Author Archives: chrissievers

Tribunal finds applicant’s ebay activities an enterprise and liable for GST

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In Cronan and Commissioner of Taxation [2014] AATA 745 the Tribunal has found that the ebay activities of the applicant were sufficient to constitute an enterprise and that the applicant was liable for GST (and also for income tax).

The decision is a reminder for those persons who transact with any sort of regularity on a site such as ebay, as reflected in the following observations of the Tribunal:

It seems the Applicant has misunderstood the legal position in regard to his circumstances. In particular the Applicant has allowed the situation regarding his eBay activities to proceed without giving proper consideration as to whether he is subject to income tax with respect to the profits on his trading and GST on his sales.

These are fundamental matters which anyone who transacts with even a small degree of regularity must turn their minds to.

In determining whether the applicant was carrying on an enterprise, the Tribunal considered the following “critical factors”:

  • the applicant had a clear commercial objective to make a profit
  • it could not be said that the trading activities could have had the character of a recreational pursuit or hobby
  • the contention that the applicant lost money on many items sold does not preclude a finding that he was engaged in carrying on a business
  • that he did not pay “wholesale” prices afforded to dealers does not require that he was not carrying on a business
  • the trading activities were carried on in a commercial or business-like manner
  • the trading activities were characterised by repetition and regularity
  • the activities were carried out on a commercial scale.

The decision is also a reminder for persons to retain documents and records. In this case, the Commissioner issued default assessments based on industry benchmarks (which the Tribunal observed were second best estimates), but in the absence of contemporaneous records the applicant was unable to show what the actual assessments should be.

Tribunal finds applicant not carrying on an enterprise

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In Guru 4U and Commissioner of Taxation [2014] AATA 740 the Tribunal has found that the applicant was not carrying on an enterprise. The Tribunal found that the taxpayer had intended to start an enterprise but had not yet done so. Accordingly, the Commissioner was required to cancel its GST registration and it was not liable to pay GST and not entitled to input tax credits.

The applicant contended that its main business activity was “lifestyle counselling and advisory services”. The applicant was incorporated on 25 November 2010 and it lodged BASs for the quarterly tax periods from October-December 2010 to April-June 2012. Each of the BASs claimed input tax credits and three reported a liability for GST, although in each case the applicant was in a refund position. In total the Commissioner paid refunds of $9,678 to the applicant.

The Tribunal found that the applicant was a corporate vehicle set up by its controller for his family to conduct activities in the future, but that it had not yet started to do so. Further, any activities during the relevant period were conducted by the controller personally. The Tribunal was also not satisfied that the applicant had made the acquisitions claimed, and that the mere assertion that administration services were provided is not persuasive, in the absence of independent evidence.

In finding that the applicant was not carrying on an enterprise, the Tribunal observed that the commencement of the enterprise is not necessarily the same thing as taking a step in preparation for such commencement: referring to Russell v Federal Commissioner of Taxation [2011] FCAFC 10; (2011) 190 FCR 449 at 465, [71]. The Tribunal also observed that the intention of the taxpayer is a relevant, but not determinative, consideration.

The Tribunal concluded as follows (at [72]-[73]):

It is plain from the above findings that the Company intends to carry on an enterprise in the future when the family members are ready. It is also the case that some initial steps have been taken in the Relevant Period…to prepare the Company for the commencement of activities, but they are very preliminary.

I have concluded that the promotional activities undertaken in the Relevant Period, including the uploading of a video on a YouTube channel about the Company’s plans and the establishment of a website, did not demonstrate that these steps were done “in the course of the commencement … of the enterprise”, which is the expanded meaning of enterprise by virtue of the definition of “carrying on” in s 195-1 of the GST Act. They were merely preparatory steps to advertise and showcase Guru 4U, and the enterprise had not commenced by June 2012.

 

 

 

Commissioner publishes draft ruling on “passing on” and final ruling on motor vehicle incentives

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Over the last few days the Commissioner published two GST Rulings.

The first is draft GSTR 2014/D4 ‘Goods and services tax: the meaning of the terms ‘passed on’ and ‘reimburse’ for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999′. The draft ruling seeks to explain the Commissioner’s view on the meaning of the terms “passed on” and “reimburse” for the purposes of Division 142 of the GST Act, being terms which are fundamental to the operation of that Division and the entitlement of taxpayers to refunds of overpaid GST. My discussion of the ruling can be found here. My thoughts generally on the issue of “passing on” can be found in the following article published on this site in June of this year.

The second is GSTR 2014/1 ‘Goods and Services tax: motor vehicle incentive payments’ which explains the Commissioner’s view on the GST consequences of incentive payments made by motor vehicle manufacturers, importers and distributors to motor vehicle dealers and to provide practical guidance to the motor vehicle industry following the decision of the Full Federal Court in AP Group Limited v Federal Commissioner of Taxation [2013] FCAFC 105. The Commissioner acknowledges that as a result of the decision, the previous ATO view concerning the GST consequences of motor vehicle incentive payments can no longer be maintained.

Commissioner’s appeal in MBI Properties partly heard by the High Court today

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Today the High Court partly heard the Commissioner’s appeal of the Full Federal Court’s decision in Commissioner of Taxation v MBI Properties Pty Ltd [2013] FCAFC 112. The appeal was adjourned to a date to be fixed part way through submissions by the respondent taxpayer.

The principal issue in the appeal is whether the purchaser of a reversionary estate in land (which is leased) makes a “supply” to the lessee within the meaning in s 9-10 of the GST Act. In the appeal, the Commissioner’s essential submission was that by submitting to and being bound to the covenants in the lease, in particular providing exclusive possession and quiet enjoyment of the premises, the purchaser made a supply.

The transcript of the hearing can be accessed here.

The documents filed by the parties are as follows:

 

 

International Cases Update – May-July 2014 – decision by Court of Appeal on VAT and tripartite agreements

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In the period May to July 2014 the following decisions dealing with VAT and GST in the United Kingdom and New Zealand were handed down.

Of particular interest is the decision of the UK Court of Appeal in Airtours Holidays Transport Ltd v Revenue and Customs [2014] EWCA Civ 1033 which dealt with the question of whether the appellant taxpayer was entitled to recover input tax credits pursuant to a tripartite arrangement pursuant to which PwC was engaged to provide services. While the appellant paid for the services, the issue was whether any services were provided to the appellant. The hearing of the appeal was deferred pending the consideration of appeals by the Supreme Court in HMRC v Aimia Coalition Loyalty UK Ltd (formerly Loyalty Management UK Ltd) [2013] UKSC 15 and WHA Ltd v HMRC [2013] UKSC 24 (my analysis of those decisions can be found here and here, respectively). The Court noted that in those cases the Supreme Court confirmed the decision of the House of Lords in CCE v Redrow Group plc [1999] STC 161 (HL) but qualified the decision in a limited respect.

The services were provided by PwC in the context of a large-scale restructuring of the appellant, at a time when its business was in financial crisis. The First Tier Tribunal accepted the argument of the appellant (supported by PwC) that the services provided by PwC for which the appellant paid had been supplied for VAT purposes by PwC to the appellant. On appeal the Upper Tribunal concluded that the FTT was wrong in law in its construction of the relevant agreements and that, looking at the substance of the transactions, the appellant did not receive a supply of services from PwC, but rather that the Services had been supplied to a number of banks, to which the appellant was, at the relevant time, indebted. The Upper Tribunal also decided that the appellant received nothing of value from PwC to use for the purpose of its business in return for payment.

The Court of Appeal (2:1) dismissed the appeal by the taxpayer. As noted by one of the majority justices, the appeal raised a narrow point, but one of some difficulty on which it is possible to take different views. The dissenting judgment helpfully outlines the current state of the law and distills a number of propositions from the decision in Redrow and the recent decisions of the Supreme Court. My analysis of the decision can be accessed here.

United Kingdom

Court of Appeal

Upper Tax Tribunal

  • Revenue and Customs v Earlsferry Thistle Golf Club [2014] UKUT 250 – VAT – jurisdiction of Tribunal – appeal by recipient of supply against refusal by HMRC to repay VAT erroneously charged on exempt supply – VATA 1994, section 80 – exercise of Community law right to obtain repayment directly from HMRC – whether Tribunal erred in refusing application to strike out – Appeal allowed.
  • Revenue and Customs v Finnamore (t/a Hanbidge Storage Services) [2014] UKUT 336 – AT – Classification of supply of plot of land and storage container – Item 1 Group 1 Schedule 9 Value Added Tax Act – supply exempt – no – appeal allowed
  • Revenue and Customs v LOK’nSTORE Group plc [2014] UKUT 288 – VAT – input tax – partial exemption – company making taxable supplies of storage and exempt supplies of insurance – special method for calculating proportion of deductible input tax on overheads – whether special method produces fairer and more reasonable result than standard method – held yes by FTT – whether FTT erred in law in so concluding – held no – appeal dismissed
  • Noble v Revenue and Customs [2014] UKUT 252 – VALUE ADDED TAX – Edwards v Bairstow – whether First-tier Tribunal erred in law in finding that that supplies shown on invoices did not take place – no – appeal dismissed
  • Revenue and Customs v Pinevale Ltd [2014] UKUT 202 – Value Added Tax – Reduced rate supply – Energy saving materials – Insulation for roofs – Polycarbonate panels for conservatories – Panels supplied to create new roof – Panels supplied to replace existing panels – Whether energy saving materials comprising insulation for roofs – Appeal allowed
  • Revenue and Customs v Roger Skinner Ltd [2014] UKUT 204 – VALUE ADDED TAX – whether certain kinds of dog food were pet food – meaning of “meal” in expression “biscuits and meal” in zero-rating schedule
  • South African Tourist Board v Revenue and Customs [2014] UKUT 280 – VAT – input tax recoverability – s 26 VATA – reg 103 VAT Regulations – whether certain activities of appellant would be taxable supplies if made in the UK – whether supplies made for a consideration – art 2, Principal VAT Directive – Apple and Pear; Tolsma – whether appellant acting as a taxable person – economic activity – art 9, Principal VAT Directive

First Tier Tribunal

  • African Consolidated Resources Plc v Revenue & Customs [2014] UKFTT 580 – VAT – holding company – economic activities – taxable supplies – intra-group loan finance – intra- group management services- HELD – loan finance quasi- equity -not carried on on commercial basis –not economic activity – management services –insufficient link between fixed fee and services provided – not taxable supply – appeals dismissed.
  • Baldwin (t/a Ventnor Towers Hotels) v Revenue & Customs [2014] UKFTT 489 – VAT – Place of supply – hotel accommodation supplied to non UK travel agents; EC Sales Lists
  • Helmbridge Ltd v Revenue & Customs [2014] UKFTT 732 – VAT – input tax – five invoices – whether supply to appellant or to directors personally – whether benefit in kind or pecuniary liability – appeal dismissed
  • Itchen Sash Window Renovation Ltd v Revenue & Customs [2014] IKFTT 518 – VALUE ADDED TAX – reduced rate on supplies of energy-saving materials – weather stripping services supplied with other services generally related to renovation of windows – whether composite or separate supplies – held that where weather stripping services were invoiced for separate prices they were separate supplies, otherwise they were elements of composite supplies not attracting the reduced rate – penalty considered – held that in relation to all but one of the periods assessed the inaccuracy was not careless with two minor exceptions – mitigation reduction percentages also increased – decision in principle – appeal allowed in part
  • Lees of Scotland Ltd & Thomas Tunnock Ltd v Revenue & Customs [2014] UKFTT 630 – VAT – food – excepted items – confectionary – subset cakes – snowballs – sufficient characteristics to be classified as cakes – yes – appeal allowed
  • Norseman Gold plc v Revenue & Customs [2014] UKFTT 573 – VALUE ADDED TAX — input tax — whether appellant carrying on economic activity — whether expenses attributable to onward taxable supply — UK resident company providing management services to overseas subsidiaries — no agreement on amount of consideration to be paid by subsidiaries — no — whether taxable supplies made — no — whether assessments in time — yes — appeal dismissed
  • Oriflame UK Ltd v Commissioners for Revenue & Customs [2014] UKFTT 454 – VAT – Preliminary issue – Single supply made by appellant to its non-VAT registered sales consultants – Subsequent retail sale of goods sold by sales consultants – Direction that output tax on appellant’s due at “open market value on a sale by retail” – Whether “open market value on a sale by retail” should include delivery charges made to sales consultants – Appeal Allowed – Paragraph 2 Schedule 6 Value Added Tax Act 1994
  • Spencer-Churchill v Revenue & Customs [2014] UKFTT 635 – Value Added Tax  –  Whether a “one-off” service, for which the consideration received was arguably gratuitous was undertaken “in the course of business”  –  Appeal dismissed
  • Temple Retail Ltd v Revenue & Customs [2014] UKFTT 702 – VAT – time limits for assessment – whether assessment made more than one year after the HMRC officer had received “evidence of the facts sufficient in the opinion of the commissioners to justify the making of the assessments” – held, yes – appeal allowed.
  • Vodaphone Group Services Ltd v Revenue & Customs [2014] UKFTT 701 – VAT – claim for repayment of over paid tax – appellant sought to justify claim on a different basis to the basis on which claim originally made – whether that was the making of a new claim out of time –Reed Employment considered –  appeal allowed

New Zealand

Taxation Review Authority

Federal Court dismisses taxpayer’s challenge against interim GST audit report

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In Halls v Commissioner of Taxation [2014] FCA 775 the Federal Court dismissed an application by the taxpayer challenging an interim GST audit report of the Commissioner under s 39B of the Judiciary Act 1903 and ss 5 and 6 of the Administrative Decisions (Judicial Review) Act 1977. The taxpayer sought a declaration that the interim findings were ultra vires, an injunction restraining the Commissioner from proceeding to a final position on the audit or issuing any further notices in the exercise of its powers and an injunction restraining the Commissioner from using any information obtained in the audit investigation.

The Federal Court found that the claim under the ADJR Act was incompetent for the following reasons:

  • the interim audit findings did not constitute a “decision” under the Act. The Court observed that there was no legislative requirement or provision for the making of an interim audit report, and the audit process is not otherwise provided for in legislation;
  • if the findings did constitute a “decision”, it fell within Schedule 1 of the Act outlining decisions to which the Act did not apply, which included decisions making, or forming part of the process of making, or leading up to the making of, assessments or calculations of tax, charge or duty, or decisions disallowing objections to assessments or calculations of tax, charge or duty, or decisions amending, or refusing to amend, assessments or calculations of tax, charge or duty, under the GST Act.

The Court also found that the claim under s 39B of the Judiciary Act had no reasonable prospect of success The findings were interim findings and there was nothing to quash or set aside. The Court referred to the following observations of French J (as his Honour then was) in Meredith v Federal Commissioner of Taxation and Others [2001] FCA 1135 at [21]):

The so-called decision is at best the formation of an opinion or intention which is not provided for in the Act. It has no statutory significance. It is therefore not amenable to being quashed or set aside which is the only relief claimed pursuant to s 39B of the Judiciary Act. The law cannot quash or set aside what people think or intend even if their thoughts or intentions are the precursors of statutory action. In so far as relief is claimed under s 39B of the Judiciary Actthe claim is, in my opinion, manifestly untenable and should, in respect of this “decision” be dismissed.

The decision shows that during a GST audit (indeed any audit by the Commissioner), being an administrative process, the taxpayer has limited recourse to the Courts. If an assessment does issue, the taxpayer can avail him or herself of the review rights in Part IVC of the Taxation Administration Act.

High Court to hear MBI Properties in the week commencing 9 September 2014

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The Commissioner’s appeal of the Full Federal Court’s decision in Commissioner of Taxation v MBI Properties Pty Ltd [2013] FCAFC 112 is scheduled to be heard by the High Court in the week commencing Tuesday 9 September 2014. Also, the reply submissions filed by the Commissioner are now available and can be accessed here.

For completeness, the documents filed by the parties are as follows:

 

New paper – “Division 142 and refunds of overpaid GST – when is GST passed on?”

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I have prepared a paper looking at the concept of “passing on” in the context of Division 142, which was recently introduced into the GST Act.

Division 142 replaces s 105-65 of Schedule 1 to the TAA and effectively creates a deeming regime, whereby overpaid GST that has been “passed on” to another entity is taken to have always been payable until that other entity is reimbursed for the passed on GST. The Commissioner retains a discretion to pay refunds, but it is expected to have a narrow operation.

Determining whether GST has been “passed on” is therefore a critical matter as it provides the trigger for the operation of the new regime. If no part of overpaid GST has been passed on, taxpayers will be entitled to a refund as a matter of right. However, to the extent that the overpaid GST has been passed on, taxpayers must reimburse the other entity or undertake the difficult task of convincing the Commissioner to exercise his discretion.

The paper can be accessed here. It can also be accessed from the “My Articles” part of the site.

 

 

Tribunal finds applicant claiming to be a victim of identity fraud was “dissatisfied” with objection decision

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In Van Gestel and Commissioner of Taxation [2014] AATA 396 the Tribunal found that it has jurisdiction to hear the applicant’s review of the Commissioner’s objection decision where the applicant contends that he was the victim of identity fraud. The Tribunal rejected the Commissioner’s contention that the applicant was not “dissatisfied” with the objection decision in the sense intended by the legislation and was therefore unable to challenge the objection decision. In what would appear to be a harsh outcome, the Commissioner contends that the applicant should approach the Australian Federal Police if he believes he has been the victim of identity fraud. In the meantime, the Commissioner says the taxpayer should pay the monies he is required to pay under the assessment

The facts were described by the Tribunal as follows:

This unhappy tale begins with the lodgement of Business Activity Statements (“BAS”) in respect of the periods 1 July 2010 to 31 July 2010 and 1 August 2010 to 31 August 2010. Both forms were lodged electronically. The first claimed sales of $11,098 in the period which attracted GST of $1,009 – but also recorded purchases of over $123,000, which resulted in a claim for input tax credits. After adjustments to take into account other monies the taxpayer owed to the Commissioner, a refund in the amount of $9,695 was paid into an account held in the name of a third party. The Commissioner says the third party account was nominated by the taxpayer over the phone. The second BAS also recorded an excess of purchases over sales and a fuel tax credit leading to a total refund of $8,791 after adjustments. That refund was paid into an account in the name of a different third party whose identity was also supplied to the Commissioner over the phone.

The Commissioner subsequently conducted an audit of the taxpayer’s business, only to find there wasn’t one. The taxpayer says he had not conducted a business for some time, and denied ever lodging a BAS in July or August 2010. He says he did not supply the names of the third party bank accounts or receive the money that was refunded. He claims he is mystified as to how the payments came to be made. He says he has been the victim of identity fraud, and thinks the Commissioner has been taken in by a fraudster as a result of shortcomings in internal processes. The taxpayer says the Commissioner should pursue the fraudsters rather than taking the easy option of attempting to recover the monies from the taxpayer.

On the question of jurisdiction, a person who is “dissatisfied” with a reviewable objection decision may apply to the Tribunal for review of the decision: s 14ZZ(1)(a)(i) of the TAA. The Commissioner referred to the decision of the Full Court in CTC Resources NL v Federal Commissioner of Taxation [1994] FCA 947 where it was concluded that it was not enough for the taxpayer to be curious about the outcome of an appeal if the absence of a favourable result would have no legal consequences for the taxpayer. The Commissioner contended that the objection decision concluded that the applicant was not entitled to claim the input tax credits at issue and the applicant agrees with this – therefore, there was really nothing left for the Tribunal to do as the review would produce no legal consequences for the applicant.

The Tribunal did not agree, noting that while the applicant did not dispute the reasoning in the objection decision, he disputes the factual premise on which the reasoning and the ultimate conclusion were based – namely, that he had sought credits in a BAS in the first place. He was therefore “dissatisfied” with the objection decision and a review of that decision necessarily extends to its factual basis, which may extend to the disputed allegation that the taxpayer never claimed the credits in the first place.

Tribunal finds letter by taxpayer constitutes a notification of entitlement to input tax credits

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In North Sydney Developments Pty Ltd and Commissioner of Taxation [2014] AATA 363 the Tribunal found that a letter provided to the Commissioner was a valid notification for the purposes of s 105-55(1)(a) of Schedule 1 to the TAA in relation to input tax credits for tax periods ending December 2005 and January 2006.

Set out below are the principal events underlying the input tax credit claim as identified by the Tribunal and the conclusions of the Tribunal. As I appeared in the case I will not be providing an analysis of the decision.

The principal events were as follows:

  • May 2004 to November 2005: North Sydney lodged 17 monthly Business Activity Statements reporting GST purchase payments totalling $1,070,800, and no sales. The Commissioner accepted that North Sydney was entitled to input tax credits in relation to the amounts claimed in each statement.
  • December 2005: North Sydney did not lodge a Business Activity Statement for the month.
  • January 2006: North Sydney again did not lodge a Business Activity Statement for the month.
  • 16 February 2006: the Commissioner issued a “lodgement and payment” notice requiring North Sydney to lodge its December 2005 Business Activity Statement, and pay any liability amount it recorded.
  • 8 March 2006: a mortgagee appointed a controller to the substantial property, whose (not yet completed) development had been the reason for the $11.78m GST purchases reported in the Business Activity Statements lodged up to November 2005.
  • 24 March 2006: the Commissioner issued a further “lodgement and payment” notice requiring North Sydney to lodge its January 2006 Business Activity Statement, and pay any liability amount it recorded.
  • 23 June 2006: North Sydney was placed in receivership, and the receiver subsequently sold the partially completed development.
  • 3 September 2009 North Sydney wrote to the Commissioner. The letter reported the receiver’s appointment on 8 March 2006 and stated that “ASIC and the receivers” had taken possession of all North Sydney’s books and records, and refused to either return them or provide access to them. The letter continued with statements to the effect that:
      1. North Sydney was unable to complete the lodgement of Business Activity Statements for December 2005 and January 2006
      2. The letter was to “provide notice that substantial GST refunds are due for these months”.
      3. North Sydney would be unable to lodge Business Activity Statements for those months until it gained access to the necessary books and records.

After considering a number of authorities (including Central Equity Ltd v Federal Commissioner of Taxation [2011] FCA 908; MTAA Superannuation Fund (RG Casey Building) Property Pty Ltd v Commissioner of Taxation [2011] AATA 769; National Jet Systems Pty Ltd v Commissioner of Taxation [2011] AATA 766 and Brookdale Investments Pty Ltd v Commissioner of Taxation [2013] AATA 154) the Tribunal observed as follows (at [25]):

The common themes resonating through the decisions to which I have referred are the absence of any formal notification content requirement, a disavowal of amount specificity and the apparent sufficiency of a notice where it communicates a claim relating to a particular tax period in relation to a particular kind of tax liability. Implicit in the third theme, and variously expressed in the judgments and reasons, is a refusal to endorse any particular requirement for the details, grounds or even circumstances relied on to support the claim. 

The Tribunal’s conclusion was as follows (at [31]):

In my view, North Sydney’s 3 September 2009 letter did notify the Commissioner of “the refund, other payment or credit” to which TAA Schedule 1: s 105-55(1)(a) applied. It did so for two reasons. Firstly, the provision required no greater specification than the tax period involved, and the nature of the refund or input tax credit claimed. The letter, by describing the notification as relating to the expected outcome of Business Activity Statements for December 2005 and January 2006, satisfied the requirements of a complying notification. Secondly, if the letter required some greater degree of specificity in order to permit satisfaction that any subsequent claim was covered by the notification, the letter also satisfied that requirement. It did so because it indicated that the reason for the notification was the lack of access to the contemporary books and records in the possession of the receiver. On this view any subsequent claim would be limited to a summarised reproduction of the information in the purchase, payment and supply records maintained by the receivers.