Reglon Pty Limited v Commissioner of Taxation [2011] FCA 805

CASE ANALYSIS

Summary

There have been a number of cases dealing with GST and damages where the Commissioner was not a party.  This decision is important as the Court looked at the GST implications of a judgment for damages where the Commissioner was a party.  The Commissioner did file an appeal to the Full Federal Court, but that appeal was discontinued on 13 October 2011.  We may get an insight to why the Commissioner did not like the decision once the Decision Impact Statement is published.

Facts

The taxpayer obtained a judgment in the Supreme Court of New South Wales against the defendant for conversion of the taxpayer’s scaffolding.  The judgment was for $1,478,125, which was arrived at by reference to expert opinion as to the auction value of the scaffolding.  The amount of the judgment was paid to the taxpayer and the money was used to pay off certain loans, leaving the taxpayer with assets of $499 and a loan of $189,588.

The Commissioner conducted an audit of the taxpayer and issued assessments on the basis that the taxpayer had made a taxable supply of the scaffolding for the consideration of $1,478,125, giving rise to a GST shortfall of $134,375.

At the time of the case, the taxpayer had no business assets and was not involved in any business or activity.  The taxpayer continued in existence for the sole purpose of prosecuting the appeal.

Consideration

The issues before the Court were whether the taxpayer made a supply for consideration and, if so, whether that supply was made in the course or furtherance of an enterprise carried on by the taxpayer.

Was a supply made?

The Court noted that in the Supreme Court proceeding, the taxpayer brought claims in detinue and conversion in the alternative.  The reasons for decision show that the prerequisites for succeeding in detinue were not established, but that the taxpayer succeeded in the claim of conversion.

The Court approached the issue of whether the judgment gave rise to a supply by looking at the nature of a claim in conversion.  In finding that there was no supply, the Court said as follows (at [26]):

The effect of the payment in full by Citidel of the judgment in conversion against it was to vest in Citadel the ownership of the Taxpayer’s scaffolding.  However, the mere obtaining of judgment in conversion against a defendant does not of itself affect the ownership of the coverted goods.  Nor does the formal entry of judgment.  It is the satisfaction of the judgment that effects a transfer to the defendant of property in the goods that were the subject of the conversion.

and further (at [32])

The payment made in satisfaction of that judgment resulted in ownership and was triggered by the payment of the judgment sum by Citadel.  That payment did not depend upon any action of the Taxpayer.  I do not consider that, in those circumstances, the Taxpayer may be said to have made a supply.  There was no taxable supply by the Taxpayer.

The Court distinguished a claim in conversion from a claim in detinue.  While the Court did not come to a view on the issue, if the judgment was for a claim in detinue, there could have been a supply made by the taxpayer.  This is because a plaintiff in detinue assets a right to recover the goods in specie and in the case of non-delivery, the plaintiff can recover their value.  Once payment of the full value is made, there is in effect a purchase of goods – (at [28]) “that is to say, the satisfaction of the price is taken to be in place of purchase.  The theory of judgment in an action of detinue is that it is a kind of involuntary purchase of the plaintiff’s goods by the defendant“.  This can be compared with conversion where only damages can be recovered.

Given the finding that there was no supply, the Court did not find it necessary to consider the question of whether there was a supply for consideration. However, (at [33]) the Court found that it was strongly arguable that the judgment payment would have been made in connection with the supply.

Was the supply made in the course or furtherance of an enterprise?

Given the finding of the Court that no taxable supply was made by the taxpayer, there was no need to consider this issue.  However, the Court did consider this issue.

The taxpayer contended that, in effect, it ceased to carry on an enterprise when the scaffolding was converted.  If it had been required to do so, the Court would have found that the supply was made in the course of an entries carried on by the taxpayer.  In considering this issue, the Court noted that there can be a course of business, even if there is nothing more than an intention to carry on a business (referring to Russell v Commissioner of Taxation [2011] FCAFC 10 at 87), noting that the taxpayer accepted that if the scaffolding had been returned it would have resumed its scaffolding hiring activity.

8 November 2011

This case was also discussed in GST on judgments and settlements – a review of GSTR 2001/4 ten years on, which was published on this site.