial premises that are subject to a lease, the purchaser of the reversion is liable for GST relating to the lease where s 9-5 is satisfied.

Interestingly, in this Determination, the Commissioner relies on the decision of the Full Court in Westley Nominees – whereas in GSTD 2012/1 the Commissioner relies on the decision of the Full Court in South Steyne.  Given the concession by the Commissioner that he cannot reconcile the two decisions, one could be forgiven for thinking that the Commissioner is having “a bit each way”.

Draft GSTR 2012/D1

This is a long ruling (some 82 pages and 325 paragraphs).  Comments are due on the draft by 6 April 2012.

The draft Ruling considers how Subdivisions 40-B, 40-C and Division 87 of the GST Act apply to supplies of residential premises, commercial residential premises and accommodation in commercial residential premises.  The Ruling does not consider the issue of when a sale of real property is a sale of new residential premises – that issue is dealt with in GSTR 2003/3.

The draft Ruling deals with a number of important issues relating to residential premises and commercial premises and it warrants a more detailed analysis.  By way of summary, the draft Ruling deals with the following subjects:

Residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)

  • physical characteristics
  • living accommodation provided by shelter and basic living facilities
  • fit for human habitation
  • other premises (including office building, private hospital and residential care facility)
  • premises requiring apportionment
  • land supplied with a building
  • vacant land
  • used for residential accommodation before 2 December 1998

Commercial residential premises

  • hotel, motel, inn, hostel or boarding house (including bed and breakfast accommodation, single room in a house, farm stays, whole of resort complex, house provided to employee, camp-style accommodation for employees and contractors, accommodation supplied to employees and contractors by third parties, individual holiday apartments, sale of vacant land,supply of a hotel, apartments that are residential premises

Division 87 – long term accommodation in commercial residential premises

  • commercial accommodation
  • provided to an individual as long-term accommodation
  • predominantly for long-term accommodation
  • option to input tax supplies of long-term accommodation

Transcript available in the Russell special leave application, Commissioner publishes Decision Impact Statements for three GST cases

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On 10 February 2012 the High Court dismissed the taxpayer’s application for special leave to appeal the decision of the Full Federal Court in Russell v Commissioner of Taxation [2011] FCAFC 10. The transcript has just become available and it can be accessed here.

The case involved issues relating to income tax and GST.  The GST issue was whether the taxpayer (a partnership) could claim input tax credits in respect of various “enterprises” that it carried on.

The Commissioner has released Decision Impact Statements for three decisions of the Tribunal dealing with GST issues.

Mold and Commissioner of Taxation [2011] AATA 823 

The decision impact statement can be accessed here.  My analysis of the decision can be accessed here.

The ATO accepts that this decision was open to the Tribunal due to the particular facts and circumstances of this case and the evidence presented during the hearing.The ATO does not accept as a general principle that there will always be consistency between deductions and input tax credits due to the different laws applying to the different taxes. The relevant Acts for income tax and GST have a number of different criteria for the allowance of deductions and input tax credits, and each case needs to be looked at individually to determine the allowance of relevant amounts.

The ATO also accepts that the penalty decision was open to the Tribunal on the particular facts and circumstances of the case, and the evidence presented. However, the ATO notes that, in relation to penalty, the Tribunal considered the case marginal and that the voluntary disclosure decision was made “on balance”.

The Trustee for the Naidu Family Trust and Commissioner of Taxation [2011] AATA 910

The decision impact statement can be accessed here.  My analysis of the decision can be accessed here.

Mackay, Hugh and Commissioner of Taxation [2011] AATA 593

The decision impact statement can be accessed here.

Exposure Draft Legislation released to allow Commissioner to retain GST refunds

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Yesterday the Treasury released Exposure Draft Legislation to allow the Commissioner to retain refunds pending verification.  The legislation follows an announcement by the Assistant Treasurer on the same day that the Government would amend the legislation.  Submissions are due by 21 February 2012.

The Exposure Draft Legislation can be accessed here.  The Explanatory Memorandum can be accessed here.

My analysis of the Draft Legislation can be accessed here.  The proposed legislation gives the Commissioner broad powers to retain refunds for at least 120 days before the taxpayer can take any action, which appears to be limited to lodging an objection against the decision of the Commissioner to retain the refund.

The amendments are to commence on the day that the Act receives Royal Assent. The legislation is not retrospective.

The amendments appear to be aimed at addressing the decision of the Full Federal Court in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142 (the Commissioner’s special leave application was refused) – my analysis of that decision can be accessed here.

The Explanatory Memorandum outlines the context of the amendments as follows:

“1.2 The amendment is intended to address the outcome in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142 (Multiflex). The issue central to the Multiflex case was whether, under section 35-5 of the A New Tax System (Goods and Services Tax) Act 1999 and section 8AAZLF of the TAA 1953, the Commissioner had an implied reasonable time in which to refund a net amount, including such time as reasonably necessary to determine whether the amount was truly payable.

1.3 The Commissioner’s administrative practice with respect to GST amounts has been to retain certain refunds pending verification checks on the basis that the ability to do so was implied by those Acts.

1.4 The Full Federal Court found that the Commissioner is required to pay a GST refund within the time it takes to undertake the necessary administrative steps to process the taxpayer’s return and make the payment, and that the law provides no additional time for checking the validity of the claim, even if the Commissioner suspects it might be incorrect.

1.5 On 9 December 2011, the High Court of Australia dismissed the Commissioner’s application for special leave to appeal against the decision. As a result, in the absence of a legislative amendment, the Commissioner would be required to pay out GST refunds claimed by a taxpayer on their return once it had been processed, and then seek to recover the amounts if subsequent checks showed the amounts claimed to be excessive.

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1.6 As there will be circumstances where the amount claimed in a return or other notification is incorrect, including due to carelessness, recklessness or fraud, it is a necessary integrity requirement that the Commissioner has the ability to delay refunding amounts in certain circumstances.

1.7 Consistent with the rest of Division 3 and Division 3A, the new provision will potentially apply to all payments and credits that exceed a primary tax debt allocated to the taxpayer’s running balance account (RBA).”

Exposure Draft released on GST and the Sale of a Corporation’s Property by a Mortgagee or Chargee

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In the 2011-12 Budget the Government announced that it would amend the GST Act to clarify that Division 105 operated to the exclusion of Division 58 where a mortgagee in possession or control sold the property of a corporation.  On Tuesday 14 February 2012 an Exposure Draft of the legislation was released for comment.

The Exposure Draft legislation can be accessed here.

The Explanatory Memorandum to the Exposure Draft legislation can be accessed here.

The provisions are to take effect from the start of the first quarterly tax period on or after Royal Assent.

A consultation paper was released on 7 June 2011.  To access the paper press here.

The closing date for submissions is 13 March 2012.