In November the ATO published over 70 GST private rulings on the Private Rulings Register.  Those rulings can be accessed from the new drop down menu item on the site and here.

Many of the rulings deal with “run of the mill” issues such as registration, real property sales and going concerns, however there are some interesting questions raised.  In particular, I refer to the following rulings:

11011962220496 – GST and credit cards annual fees

The question in this ruling request was whether a credit card annual fee represented consideration for a supply that was partly input taxed and partly GST under item 4 of sub-section 38-190(1) of the GST Act.  The ATO accepted that the fee may be partly GST-free, to the extent that the cardholder intends to use the credit card facility outside Australia.

The applicant’s contentions were as follows:

• The findings of the High Court in Travelex Ltd v Commissioner of Taxation [2010] HCA 333 should be extended to credit card annual fees. The supply of banknotes was found by the High Court to be “in relation to rights” because it is the rights attaching to the physical banknotes that gave them their value and that this principle applied equally to credit cards, because the, too, have a physical aspect of negligible value without the attached rights (i.e., the plastic card).
• Whilst the payment of the annual fee is for the issue of the credit card, the annual fee is not consideration for the provision of an interest in or under a credit arrangement.  Rather, it was contended that what the customer obtained when paying the fee was the right to use the credit card, which was  right to credit.  This supply of  aright to credit is GST-free under item 4(a) of subsection 38-190(1) of the GST Act.

With regards to the applicant’s contentions re the decision in Travelex, the ATO considered that the plastic card was clearly distinguishable from foreign currency banknotes – the cardholder acquired no proprietary interest in the card and the card was much less of a token of value and rights than banknotes because it is not, of itself, a negotiable instrument – the card itself has not rights attached to it and it is not money in any form.

The ATO accepted that the credit card facility is a supply that may be additionally characterised as a supply of rights and that the supply may be GST-free as a supply to which s 38-190(1) applied.  For the annual fee to be party GST-free, it would need to be shown that the credit arrangement is specifically intended to be used outside Australia – that is, the cardholder intends to use the credit card facility outside Australia.

101192440447 – GST and Electricity Rebate Agreement

The question here was whether a government entity made a creditable acquisition where it paid money to retailers under an agreement whereby electricity retailers gave a rebate to eligible persons.

Not surprisingly, the ruling agreed that a creditable acquisition was made.  While the basis for this view was GSTR 2006/9 (the Ruling on “supplies”), such a conclusion would appear to be irresistible given the decision of the Full Federal Court in Commissioner of Taxation v Secretary to the Department of Transport (Victoria) [2010] FCAFC 84, which found that the Department was entitled to input tax credits for payments made to taxi cab operators under a program where taxi services were provided to people with disabilities.

More surprisingly, the ruling denied the existence of a creditable acquisition for rebates paid “retrospectively” to rebate customers (being claims for 12 months or more prior to the customer making a separate application for the rebate).  The basis for this view was that the Electricity Retailer had not made a supply to the government entity and the payment for the retrospective rebate was a third party payment.  Rather, the payment to the Retailer was an administrative arrangement to pay on behalf of the customer for a liability owed by the customer to the Retailer.

Given that both the rebate and the Retrospective rebate are payment under the same arrangement between the government entity and the Electricity Rebate, one may have cause to doubt the existence of a real distinction between those payments.  The decision may also show that the Commissioner is still not comfortable with the decision in Department of Transport and is seeking to give that decision a narrow compass.

On 1 December 2011 the Commissioner issued GSTD 2011/3 ‘Goods and services tax: do the acquisitions of the services provided under the arrangement described in Taxpayer Alert TA 2010/1 form part of a reduced credit acquisition made by the financial supply provider under item 9 of the table in in sub regulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999?’

The Determination was previously issued as draft GSTD 2011/D2 and is based upon the arrangement outlined in Taxpayer Alert TA 2010/1.

My comments on the Determination can be found here.

On 18 November 2011 the Tribunal handed down its decision in Mold and Commissioner of Taxation [2011] AATA 823.  The case essentially involved the issue of whether the applicant could substantiate input tax credits in the absence of tax invoices, but the decision does provide an interesting insight into the capacity of the Tribunal (while sitting in the shoes of the Commissioner) to step outside the somewhat prescriptive rules in which the Commissioner sometimes operates when conducting investigations into the affairs of taxpayers.

The applicant was a cabinet maker who the subject of an audit.  During the periods in questions the applicant suffered periods of ill-health, which meant that the business was not as profitable as it might have been.  Following the audit, the taxpayer was assessed for GST shortfalls on the basis that claims for input tax credits could not be substantiated.  The applicant claimed that he posted the relevant tax invoices to the Commissioner, who says they were not received.  This left the applicant in the difficult position of not being able to substantiate those input tax credits.

The applicant was able to provide some information to substantiate the credit claims, including tax invoices from previous periods and bank statements.  The Commissioner accepted that the applicant was entitled to some of the input tax credits, but only to the upper extent of the industry standard for cabinet makers.

Senior Member O’Loughlin accepted that the applicant did have a significant amount of documentation of the expenditures associated with the business and that he no longer had it as a consequence of at least attempting to provide it to the Commissioner.  The Tribunal also accepted that some “surrogate” information was provided, but not enough to substantiate all the claims. The Tribunal found that a balance needed to be struck between the onus on the applicant to prove his assessments are excessive and where the applicant experiences difficulties because his attempts to do so rendered him unable to do so.

In determining this balance, the Tribunal found that the industry range was not appropriate, in circumstances where the applicant had suffered a serious illness that undoubtedly impacted his business activities and it can readily be concluded that he may not be within industry norms.  Accordingly, something more than the industry average was appropriate.  Instead of the upper range of the industry average of 44% of the GST on sales revenue, the Tribunal awarded credits of 72.87%.

This decision is a good example of how the Tribunal is often in a better position to consider the particular circumstances of a case, as opposed to the Commissioner who is sometimes distracted by things such as industry standards.  It is also clear that the Tribunal found the applicant to be an honest and credible witness, which is always a good start.

On 24 November 2011 the Commissioner issued the following draft Law Administration Practice Statements:

• PSLA 3550 ‘Administration of penalties for making false or misleading statements that do not result in shortfall amounts’
• PSLA 3551 ‘Administration of penalties for false or misleading statements that result in shortfall amounts’

The essential difference between the two practice statements appears to be that where there is a shortfall amount, the penalty is imposed by reference to a percentage of the shortfall (i.e., 75% for intentional disregard, 50% for reckless and 25% for failure to take reasonable care); and where there is no shortfall amount, the penalty is imposed by reference to “penalty units” (currently $110 to 1 penalty unit) – being 60 units for intentional disregard, 40 units for reckless and 20 units for failure to take reasonable care.

A more detailed analysis of these statements will follow in the next few days, but my initial concern is that the scope to apply penalties where there is no shortfall is very wide and, in the GST space, could apply to things such as:

• BAS statements
• “stop the clock” notifications pursuant to s 105-55 of Schedule 1 to the Taxation Administration Act
• Objections

Indeed, the writer is aware of the ATO imposing penalties on taxpayers who lodged “stop the clock notices” to protect their rights to claim GST refunds – those penalties were subsequently remitted on the basis that the taxpayers took reasonable care, but it does illustrate the potential scope for the application of this penalty regime.

The potential broad scope of these penalties appears to be accepted in the draft Practice Statement, when regard is had to statements such as:

• “The penalty law, on its face, has a broad application to written and verbal statements made relating to all taxes, and could apply to compliance, objection, advice, debt, lodgement and registration activities” [at 14]
• “Statements which do not result in a shortfall amount will be examined (including for the purposes of assessing penalty) where ATO action is required to investigate or mitigate a risk.” [at 17]

Where a misstatement leads to a GST shortfall, one can understand the risk of penalties being imposed by reference to the amount of that shortfall.  However, where one forms the view that GST has been overpaid, it is another thing to be potentially exposed to a financial penalty where steps are taken to claim that refund from the ATO or to initiate the review procedure in Part IVC of the Taxation Administration Act.

Comments on the draft Practice Statements are due by 27 January 2012.