In Norseman Gold Plc v Revenue and Customs [2016] UKUT 69 the Upper Tax Tribunal agreed with the finding of the First Tier Tribunal that a UK management company providing management services to overseas subsidiaries was not entitled to input tax credits because it did not make taxable supplies to those subsidiaries. The management company was found to have made supplies to its subsidiaries, but those supplies were not made “for consideration”

The decision illustrates two differences between the UK VAT regime and the GST in Australia. First, the threshold requirement for claiming input tax credits is different. Second, the requisite nexus between “supply” and “consideration” is narrower in the UK.

In the UK, an entitlement to input tax credits arises if acquisitions are made in the course of conducting “economic activity”, meaning the making of taxable supplies (supplies for consideration) or intending to make at some time in the future taxable supplies. The First Tier Tribunal found that the taxpayer had supplied management services to its subsidiaries and that what it supplied was “capable” of amounting to a taxable supply – however, what it had supplied was not in fact supplied for consideration and was therefore not a taxable supply. Any understanding (referred to by the First Tier Tribunal as a “vague intention”) between the taxpayer and its subsidiaries about payment being made for services when the subsidiaries could afford to pay was insufficient to establish that supplied would be made “for consideration”.

On appeal, the Upper Tribunal agreed with the First Tier Tribunal and found that the supplies were not made for consideration, they were made gratuitously. The Upper Tribunal noted (at [126]) that the taxpayer did intend to make supplies to its subsidiaries, but the question was whether the taxpayer intended to make supplies “for consideration”. The answer to this question was no because:

…the direct and immediate link between the supplies and intended supplies on the one hand and any payment in respect of those supplies on the other hand was absent at the time when the input tax was incurred.

The conclusion of the Upper Tribunal was helpfully summarised as follows (at [137]:

Putting the matter in the very briefest of ways, this is a case where one party (Norseman) has supplied services to closely related parties (its subsidiaries) with, at best from Norseman’s point of view, an intention on its part to charge at some unspecified time in the future for its services, but with no agreement with the subsidiaries to that effect (even to the effect that the subsidiaries would pay if an when they had the funds available to do so) and no understanding of the amount or timing of such payment. The charge/payment, if and when introduced, might or might not match or exceed recovery of the costs incurred in providing the services and might or might not include a profit element. It might even be nominal…This is an insufficient basis on which to be able to say, at any time prior or during the relevant period, that the eventual charge and payment would have the immediate and direct link with the services provided which EU law requires. If it is not possible to find the necessary link in relation to future supplies and the intended payments for those supplies, still less is it possible to find a link where there has, as yet, been no payment at all, in particular in relation to services provided during the relevant period.

Comment

The decision illustrates two differences between the UK VAT regime and the GST Act.

Entitlement to claim input tax credit

In the UK the entitlement to claim input tax credits arises where there is a direct connection between the acquisition and the making of taxable supplies (i.e., the making of supplies for consideration). In Australia, the test is one of “creditable purpose” and requires that the entity make the acquisition “in carrying on its enterprise”: s 11-15(1) (subject to the “blocking provision” in s 11-15(2) where the acquisitions relate to making supplies that would be input taxed or where the acquisitions are of a private or domestic nature).

These tests can operate quite differently. In the UK an entity must show that it is, or will be, making taxable supplies (i.e., supplies for consideration). In contrast, in Australia an entity need only show that it is making the acquisitions “in carrying on its enterprise”.  To constitute an enterprise, an entity must carry out an activity, or series of activities, done, inter alia, in the form of a business or in the form of an adventure or concern in the nature of trade: s 9-20(1). Given that the carve-out for activities undertaken without a reasonable expectation of profit or gain is limited to individuals (whether on their own or in partnership), it does not appear necessary that a corporate entity carry out these activities for profit or gain or that it actually make taxable supplies. This raises the question of whether this case would be decided differently in Australia.

Meaning of “for consideration”

The meaning of the words “supply for consideration” is narrower in the UK.The Upper Tribunal observed that the authorities established that a supply is “for consideration” where there is a direct link between the service supplied and the consideration received, although there need not be a legally binding agreement between the parties. The nexus between “supply” and “consideration” is a direct one.

In contrast, the words “supply for consideration” in s 9-5(a) of the GST Act need to be seen in light of the expansive definition of “consideration” in s 9-15. In AP Group Limited v Commissioner of Taxation [2013] FCAFC 105  (Edmonds and Jagot JJ) observed that if the definitions in s 9-15 were inserted in substitution for the defined terms where they appear in s 9-5, the result was as follows:

you make a supply for [any consideration, within the meaning given by sections 9-15 and 9-17 in connection with the supply or acquisition].

In Australia, the nexus between “supply” and “consideration” is broader than the UK.  There will be a “supply for consideration” where the supply is made “in connection with” consideration. This nexus may therefore be direct or indirect, although it would appear that a “trivial” or “remote” connection will not suffice.

On 10 February 2016 the Treasurer introduced Tax and Superannuation Laws Amendment (2016 Measures No.1) Bill 2016 into Parliament. The Explanatory Memorandum to the Bill can be accessed here. The Bill contains measures initially flagged in the Budget. The measures have been the subject of a detailed consultation process and two forms of Exposure Draft have been published for comment.

In summary, the amendments have the following aims:

• to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to goods and services tax in a similar way to equivalent supplies made by Australian entities; and
• to better target the way Australia’s goods and services tax rules apply to cross-border supplies that involve non-resident entities.

A brief outline of the amendments are set out below. The measures are to take effect for tax periods starting on or after 1 July 2017.

Extending GST to imported digital products and other services

Expansion of the concept of “connected with Australia”

Under the existing law, for a supply to fall within the GST net and potentially be a taxable supply it must be “connected with the indirect tax zone” (i.e., connected with Australia) pursuant to s 9-25 of the GST Act. The amendments expand this concept considerably.

Section 9-25 contains the following categories of supplies that may be connected with Australia:

• supplies of goods wholly within Australia – sub-section (1);
• supplies of goods from Australia – sub-section (2);
• supplies of goods to Australia – sub-section (3);
• supplies of real property – sub-section (4); and
• supplies of anything else – sub-section (5).

Section (5) currently makes a supply of “anything else” connected with Australia where one of the following applies:

• the thing is done in Australia;
• the supplier makes the supply through an enterprise carried on in Australia; or
• the supply is a right or option to the supply of a thing that would be connected with Australia.

The amendments expand subsection (5) to provide that a supply of anything other than goods or real property is connected with Australia if “the *recipient is an *Australian consumer“.

An “Australian consumer” is essentially an entity that is an Australian resident who is not registered for GST, or if it is registered, the entity does not acquire the thing supplied solely or partly for the purpose of an enterprise carried on by the entity.

This means that all supplies of intangibles (e.g., digital downloads, professional services etc) to a private consumer, or a registered consumer who acquires it not for the purpose of an enterprise (e.g., in a private capacity), from an overseas entity will be “connected with Australia” and will be potentially subject to GST in the same way as supplies from entities in Australia – i.e., if the other requirements in s 9-5 are satisfied. This also means that overseas suppliers will be required to register for GST if they exceed the GST turnover threshold. The stated aim is for there to be a “level-playing field” where all intangibles acquired by consumers have the same GST treatment, regardless of where the supplier is.

Safeguards for overseas suppliers

The Explanatory Memorandum recognises that in may cases foreign suppliers will have only a limited capacity to investigate the residency and GST registration status of the recipient. The amendments provide a safeguard for supplies, to the effect that the offshore supplier will only be liable for GST in relation to a supply if:

• the supplier takes reasonable steps to obtain information concerning whether the recipient of the supply is an Australian consumer; and
• having taken these steps, reasonably believes that the recipient is not an Australian consumer.

Interestingly, the safeguards do not extend to the reverse situation, where the overseas supplier wrong treats the recipient as a consumer and over-pays GST. The Explanatory Memorandum states that in such case Division 142 of the GST Act would apply and the supplier should generally be required to reimburse the Australian consumer for the GST before being able to claim a refund.

Shift of GST liability to electronic distribution platforms

The amendments shift the liability for GST from the overseas supplier to the operator of an “electronic distribution platform”. This is a platform operating over the internet, but not a physical store or one operated by mail.

The rationale for shifting liability is that the platform operator has most of the information about the recipients of the supplies and is generally larger and better resourced than most of the entities making supplies through the platform.

The parties can agree to shift the liability for GST to the supplier if the parties agree in writing and the recipient is given a document identifying the supply as having been made by the supplier.

GST-free and input taxed supplies

Divisions 38 and 40 are to be amended to allow Legislative Determinations to be made that a specific class of supplies that fall within the amendments to be GST-free or input taxed.

The Explanatory Memorandum states that this power will only be exercised where the current treatment of the supply or class of supply is contrary to Australia’s international trade law obligations and the Treasurer is satisfied that a supply made by a comparable Australian resident entity would receive the same treatment.

Tax invoices

The Amendments provide that the supplier is not obliged to provide a tax invoice or adjustment note at the request of the recipient. The rationale for this is that unlike most other types of taxable supplies, offshore supplies falling within the amendments by definition cannot be made to an entity that is entitled to an ITC in relation to the acquisition of the supply.

The margin scheme in Division 75 operates in the same way. As the purchaser is not entitled to input tax credits where the margin scheme is used, there is no need for a tax invoice to be provided.

GST treatment of B2B cross border transactions

These Amendments are not aimed at altering the tax base. Rather, they are aimed at streamlining the way the GST applies to cross-border supplies between businesses by relieving non-resident suppliers of the obligation to account for GST on certain supplies.

The amendments do this by ensuring that certain supplies made by non-residents are not connected with Australia – those supplies are treated as being “disconnected”. For these supplies, the recipient will be responsible for for determining if they have a GST liability under the reverse charge rules in Division 84 of the GST Act – that liability will arise to the extent that the acquisition is not creditable. If the acquisition is fully creditable in the hands of the recipient, Division 84 does not apply – there is no need to collect the GST revenue where that is fully offset by the claim for input tax credits.

In a decision handed down just before Christmas, the European Court of Justice in Air France – KLM [2015] EUECJ C-250/14 found that Air France was liable to VAT on unused air transport tickets – also described as “no-shows”. The same issue was considered in Australia in 2012 where the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 found that GST was payable.

The Court approached the question on the basis a supply of services, such as air passenger transport, is subject to VAT where:

• first, the sum paid by a passenger to an airline company, in the context of the legal relationship constituted by the transport contract, is directly linked with an identifiable service for which it constitutes the remuneration; and
• secondly, that service is performed.

In respect of the first dot-point, the Court observed that it had previously found that the services provided in performance of obligations arising from a contract to transport passengers by air are the checking-in and the boarding of passengers, the on-board reception of those passengers at the place of take-off agreed in the transport contract, the departure of the aircraft at the scheduled time, the transport of the passengers and their luggage from the place of departure to the place of arrival, the care of passengers during the flight, and, finally, their disembarkation in conditions of safety at the place of landing and at the time scheduled in that contract.

In respect of the second dot-point, the Court observed that it was  possible to perform those services only if the passenger of the airline company turns up on the agreed date and at the agreed place of boarding, the customer’s right to performance of those services being given by the company until the time of boarding, according to the conditions set out in the contract to transport passengers concluded when the ticket was purchased.

Nevertheless, the Court found that the consideration for the ticket consisted of the passenger’s right to benefit from the performance of obligations arising from the transport contract, regardless of whether the passenger exercises that right, since the airline company fulfilled the service by enabling the passenger to benefit from those services.

The finding of the Court is similar to that of the majority of the High Court in Qantas, where the taxable supply was identified as being “at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline”, with the fare being consideration for that supply. In the context of both decisions it did not matter whether the flight was actually taken by the passenger.

In Crown Estates (Sales) Pty Ltd and Commissioner of Taxation [2015] AATA 949 the Tribunal found that the applicant was not entitled to claim input tax credits in respect of acquisitions made in providing property management services to owner-clients because the applicant was acting as the agent of those owner-clients.

The applicant contended that there were two aspects to the relationship with owner-clients:

• finding and securing clients and collecting rents that were paid into a trust account; and
• managing the property, including its physical state of repair. This included acquiring goods and services from tradespeople.

In respect of the second aspect of the relationship, the applicant contended that while those goods and services were acquired for use in properties owned by the owner-clients, it was acting as a principal when engaging the contractors and that the applicant was liable to the contractors, with the costs then passed-on to the owner-clients (some of whom refused to pay).

The Tribunal was not persuaded that the applicant was acting as a principal. In doing so, the Tribunal made some general observations about the  interaction between the GST and the law of agency:

• you cannot receive an input tax credit in respect of a creditable acquisition made by another – the issue here was whether the applicant acquired anything, or whether the acquisition was made by the property owners;
• an agent is able to create and affect a legally enforceable relationship between the principal and a third party – at least where the agency is disclosed or it is clear from the the terms of the agreement that the agent is acting in that capacity and does not intend to be personally bound;
• where the agent does not disclose the existence of the principal and appears on the face of the relationship to be contracting with the third party in his or her own right, the undisclosed principal will still be liable and may enforce the agreement with the third party – in that event, the (undisclosed) relationship as between principal and agent suggests the acquisition of goods or services from the third party will still amount to a supply of goods or services by the third party to the undisclosed principal, albeit that the agent may also be liable to the third party.

A final comment of the Tribunal was that if the applicant was entitled to input tax credits on the acquisitions from the contractors, any input tax credit that could be claimed would be offset by the GST payable when those costs were passed on to the property-owners.

The recent decision of the First Tier Tribunal in  Adecco Uk Ltd v Revenue & Customs [2015] UKFTT 600 illustrates the difficulties with tripartite agreements (both here and in the UK).

The Tribunal had to decide whether the applicant was liable to pay VAT on the full charge paid by its clients for the services of non-employed temps provided to those clients or only on the element of the charge retained by it (i.e. the commission or gross profit element).

As observed by the Tribunal (at [8]), the question for the Tribunal was simple in essence. What did Adecco supply to its clients?

• A supply of introductory services – the consideration being the commission?; or
• A supply of the temps – the consideration being the entire fee?

The answer was not so easy.

The Tribunal ultimately found that Adecco was liable to pay VAT on the whole charge, but doing so required a decision running to some 314 paragraphs, taking the reader on a detailed journey through the minefield that is the world of tripartite supplies and a consideration of the various decisions of the UK courts and the ECJ that have considered the issue, including Redrow, Loyalty Management, Baxi Group, WHA and Airtours.

In an additional twist that only adds to the confusion surrounding VAT/GST and tripartite agreements, in coming to its conclusion the Tribunal found that it could not follow a decision of the First Tier Tribunal in 2011 that came to the contrary view on the same issue and almost identical facts.

No doubt there will be an appeal – indeed, the Tribunal effectively invited an appeal to allow a higher authority to clarify the VAT issues.

My analysis of the decision can be accessed here.

In Sedgwick and Commissioner of Taxation [2015] AATA 690 the Tribunal found that the applicant was not entitled to claim input tax credits where the claim for credits was made after the four year statutory time period in Division 93 of the GST Act.

The Tribunal found that the operation of Division 93 was clear and unambiguous and the legislation left no room for the operation of a discretion. In coming to this view, the Tribunal relied on the decision of the Tribunal earlier this year in Re The Trustee for SBM Trust and Commissioner of Taxation  [2015] AATA 174. The Tribunal observed that this may be an unfortunate outcome, but there were policy reasons that underpinned the imposition of a decisive cut-off date.

As I noted in my post of last week, the Full Federal Court, in an ex tempore judgment, dismissed the taxpayer’s appeal of the decision of in Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCA 94. The judgment is now available on austlii and can be accessed here.*

The Full Court described the issue in the appeal as whether Rio Tinto is entitled to credits for the GST paid on the acquisitions made by the members of the GST group in relation to the supply of residential accommodation to employees, contractors and ancillary service providers in the remote Pilbara region. Rio Tinto contended that GST was paid on acquisitions by Hamersley and PICS in connection with the provision of residential accommodation to which the group is entitled to credits. The Commissioner contended, as her Honour held at first instance, that credits were denied to Rio Tinto by operation of s 11-15(2)(a) of the GST Act.

The Full Court found that the effect of s 11-15(2), being an exclusion or blocking provision, was to exclude an acquisition to the extent that it relates to a supply that is input taxed from the ambit of “creditable purpose”. The statutory enquiry of s 11-15(2) was described as follows:

…the inquiry called for by s 11-15(2)(a) is not into whether something had been acquired in carrying on the enterprise (which would otherwise have acquired the thing for a creditable purpose within the meaning of s 11-15(1)) but, rather, irrespective of the extent to which the thing had been acquired in carrying on the enterprise, to what extent, if any, did the acquisition relate to making supplies that would be input taxed. The relationship to focus on, in other words, is the relationship between the antecedent acquisitions for which credit is claimed and the subsequent supply for which the credit is, in effect, lost.

The application of s 11-15(2)(a) requires, therefore, the precise identification of the relevant acquisition and a factual inquiry into the relationship between that acquisition and the making of supplies that would be input taxed. An acquisition will not be for a creditable purpose to the extent that the facts disclose that the acquisition relates to the making by the enterprise of supplies that would be input taxed. Some acquisitions may relate to the making of supplies that would be capable of distinct and separate apportionment as between an input taxed supply and an otherwise taxable supply. In that case it may be possible to divide the creditable purpose between the two. Other acquisitions may be indifferently both for supplies that would be both input taxed and otherwise taxable generally. In that case some fair and reasonable assessment of the extent of the relationship between the two may need to be made. But, as is the case here, an acquisition which relates wholly to the making of supplies that would be input taxed is not to be apportioned merely because that supply may also serve some broader commercial objective of the supplier.

The Full Court found that an examination of the acquisitions in question revealed unquestionably that they all relate wholly to the making of supplies that would be input taxed, albeit that they do so for the wider purpose of the enterprise. The terms of s 11-15(2)(a) do not depend on the reason or purpose of the enterprise in making the supply or making the anterior acquisition.

My discussion of the judgment of the primary judge can be accessed here.

* As I appeared for the Commissioner, in this post I have endeavoured to not provide any analysis or comment on the decision, but rather to summarise the reasons for decision of the Court.

Today the Full Federal Court, in an ex tempore judgment*, dismissed the taxpayer’s appeal of the decision of in Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCA 94. In the decision below, the primary judge dismissed an application by the taxpayer for a declaration that it was entitled to input tax credits in respect of acquisitions made in the course of providing remote housing accommodation to its workforce in the Pilbara mining region of Western Australia.

I will post the written reasons of the Full Court when they become available on austlii. My discussion of the judgment of the primary judge can be accessed here.

*An ex tempore judgment is one that is made on the day of the hearing, as opposed to one made after the Court has reserved its decision.