Author Archives: chrissievers

Welcome to 2012 – parties agree on consent orders in Centrebet refund case – ATO private rulings and International Cases update for December 2011

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Welcome to my first post for 2012.  This promises to be another big year for GST.

To start the year off, on 20 December 2011 the Commissioner and Centrebet Pty Limited agreed on consent orders for the dismissal of the Federal Court proceeding.  I understand that the proceeding was similar to that considered by the Federal Court in International All Sports v Commissioner of Taxation [2011] FCA 824 regarding the GST treatment of gambling supplies, where the Federal Court found that refunds of GST should be paid to the applicant.  A copy of the orders can be found here.

ATO Private Rulings for December 2011

In December 2011 the ATO published more than 50 private rulings dealing with GST.  The rulings can be accessed from the drop-down menu and also here.

Some of the more interesting rulings are discussed below, dealing with bare trusts and refunds.

GST and charitable property trusts – Ruling no 1011991811094

  • this private ruling request was made by a State Trustee (being an unincorporated association that acts as the State arm of the organisation) -the functions of the State Trustee included providing trustee services to local branches in regard to real property.  In such circumstances, charitable property trusts were established for the benefit of local branches whereby the State Trustee, or a specific purpose corporate trustee, acts as trustee
  • the facts relevant to the arrangements can be stated as follows:
  1. the State Trustee enters into contracts to acquire real property as trustee to hold the property for the public charitable purposes of the local branch
  2. the terms of the trust usually oblige the State Trustee to act on the direction of the local branch (the controller)
  3. the State Trustee is normally passive in the trust arrangement with the costs and management of the real property being met and carried out by the local branch
  • the issue sought to be addressed in the ruling was whether the relevant entity for the purposes of GST was the State Trustee or the beneficiaries (with the State Trustee acting as bare trustee).  In finding that the State Trustee was not acting as a bare trustee, the ATO accepted that the terms of the trust deed required the State Trustee to deal with the property in accordance with the instructions of the local branch, the trust deed conferred considerable powers on the State Trustee to act independently of the local branch and, in certain circumstances, was required to act in accordance with the direction of the State Executive.
  • In taking this view, the ATO relied on GSTR 2008/3 dealing with bare trusts,and referred to the following paragraphs:
37. The activities of a bare trustee are essentially passive in nature.  A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties.  A bare trust as that term is used in this Ruling does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.
39. If the asset is sold, the transaction will involve a transfer of the legal title to the property to a third party by the trustee at the direction of the beneficiary.
  • Without having an opportunity to review the terms of the trust deed, but having regard to the terms of the trust deed outlined in the private ruling, I have some concerns with the ATO view.
  • The judicial approach to “bare trust” focuses on the absence of any duties of management on the trustee and the ability of the beneficiary to compel the trustee to transfer the trust estate to them: see Christie v Ovington (1975) 1 Ch D 279 at 281; Morgan v Swansea Urban Sanitary Authority (1878) 9 Ch D 582 at 585; Schalit v Nadler [1933] 2 KB 79; Herdegen v FCT (1988) 84 ALR 271 at 282. The “powers” of the State Trustee relied on by the ATO (which include powers to sell, lease and mortgage the property) could arguably be seen to be administrative mechanisms whereby the directions of the local branch can be given effect to, rather than facilitating the lawful independent action of the State Trustee.
  • While it is true that, taken literally, some of the powers relied on by the ATO may give the State Trustee the “power”, or the capacity, to act independently of the local branch (for example in selling the property) – one must always consider whether such a power would be a lawful act of the trustee.  As noted at paragraph 12 of GSTR 2008/3, “the key point is that the trustee only acts at the direction of the beneficiary in respect of the relevant dealings win the trust property and has no independent role in respect of the trust property” – in this ruling application, one may have cause to question whether the State Trustee did have the lawful capacity to undertake an independent role in respect of the trust property.
  • the issues in this private ruling application were whether the supply of online content by an overseas company (OSCo) to Australian consumers was subject to GST free, and if not, whether the ATO would pay the GST refund to OSCo in light of s 105-65 of Schedule 1 to the TAA – the private ruling found that the services were not subject to GST, but that no refund would be paid because the discretion in s 105-65
  • in support of the refund application, given that the Australian consumers were not registered for GST and the consumers had not been reimbursed for the overpaid GST, the matters relied on included:
  1. the RRP for the price was the same, regardless of whether the customers were located in territories that imposed GST/VAT;
  2. the GST/VAT was not factored into the RRP
  3. OSCo sets its RRP and then recognises its revenue after any applicable GST or VAT was deducted
  4. the consumer pays the RRP, whether or not GST applies to the transaction, and does not bear the cost of the GST
  5. giving a refund to costumers would be a windfall gain to an ‘undeserving consumer’ as referred to by the Tribunal in Luxottica Retail Australia Pty Ltd v Commissioner of Taxation [2010] AATA 22
  • In finding that the refund should not be paid, the first point to note is that the ATO characterised the discretion in s 105-65 as effectively relieving the Commissioner from any obligation to refund the overpaid GST, but nevertheless  giving the Commissioner a residual discretion to pay the refund.  That approach appears to be contrary with the recently stated view of the President of the Tribunal (sitting with Senior Member O’Loughlin), that the discretion  is to “not pay” the refund: see MTAA Superannuation Fund (RG Casey Building) Property Pty Ltd and Commissioner of Taxation [2011] AATA 769 at [65] and National Jet Systems Pty Ltd and Commissioner of Taxation [2010] AATA 766 at [79].
  • The second point to note is that the private ruling gives an insight into the limited circumstances in which the ATO will allow refunds to be paid, where the transactions involve consumers who are not registered for GST – in this regard, the presumption is that the cost of GST is a foreseeable cost that is passed on as part of the cost recovery and pricing structure of the supplier and it would appear that only in very limited circumstances will a supplier be able to satisfy the Commissioner that the overpaid GST has not been passed on.

International cases update 

December 2011 saw a number of cases handed down in the UK, NZ and Canada relating to VAT and GST.

United Kingdom

Court of Appeal

Tax Tribunal

New Zealand (High Court)

  • FB Duvall Limited v Commissioner of Inland Revenue [2011] NZHC 1783 – application for judicial review of Commissioner’s refusal to accept late objections to GST assessments – whether open to Commissioner, having determined for income tax purposes that no services are supplied in return for the payment assess for GST on the basis that the payment is made in return for a supply of services – scope of ‘supply’

Canada (Tax Court of Canada)

2011 – a year in review for GST

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This is my last post for 2011.  I want to thank all of you who have supported this site and wish you all a great holiday.  I will be back on line in January 2012, which should be another big year for GST – starting with the Qantas special leave application.

Summary of the year

This year was all about GST refunds.  The Multiflex case is a great example – the Commissioner went all the way to the High Court in a frantic effort to justify his refusal to comply with the mandatory language of s 35-5 of the GST Act and pay a refund of input tax credits to the taxpayer.  We also had Qantas, International All Sports  and Central Equity plus some Tribunal cases all seeking GST refunds.  It remains to be seen whether this activity continues in 2012.

We are all waiting to see what the High Court does in Qantas.  Is it just another characterisation case or does it go to the very fabric of the GST system?

2011 also saw a lot of activity with respect to GST and government.  At least two Court proceedings were issued by government entities (including State and local government) against the Commissioner.  These cases did not proceed to hearing, but they serve to illustrate some of the flaws in the way the GST Law (which includes the GST Act and the TAA) may (or may not) apply to particular layers of government and particular types of government transactions.

On 1 July 2011 GST entered into the general private ruling regime, with objection and review rights, which has brought its own controversies.  Probably the most controversial is the capacity of the Commissioner to effectively legislate by ruling.

On 1 July 2012 GST enters into the realm of self-assessment.  No doubt there will be teething issues, but hopefully that will reduce some of the confusion which has stemmed from the disconnect between Business Activity Statements, assessments and time limits in Schedule 1 to the TAA.

The GST continues to develop and I expect that 2012 will bring a broad range of new and interesting issues.

Case Highlights 

High Court

  • Commissioner of Taxation v American Express Wholesale Currency Services Pty Ltd – the High Court refused the Commissioner’s special leave application denied, but only after a full day’s hearing before an extended bench.
  • Lansell House Pty Ltd v Commissioner of Taxation – the High Court refused the taxpayer’s special leave application – this was probably the first time the High Court has had to look at the taxable treatment of crackers!
  • Commissioner of Taxation v Multiflex Pty Ltd – the High Court refused the Commissioner’s special leave application – another GST refund case – the whole process from judgment of the trial judge in the Federal Court (30 September 2011) to the hearing of the special leave application (9 December 2011) took about 10 weeks!
Full Federal Court
  • Commissioner of Taxation v Luxottica Retail Australia Ltd – the Full Federal Court dismissed the Commissioner’s appeal and found that the formula in s 9-80 of the GST simply did not work.  Arguably the most disappointing aspect of this case is that the Commissioner did not appeal the Tribunal’s decision on s 105-65 of Schedule 1 to the TAA, thus depriving the Full Court the opportunity to make some definitive statements about the operation of this difficult section
  • Qantas Airways Limited v Commissioner of Taxation – the Full Federal Court allowed the taxpayer’s appeal in full in a landmark decision – not surprisingly, the Commissioner has filed an application for special leave to appeal to the High Court, which should be heard early in 2012
Federal Court
  • Reglon Pty Ltd v Commissioner of Taxation – the first real GST on the treatment of damages – the Commissioner did file an appeal, but it was discontinued
  • International All Sports v Commissioner of Taxation – another GST refund case, this time about gambling supplies.  The Court also awarded indemnity costs against the Commissioner, which illustrated the potential scope for offers of compromise in the tax arena.
  • Central Equity Limited v Commissioner of Taxation – a case about the time of supply of real property and the transitional rules.  The taxpayer has appealed.  The Court also found that the refund notification was valid for the purposes of s 105-55 of Schedule 1 to the TAA.

Tribunal

  • MTAA Superannuation Fund (RG Casey) Property Pty Ltd and Commissioner of Taxation and National Jet Systems Pty Ltd and Commissioner of Taxation – another GST refund case, this time about s 13 of the GST transition Act and the scope of the Commissioner’s discretion in s 105-65 of Schedule 1 to the TAA where there is a “windfall gain” to the taxpayer or the recipient of the supply – both taxpayers have filed appeals to the Full Federal Court

Big issues for 2012?

Looking into my crystal ball, I see the major issues for 2012 to include:

    • GST refunds and s 105-65
    • The introduction of the self-assessment regime
    • Input tax credit recoveries for financial institutions
    • Transactions with government entities – the virtual world of the “notional” GST
    • Real property (as always)
    • The impact of the decision in Qantas (whichever way it goes)
    • An increase in the GST rate??

New draft Determination and addendums to Rulings – GSTD 2011/D5, GSTR 2002/2A addendum, GSTR 2003/8A2 addendum

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On 21 December 2011 the Commissioner issued the following Rulings and Determinations – in an unwelcome Christmas present for financial suppliers, the Commissioner’s draft view effectively halves entitlements to input tax credits for acquisitions made in respect of foreign currency transactions which were found to be GST-free by the High Court in Travelex.

GSTD 2011/D5 – 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 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

  • the draft 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.  I imagine that the draft Determination will cause much discussion because it effectively halves the input tax credit entitlement of suppliers.
  • 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
  • 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.  This acquisition supply is seen as a supply made in relation to rights, but that supply is not GST-free as the rights are for use in Australia
  • The effect of this determination is that suppliers input tax recovery on foreign exchange transactions of the type considered in Travelex will be halved – the Commissioner acknowledges a number of alternative views (all of which result in a complete, or higher, input tax recovery) but rejects them in favour of his “preferred view” – the rejected alternative arguments include:
  1. acquisitions relate more directly to the supply of the currency than the acquisition supply, as the acquisition supply is merely the means of payment or that is the purpose from the customer’s point of view;
  2. there is no acquisition supply because there is no related ‘provision’ financial supply
  3. the acquisition supply is part of a composite supply, being incidental to the supply of the FX
  4. the acquisition supply is a supply in relation to the rights attaching to the FX and is GST-free
  5. The fully of FX is always a supply in relation to rights for use outside Australia
  • Many of these alternative arguments would appear to have merit. Comments are invited on the draft Determination by 17 February 2012.

GST Ruling GSTR 2002/2DA – Goods and services tax:  GST treatment of financial supplies and related supplies and acquisitions

  • This draft addendum seeks to amend GSTR 2002/2 to reflect the decision of the High Court in Travelex

GST Ruling GSTR 2003/8A2 – Goods and services tax: supply of rights for use outside Australia – subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2)

  • This addendum amends GSTR 2003/8 to reflect the Commissioner’s view on the types of supplies that fall within the expression ‘a supply that is made in relation to rights’ in item 4 of the table in ss 38-190(1) of the GST Act.
  • Following the decision in Travelex, the Commissioner considers  that Item 4 is capable of covering the following three categories of supplies:
  1. supplies identified in paragraph 9-10(2)(e);
  2. supplies of things that derive their value exclusively, or almost exclusively, from rights; and
  3. supplies of services directly connected with rights.
  • with regards to (3) above, notwithstanding the broad scope of the words “in relation to”, the Commissioner considers that a “direct connection” is required – this may be a controversial approach.  The basis for the Commissioner’s view appears to be that “the context and the broad policy to tax domestic consumption expenditure both suggest that a reasonably close relationship must exist between a service and a right for the service to be covered by Item 4.  If this were not the case, and a more remote connection were sufficient, services supplied between Australian residents that would ordinarily be thought of as being consumed in Australia could, because of the remote connection, be rendered GST-free.”

Transcript of Commissioner’s Special Leave application in Multiflex available here

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The transcript of the Commisisoner’s application to the High Court from the decision of the Full Federal Court in Commissioner of Taxation v Multiflex Pty Ltd is still not available on Austlii.  For those of you who are interested in what the High Court had to say, I have been able to source a copy of the transcript and it is available here.

In dismissing the application, Chief Justice French said as follows:

The Commissioner seeks special leave to appeal against the decision of the Full Federal Court upholding a decision of Jessup J to issue mandamus to the Commissioner in relation to the performance of the duty under sections 35‑5 and 35‑10.  That decision was based upon his Honour’s view that the Commissioner’s obligation to pay is not subject to an implied qualification that he has a reasonable time before making the payment to investigate the correctness of the GST return.  There is a reasonable time qualification limited to the time necessary to process the return.  The implication for which the Commissioner contended was one which, in the view of both the primary judge and the Full Court, the statute does not bear.

The obligation, when it crystallises, gives rise to a debt:  see Pape v Commissioner of Taxation, but by operation of section 105-15 of the Taxation Administration Act, the obligation to pay and the time by which a net amount must be paid is not affected by the making of an assessment.  It may be that there is a statutory lacuna which gives rise to inconvenience and to risk to the revenue.  If statutory change is necessary, and it has, in fact, been foreshadowed, that is a matter for the Parliament. 

In our opinion, the decision of the Full Federal Court is not attended with sufficient doubt to warrant the grant of special leave.  Special leave will be refused with costs 

 

Tribunal finds supply made on settlement of real estate contract, not execution – The Trustee for Naidu Family Trust and Commissioner of Taxation [2011] AATA 909

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On 19 December 2011 the Tribunal handed down its decision in The Trustee for Naidu Family Trust and Commissioner of Taxation [2011] AATA 909.

The vendor had executed a contract of sale for real property but the sale was subsequently completed by the agent of the mortgagee in possession who executed the transfer and completed settlement.  The applicant, the agent of the mortgagee in possession, contended that the supply took place on execution of the contract and that the vendor was liable for the GST on the sale, not the mortgagee in possession pursuant to s 105-5 of the GST Act.  Not surprisingly, the Tribunal applied the reasoning of Gordon J in Central Equity Limited v Commissioner of Taxation [2011] FCA 908 (I should note that the taxpayer has appealed that decision to the Full Federal Court) and found that the taxable supply occurred at settlement and the GST liability fell to the mortgagee in possession.

 

New rulings and determinations – GSTR 2011/D5, GSTD 2011/4 and GSTD 2011/D4

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On 14 December 2011 the Commissioner published the following rulings and determinations.

GSTR 2011/D5 – Goods and services tax: GST treatment of care services and accommodation in retirement villages and privately funded nursing homes and hostels

GSTD 2011/4 – Goods and services tax: Are accommodation bond retention amounts or accommodation charges paid, by residents of an aged care facility covered by the Aged Care Act 1997, that is supplying GST-free services under subsection 38-25(1) of the GST Act, consideration for a GST-free supply?

  • the Commissioner’s view is that the accommodation bond retention amounts and accommodation charges paid by residents are consideration for a GST-free supply, namely the GST-free supplies of services and accommodation – this is because those payments are made by the resident “in connection with” a package of services and accommodation supplied to them by the approved provider

GSTD 2011/D4 – Goods and services tax: What is ‘hospital treatment’ for the purposes of section 38-20 of the GST Act?

  • save for one change, the views in the draft determination reflect those of the ATO in Issue 3.a, Issue 3.c.1 and Issue 3.2.c of the Health Industry Partnership Industry Register – the register can be accessed here.
  • the draft determination accepts that where the fee for accommodation includes access to a telephone, that forms part of the GST-free supply of hospital treatment.  This is a change from the previous view of the Commissioner, which was that the provision of the telephone and calls were separate and there needed to be an apportionment of the fee.
  • where a separate fee is paid for telephone or television, those items will be supplied separately from the hospital treatment.
  • the draft determination is to apply from 26 March 2009 – the draft also recognises that to the extent that an entity treated access t a telephone as a taxable supply where an additional fee was not charged, they  may be entitled to a refund

New Article – GST and compulsory acquisitions – can you have an “involuntary supply”?

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I have added a new article to the site entitled — GST and compulsory acquisitions – can you have an “involuntary supply”?

The article looks at whether there is such a thing as an “involuntary supply”, considered in the context of compulsory acquisitions of land by governments and government authorities.

Consistent with the problematic relationship between GST and real property transactions, the GST implications of compulsory acquisitions remain uncertain.  Further, the guidance from the Commissioner on the matter in GSTR 2006/9 (at paragraphs 81-90) leaves a number of matters unresolved.

The article can be accessed here and under the menu item “My Articles”.

Commissioner issues Addendum to GSTR 2000/19 and 2001/2

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On 7 December 2011 the Commissioner issued Addendum GSTR 2000/19A4 and Addendum GSTR 2001/2A1.

The effect is to amend Rulings GSTR 2000/19 and GSTR 2001/2 to reflect the changes to the rules relating to tax invoices made by Schedule 3 to the Tax Laws Amendment (2010 GST Administration Measure N0.2) Act 2010 and the repeal of the regulations 29.70.01 and 29.70.02 of the GST Regulations.

 

International cases update – November 2011

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November saw a number of cases handed down in the UK relating to VAT – the Court of Appeal, the Upper Tribunal and the First Tier Tribunal.  The cases are listed below and they can also be accessed from the drop-down menu on the site.  My research disclosed no GST decisions in New Zealand or Canada during November.

Court of Appeal

18/11/11 – HM Revenue & Customs v London Clubs Management Ltd [2011] EWCA Civ 1323

  • creditable acquisitions, apportionment methodology for rent paid by casino where some services taxable and some exempt, whether appropriate to use turnover method or floor space method
  • Summary  – the taxpayer sought to change its attribution methodology from a turnover-based approach to a floor-space approach, the Tribunal accepted that the floor space approach was fair and reasonable (although it did find that this may not be so in all cases) as the costs incurred in relation to the taxable parts were incurred for the business as a whole – on appeal the Court noted that it would be very doubtful that the finding could be upheld in the absence of a finding by the Tribunal that the taxpayer’s catering activities had the potential to be a source of profit if the relevant overheads were apportioned as proposed, further, while the Court clearly had doubts as to this finding it was not open to the appellate court to disturb this finding
  • Comment – the Court identified three points of principle which may be relevance for this issue in Australia; first, close attention needs to be paid to the facts to understand the economic or commercial reality underlying the use of the relevant inputs, second, identification of the source or potential source of profit in a business may be an important feature of a business throwing light on whether or not the standard method or another method is a more fair, reasonable and accurate method of attribution; third, depending on the precise factual situation under consideration, it may be appropriate to exclude from the equation taxable supplies which are not, in themselves a source of profit.

Upper Tribunal

24/10/11 – Glaxosmithkline Services Unlimited v HMRC [2011] UKUT 432

  • Zero-rating – Whether “Lucozade Sport” zero-rated as food or standard-rated as beverage
  • Summary – this was an appeal from the finding of the First Tier Tribunal (such appeals are limited to errors of law) that Lucozade Sport was taxable as a beverage or a powder for the preparation of a beverage falling within the list of excepted items – the taxpayer relied on an earlier decision of the VAT Tribunal in SiS (Science in Sport) Ltd v Revenue and Customs Commissioners [2000] V & DR 195 which found that the product in question was zero rated because it was only consumed “by the athletes, sportspeople and others who characteristically take them for nutritional purposes” – it was found, on the evidence, that this was not the position for Lucozade Sport as it was drunk for the purposes of hydration, refreshment and pleasure.
  • Comment – this decision is a good example of the difficulties faced when trying to appeal a decision of fact made by a Tribunal (the same hurdles apply in appealing decisions of the AAT) – the scope for such an appeal was said to be found where the finding had been made “without any evidence or upon a view of the facts which could not reasonably be entertained”. The decision also shows (see [26]) the dangers of relying on previous decisions which are applicable to their own particular facts rather than laying down any principle.

First Tier Tribunal

15/11/11 – The British Disabled Flying Association v Revenue & Customs [2011] UKFTT 743

  • whether aircraft for use of disabled persons zero rated

10/11/11 – Harrier LLC v Revenue & Customs [2011] UKFFT 725

  • whether the supply of “photo books” a zero rated supply of goods or taxable supply of photographic services, whether single supply of goods or composite supply of goods and services
  • consideration – whether donations to good causes by company making catalogue sales were part of consideration for its supplies
  • whether iced tea concentrate zero rated as a “tea, mate, herbal teas and similar products and preparations and extracts thereof” or standard rated