1    Introduction

The last 12 months has seen a steady stream of cases in the Federal Court and the Tribunal dealing with GST issues. We have also seen two decisions of the High Court, which takes the number of decisions heard by our highest court to four.

Excluding those decisions dealing with substantiation and penalty issues, the last 12 months has seen the following:

• 2 decisions of the High Court
• 3 decisions of the Federal Court and 1 decision of the Full Federal Court (with 3 more on the way)
• 12 decisions of the Tribunal

This paper provides a summary of most of these cases. In addition, the paper includes a summary of the decision of the Supreme Court of Victoria in Duoedge Pty Ltd v Leong & Anor [2013] VSC 36 which involved a dispute about the construction of a GST clause in a contract for the sale of land.

Interestingly, most of the cases fall into one or more of the following four categories, which may well reflect the major battlegrounds for GST going forward:

• Statutory interpretation
• Characterisation of transactions
• Enterprise
• Recovery/refund provisions in the Taxation Administration Act 1953

1.1     Statutory interpretation

The task of statutory construction was recently outlined by the High Court in Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 298 ALR 257 at [39] (referring to what the High Court said in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at [47]): (emphasis added):

This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text.” So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.

This approach was adopted by the High Court in Commissioner of Taxation v Unit Trend Services Pty Ltd [2013] HCA 16 at [47] in considering the meaning to be given to the words “not attributable to” in s 165-5(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). In doing so, the Court distinguished those cases dealing with the context in which the word “attributable” was used, as involving a different test.

A number of other cases involved the issue of construction of the GST Act, being:

• Cyonara Snowfox Pty Ltd v Commissioner of Taxation [2012] FCAFC 177[1]
  • This involved the construction of Division 75 (at the time) which allowed the supplier to “choose” to apply the margin scheme and whether that choice could be made after the supply took place and the activity statement was lodged.
• MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56[2]
  • Whether the imposition of an increasing adjustment under s 135 is limited to circumstances where the acquirer of the enterprise intends to make input taxed supplies under the enterprise acquired as a going concern.

1.2     Characterisation of transactions

The characterisation of transactions is a fundamental part of the GST. The recent cases show that the issue of characterisation can arise in a number of different ways, including:

• Whether there is a supply for consideration;
• Whether there is a single supply or multiple supplies;
• Whether the supply is taxable, GST-free or input taxed

While the decision of the High Court in Qantas has raised some doubt as to the role of characterisation, what does appear to be clear is that the facts of each case are critical. As observed earlier this year by Lord Reed[3] of the Supreme Court in the United Kingdom in WHA Ltd v Revenue and Customs [2013] UKSC 24 at [26]:

As this court has recently observed (Her Majesty’s Revenue and Customs v Aimia Coalition Loyalty UK Limited [2013] UKSC 15, para 68), decisions about the application of the VAT system are highly dependent upon the factual situations involved. A small modification to the facts can render the legal solution in one case inapplicable to another. It is therefore necessary to begin by considering carefully the facts of the present case.

Further, all of the circumstances must be considered, including the entirety of the contractual arrangements between all of the parties. So much was accepted by Lord Reed in WHA Ltd where his Lordship observed (at [26]):

Furthermore, as Lord Walker explained in Aimia at paras 114-115, in cases where a scheme operates through a construct of contractual relationships, as in the present case, it is necessary to look at the matter as a whole in order to determine its economic reality.

Noting the caution that needs to be adopted before referring to overseas authorities, in my view these observations of the UK’s highest court are equally applicable in the application of the GST system in Australia.

The recent cases dealing with issues of characterisation were as follows:

• Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41
  • Whether the taxpayer made a taxable supply (ie, a “supply for consideration”) in circumstances where a passenger booked and paid for airline travel, but subsequently did not show for the flight and did not receive a refund of the fare.
• ATS Pacific Pty Ltd v Commissioner of Taxation [2013] FCA 341[4]
  • Whether the supply made by the applicant to non-resident travel agents was the supply of booking or arranging services or the supply of Australian tourism products or the rights thereto.
• ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795
  • Whether the supply of shared studio style apartments was the supply of “commercial residential premises” and therefore taxable, rather than the input taxed supply of residential premises.
• AP Group Limited and Commissioner of Taxation [2012] AATA 617[5]
  • Whether certain “incentive” payments by car manufacturers to car dealers were properly characterised as consideration for supplies made by the dealers
• Wynnum Holdings No 1 Pty Ltd and Commissioner of Taxation [2012] AATA 616
  • Whether premises were properly characterised as “commercial residential premises” or “residential premises”

1.3     Enterprise

Whether a taxpayer is carrying on an enterprise is one of the fundamental building blocks upon which the GST is based. The recent decisions show that the issue is very fact dependant. Further, the intention to operate an enterprise is not sufficient.

• Bayconnection Property Developments Pty Ltd v Commissioner of Taxation [2013] FCA 440
• Naidoo and Commissioner of Taxation [2013] AATA 443
• The Private Tutor and Commissioner of Taxation [2013] AATA 136
• Wynnum Holdings No 1 Pty Ltd and Commissioner of Taxation [2012] AATA 616
• Clayton and Commissioner of Taxation [2013] AATA 428

1.4     Recovery/refund provisions in the Taxation Administration Act

Sections 105-50, 105-55 and 105-65 of Schedule 1 to the TAA continue to be the subject of dispute, before the Tribunal and the Federal Court. In a significant turn of events, the Tribunal has recently found that it does not have jurisdiction to hear matters involving s 105-65 (and presumably also s 105-50 and 105-55).

• Cyonara Snowfox Pty Ltd v Commissioner of Taxation [2012] FCAFC 177
  • The issue was whether the issue of a Notice of Assessment was a “notice” under s 105-50. Also, whether the Notice of Assessment was a valid notice in circumstances where it did not require payment of the correct amount.
• Naidoo and Commissioner of Taxation [2013] AATA 443 (and The Private Tutor and Commissioner of Taxation [2013] AATA 136)
  • Whether the Commissioner can rely on s 105-65 to retain an amount of overpaid GST in circumstances where the taxpayer was not required to be registered for GST at the time of the lodgement of the activity statements.
  • Whether the Tribunal has jurisdiction to review a decision of the Commissioner to refuse to exercise his discretion to refund GST under s 105-65 of Schedule 1.
• Brookdale Investments Pty Ltd and Commissioner of Taxation [2013] AATA 154
  • Whether the Commissioner’s notice was valid for the purposes of s 105-50 of Schedule 1 where it failed to identify the amount of unpaid GST.
• Sanctuary Australasia Pty Ltd and Commissioner of Taxation [2013] AATA 371
  • Whether the taxpayer can apply to the Tribunal in respect of a decision of the Commissioner to withhold a refund under s 8AAZLGA pending an investigation, but where the Commissioner subsequently issued an assessment.
• Dandenong Motors Unit Trust and Commissioner of Taxation [2012] AATA 920
  • Whether the 4 year time limitation in s 105-50 (prior to its amendment on 1 July 2008) applied to prevent the payment of refunds of overpaid GST to the extent that the taxpayer did not have a positive net amount.
• Wynnum Holdings No 1 Pty Ltd and Commissioner of Taxation [2012] AATA 616
  • Whether the 4 year time in s 105-50 operated to prevent the recover of a claim to input tax credits.

2    The cases

2.1     High Court

2.1.1     Commissioner of Taxation v Unit Trend Services Pty Ltd [2013] HCA 16

The issue before the High Court

The Commissioner sought special leave to appeal from the decision of the Full Federal Court concerning the interpretation of s165-5(1)(b) of the GST Act, being one of the threshold tests for the application of the anti-avoidance provisions in Division 165. The High Court allowed the Commissioner’s appeal. The application for special leave was referred to a Full Bench of the High Court, which proceeded to allow the application and also the appeal.

Section 165(1) relevantly provides as follows:

(1) This Division operates if:

(a) an entity the (avoider) gets or got a *GST benefit from a *scheme; and

(b) the GST is benefit is not attributable to the making, by an entity, of a choice, election, application or agreement that is expressly provided for by the *GST law…

The question before the Court was described as follows:

Whether GST benefits obtained by Unit Trend are not attributable to the making of a choice, election, application or agreement (collectively a “choice) that is expressly provided for by the GST Act.

This question was resolved by the Tribunal in favour of the Commissioner and on appeal the Full Federal Court found in favour of Unit Trend.

The Facts

Unit Trend was the representative member of a GST group, which included Simnat Pty Ltd, Blesford Pty Ltd, Mooreville Investments Pty Ltd and Rapcivic Contractors Pty Ltd.

On 14 December 1998 Simnat entered into a contract to purchase land for $30m and the contract settled on 20 April 1999.  Simnat obtained development approval for the construction of three high-rise towers.  On 31 July 2001 Simnat appointed Rapcivic to construct Tower 1, which was completed by December 2002 and the units were sold to the public.  The margin scheme in Division 75 of the GST Act was used to calculate the GST payable on the sale of the units.

Tower II

By contract dated 1 July 2002 Simnat engaged Rapcivic to construct Tower II on the site.  By contract dated 14 April 2004 Tower II was sold to Blesford and the purchase price was to be determined by an independent valuer.  The sale was agreed to be the sale of a going concern and the price was determined by a valuation of $149,800,000. Under the contract of sale, Simnat assigned to Blesford all of its rights under the sale contracts it had entered into with purchasers of the units prior to the sale of the Tower. The contract settled on 7 May 2004 and Blesford (as the new owner) continued marketing units in the tower and made off the plan sales to the public.

When the construction was completed, Blesford settled the sale contracts (including those assigned from Simnat). Blesford applied the margin scheme for the GST on the sales to the public.  In determining the margin, Blesford adopted the price it paid to Simnat for Tower II and determined the margin between that price and the value of the end sales (applying an apportionment of the acquisition price to each unit).

Tower III

This operated in a similar way to Tower II.  By contract dated 29 January 2003, Simnat engaged Rapcivic to construct Tower III.  By contract dated 15 April 2004, Simnat sold Tower III to Mooreville, with the price to be determined by an independent valuer.  The value was $10,500,000.  The sale was agreed to be a going concern and Simnat assigned the rights to existing sale contracts to Mooreville.  On completion, Mooreville settled contracts (including sales made on its own behalf and sales assigned from Simnat).  Mooreville applied the margin scheme and used the price it paid to Simnat as the consideration for the acquisition of the units.

The Tribunal – the “choice” issue

The Commissioner sought to apply the anti-avoidance provisions in Division 165 of the GST Act. A threshold issue to the application of those provisions was whether the GST benefit to Unit Trend was “attributable” to the making of a choice, election, application or agreement expressly provided for by the GST Act.

Unit Trend identified the relevant choices or elections as:

• the choices of the acquiring entities to become members of the GST group;
• the agreement by the parties to treat the sales as going concerns; and
• the choices by the acquiring entities to apply the margin scheme.

The essential argument of Unit Trend was that if the election to sell the lots under the margin scheme had not been made, GST would have been payable at 1/11^th of the sale price.  The Tribunal rejected this argument, finding that the exclusion in s 165-5(1)(b) did not extend to benefits that had “some connection” with choices that are provided for, and where the benefit was not explained by the choice but was explained by something else – in this case the sales of Tower Two and Three to the related entities.  The GST benefit was “attributable” to the use of the higher acquisition amount used in the calculation of the margin.  As noted by the Tribunal (at [110]):

The higher amount is not the product of the election to adopt the margin scheme but is a result of the transfers of Tower Two and Tower Three and the consideration agreed to be paid for them.  We take the view that a development group, such as Developco, which acquires land in respect of which no input tax credits are available, will always sell the developed product under the margin scheme if the end purchasers, such as those who purchased from Developco, would not be able to enjoy any benefit of input tax credits.  Accordingly, we consider that the margin scheme would have been applied to any sales of completed apartments in the development in any event.  Thus the GST benefit arises not out of any election but from the effect of the transfers of Tower Two and Tower Three.

The Full Federal Court

On appeal, Unit Trend contended that the Tribunal’s approach was to import the notion of “solely attributable” into the section.  In this regard, the majority of the Court found that the object, focus or aim of Division 165 does not suggest that the nature of the attribution contemplated is that the choice etc, be the sole or dominant cause of the GST benefit.  Further, the majority found that a scheme may contemplate a number of steps, each potentially involving choices etc expressly provided for by the GST law and also steps chosen or dictated by the particular commercial circumstances.  In this context, the majority saw the question to be decided in the following terms (at [177]):

In those circumstances of mixed choices determined in part by the commercial arrangements and in part by choices expressly provided for by the GST law, the question to be decided is whether, as a matter of proper construction of s 165-5(1) in context, the GST benefit is attributable to the choices or elections implemented within the scheme expressly provided for by the GST law, or whether, because the scheme is comprised of those choices and other steps or choices not expressly provided for by that law, the GST benefit is attributable to the aggregated arrangement, that is, the scheme rather than the choices forming part of the scheme, expressly provided for by the GST law itself.

The majority found that s 165-5(1)(b) ought to be construed in a way that gives effect to its statutory purpose of preserving the entitlement to, and the effect of, specific legislative options, choices, elections etc expressly provided for by the GST law.  The rule in s 165-5(1)(b) prevents the application of Division 165 where the GST benefit “has the relevant degree of connection” with the making of expressly conferred choices etc.  This approach appeared to introduce a “nexus” test between the GST benefit and the choice etc expressly provided for.  The relevant nexus was explained by the majority in the following extract (at [194]):

…the language of s 165-5(1)…seems to more properly contemplate causation in an allocative sense asking whether the nexus between the GST benefit and the exercise of the statutory choice is sufficiently close to provide an answer to the question, is the choice etc made by the taxpayer as expressly provided by a GST law, the predominant cause or the direct cause of the GST benefit?  In that sense, the subsection does not import by its terms…a concept of causation in which the relevant choice etc is simply one of a number of contributory causes, as a sufficient connection.  Otherwise, the Division would seem to have little field of operation.

Applying this “nexus test” to the facts, the majority found that the GST benefit was “attributable” to a number of choices etc made by Unit Trend expressly provided for under the GST law.  This included the agreement to sell the Towers as going concerns (the intermediate sale) and the choice to the use margin scheme on the ultimate sale.

The Commissioner contended that the choice to enter into the intermediate sales of the Towers was a commercial election or choice that brought about, in effect, the uplift in the intermediate cost base.  In essence, the Commissioner appeared to contend that the GST benefit was “attributable” to the intermediate sales.  The majority found that the entry into these sales was consistent with a sale of a going concern in a manner which conformed with the provisions in s 38-325.  As noted by the majority (at [200]):

The taxpayer was entitled to make a choice or election to enter into a going concern transaction in conformity with s 38-325 which had the effect that GST would not become payable on settlement of the transfers from Simnat to those entities.

The majority appeared to find that the uplift was “attributable” to the choice to treat the sales as going concerns, rather than the choice to enter into the sale transactions.  But for making the choice to treat the sales as going concerns, a GST liability would have arisen by reason of settlement of the transfer.  With respect, this reasoning appears to assume that the intermediate transactions would have proceeded in the absence of the going concern provisions.

The majority disagreed with the Tribunal’s conclusion that the application of the margin scheme to the end transactions did not involve a choice because that would have necessarily applied in any event.  The majority found that while it may have been a prudent choice to use the margin scheme, the supplier nevertheless had a choice to apply the margin scheme (or not).

In conclusion, the majority (at [204) agreed with the Tribunal’s finding that for the purposes of s 165-5(1)(b), the notion of “attributable to” means that the GST benefit must be “explained by” a choice, election, application or agreement in the sense of an allocative concept in which the GST benefit belongs to or is directly explained by that choice etc.  Where the Tribunal fell into error was concluding that the GST benefit was not properly “explained by” the choices etc made by Unit Trend.

The dissenting judgment

In his dissenting judgment, Dowsett J (at [42]) found that the word “attributable” involved a decision as to whether the relevant benefit is attributable to the scheme under consideration or to a choice, such choice presumably being one aspect of the scheme.  His Honour found that the section contemplated a direct connection between the GST benefit and the relevant choice.  In this regard, his Honour doubted the submission of Unit Trend that the GST benefit should be seen as the product of a number of choices and that the benefit is attributable to them collectively.

In the context of the appeal, his Honour described the issue as follows:

…whether or not the reduction in Unit Trend’s GST liability, effectively as the result of the intermediate sales by Simnat to Blesford and Mooreville, was attributable to the identified scheme or to a choice expressly provided for by the GST law.

In finding against Unit Trend, his Honour found that the GST benefit was attributable to the scheme, rather than to any particular choice.  His Honour’s conclusion was set out as follows (at [48]):

In any event, in the present case, the scheme which produced the benefit included the intermediate sales by Simnat to Blesford and Mooreville.  Such sales lay at the heart of the scheme, even if the various choices were also necessary integers of it.  In my view, the GST benefit was attributable to the events of which such sales were necessary parts, in other words, the scheme.  In those circumstances, the benefit was attributable to the scheme, and not to any particular choice expressly provided for by the GST Act.

The High Court

The Commissioner submitted that the decision of the majority of the Full Federal Court did not “best achieve the purpose or object” of Division 165 in that the purpose of s 165-5(1)(b) was to prevent the anti-avoidance provisions applying to a person merely by reason of the exercise of a right to make a choice expressly provided for by the GST Act. The section was intended to only make Division 165 inapplicable where the GST benefit was produced by an individual statutory choice. Further, a mere contributory causal connection with a statutory choice was not sufficient. There must be a “direct link” between the GST benefit and the choice.

The Court approached the question as one of statutory construction, noting that this task must begin with a consideration of the statutory text, but that context and purpose are also important. In this regard, the critical question asked by the section was whether the GST benefit got by the scheme was “not attributable” to a “choice”. In this context, to embark on an inquiry as to whether the GST benefit in question was “attributable” to a choice (as contended for by Unit Trend) was apt to distort somewhat the inquiry invited by the text. On this analysis (at [50]-[51]):

…the words “not attributable to” in s 165-5(1)(b) do not invite and enquiry as to causality to differentiate the effects of the scheme from the exercise of a statutory choice. Rather, the phrase is concerned with whether the GST benefit in question, which (ex hypothesis) has been got from the scheme, is not one to which the exercise of a statutory choice has entitled the taxpayer.

It should be noted that the observations in Sun Alliance on which Unit Trend relies were made in a markedly different context. While the word “attributable” was considered in Sun Alliance to be concerned with a contributory cause rather than source, the phrase “not attributable to” in s 165-5(1)(b) is used in a context in which a causal link is assumed to have been established in terms of the getting of a benefit from a scheme in which a statutory choice is an element. The expression “not attributable to” in s 165-5(1)(b) is used in a context in which a causal link is assumed to have been established in terms of the getting of a benefit from a scheme in which a statutory choice is an element. The expression “not attributable to” in s 165-5(1)(b) is not concerned to identify another relationship of cause and effect which might or might not proceed on a different level of cause and effect from that expressed by “got…from”. Rather, the expression is, in its context, concerned with the absence of a statutory entitlement to the GST benefit in question.

The Court then found that based upon the undisputed facts the GST benefit was “not attributable” to a statutory choice. The GST benefit got from the scheme reflected the amount agreed to be paid to transfer Towers II and III, which reflected the increase in the value of the properties by reason of the work done on them. The choice to form a GST Group and to use the margin scheme did not operate to confer the GST benefit, being a reduction in the GST payable on supplies to end buyers.

2.1.2     Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41

The issue was whether Qantas made a taxable supply in circumstances where a passenger booked and paid for airline travel, but subsequently did not show for the flight and did not receive a refund of the fare.[6]

The Tribunal

The Tribunal found that Qantas made a taxable supply upon the making of the booking and the receipt of the fare. The Tribunal observed as follows (at [9]):

The correct view of the Conditions of Carriage seems to us to be that they give rise to a contract enforceable at law between Qantas and each passenger. The contract, in turn, creates rights (s 9-10(2)(e)) and involves entering into obligations “to do anything” (s 9-10(2)(g)). There is, accordingly, an argument that at the time of the creation of the rights and the entering into of the obligations, which will generally be at the time, or shortly after, a reservation is made, there is a supply. Certainly it will be no later than the time of payment. The mutual promises or the payment will provide consideration.

The Tribunal went further and acknowledged that the “circumstance which dominates this case” is that none of the passengers ever undertook their journey, and that the Tribunal must therefore ask itself whether the absence of the actual carriage affected the operation of s 9-10(2)(e) and (g). The Tribunal found that this was not the case. Once it was accepted that a contract was made with passengers, the Tribunal could see no reason why the arrangements with passengers did not fall within both s 9-10(2)(e) and (g). Further, in taking this view, the Tribunal considered that it was acting consistently with the approach taken by the High Court in Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342.

The Tribunal also considered the question of whether, on the ordinary meaning of “supply” in s 9-10(1), there was a supply when a passenger made a reservation even though the object of the reservation was not fulfilled. The Tribunal observed that the UK cases were concerned more with the ordinary meaning of supply (noting that in Australia it seemed appropriate to address the precise statutory provision). In finding that there was a supply in its ordinary meaning, a way of describing what Qantas had done for a passenger, and in return for the “fare” that had been paid, was holding itself ready to carry the passenger in accordance with its Conditions of Carriage. This was the provision of a sufficient service to give rise to the imposition of GST.

Full Federal Court

The Full Federal Court unanimously allowed Qantas’ appeal.[7] Edmonds and Perram JJ observed (at [10]) that at the heart of Qantas’ case was “the simple proposition that the air journey was the supply in contemplation, it did not occur, and therefore no supply occurred; as such no GST liability was, in the event, triggered.”

The Full Court distinguished Reliance Carpet on the basis that Division 99 of the GST Act provided a “statutory mandate” to search for and identify some “anterior supply” as the taxable supply. In the absence of that statutory mandate, because an outcome, which was the supply paid for, failed, did not provide a warrant to search for and identify an anterior supply as the taxable supply, which was what the Full Court thought the Tribunal did.

The Full Court referred to the findings of the Tribunal that “the actual carriage of the passenger” was “obviously the purpose of each reservation” and noted that French CJ and Hayne J in Travelex Ltd v Commissioner of Taxation (2010) 241 CLR 510 clearly supported recourse to the purpose of the transaction as identifying the relevant supply. The Full Court then concluded that “the relevant supply” was the contemplated flight, not the reservation or booking, and the contemplated flight failed to occur.

The Full Court observed that the taxpayer referred to the decisions in Saga Holidays Ltd v Commissioner of Taxation (2006) 156 FCR 256 and AGR Joint Venture and Commissioner of Taxation (2007) 70 ATR 466 where the focus was on the “substance and reality” of the transaction. Using the criteria in those cases, the Full Court found that “the essence and sole purpose” of the transaction was carriage by air – and if the actual travel did not occur there was no taxable supply. The Tribunal erred in artificially splitting the transaction, and in the absence of the principal supply, looked for things otherwise incidental to that supply.

High Court

The majority of the High Court allowed the Commissioner’s appeal.[8] The majority observed (at [11]-[12]) that the reasoning of the Full Court fixed upon the consideration “for” which a taxable supply was provided and identified this by distilling from the arrangements between airline and customer the “essence and sole purpose” of the transaction.

The majority considered that the appeal turned upon the construction and application of the provisions of the GST Act, particularly the phrase “the supply for consideration” in the definition of “taxable supply” in s 9-5(a), noting that the word “for” does not adopt contractual principles but requires a connection or relationship between the supply and the consideration.

The majority also observed (at [21]-[22]) that in addition to the general provisions, various specific provisions with respect to various species of supply are made elsewhere in the GST Act and use phrases of relationship of connection and that these specific provisions were insufficiently appreciated in the submissions by Qantas. In this context, the majority observed that Travelex turned on subdivision 38-E and the phrase “in relation to rights”; Saga Holidays turned on the phrase “connected with Australia”; and TAB Ltd[9] hinged upon the phrase in Division 126 “relating to the outcome of a *gambling event”.

The majority then observed that the decision in Reliance Carpet was treated as if it supported the contention by Qantas that the sole candidate for a taxable supply was the flight, for which the fare was pre-paid, to the exclusion of the supply by reason of the making of the contract of carriage upon payment of the fare. In response to this purported reliance, the majority’s view was clear:

The case provides no support for the proposition adopted by the Full Court in the present case that it was necessary to extract from the transaction between the airline and the prospective passenger the “essence” and “sole purpose” of the transaction.

The majority concluded as follows (at [33]) (footnotes excluded):

The Qantas conditions and the Jetstar conditions did not provide an unconditional promise to carry the passenger and baggage on a particular flight. They supplied something less than that. This was 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. This was a “taxable supply” for which the consideration, being the fare, was received.

2.2     Full Federal Court

2.2.1     Cyonara Snowfox Pty Ltd v Commissioner of Taxation [2012] FCAFC 177

Facts

The proceeding mainly concerned the GST treatment of the sales of certain lots in a property development conducted by the taxpayer.  The taxpayer purchased land in 1997 and subdivided the land for sale, including:

• Lot 1 was sold for a price of $1.5m.  No contract of sale was produced, but the Settlement Statement showed that the amount of $1,655,981 paid on settlement, which took place on 16 September 2004, included the amount of $150,534 in respect of GST.  The taxpayer did not account for GST on this sale in its BAS.  After audit, the Commissioner issued an assessment increasing the GST by $150,543 to bring to account GST on the sale of Lot 1. The Commissioner also imposed penalties of 50% which were remitted to 20%.
• Lot 9 was sold for a price of $1.5m.  The Settlement Statement showed that settlement took place on 1 November 2004 and that GST of $150,000 was payable by the purchaser.  The taxpayer accounted for GST of $150,000 in its BAS. The Commissioner increased the GST payable from $150,000 to $151,778 to bring into account the adjusted sale price for Lot 9, rather than its sale price.
• Lot 6 was sold for a price of $2,205,611 (excluding GST) in January 2006.  The taxpayer accounted for GST on that sale price in its BAS. The Commissioner decreased the GST from $220,561 to $215,561 to reflect an adjustment of the price at settlement.
• Lot 10 was sold for a price of $1,075,000 (excluding GST) in September 2006.  The Settlement Statement shows that GST of $107,966 was paid by the purchaser on settlement which took place on 31 October 2006.  The taxpayer did not account for GST in its BAS. The Commissioner increased the GST payable from nil to $102,481 on account of GST.  The Commissioner also imposed penalties of 50% which were reduced to 20% and then remitted by 50%.
• Lot 8 was sold for a price of $3.7m in October 2005 as a “going concern” and subject to a condition that the taxpayer would have a two year lease over the property commencing 6 December 2005.  The contract completed on 7 December 2005 and the purchaser became registered for GST on 1 January 2006.  On 31 March 2007 the taxpayer issued a tax invoice to the purchaser showing GST payable of $370,299.  The Commissioner increased GST payable from nil to $370,299 as the Commissioner rejected the taxpayer’s contention that the supply was GST-free as a going concern.  The Commissioner imposed penalties of 25% but the penalty was remitted in full.

The proceeding also concerned an acquisition of property (Lot 202) in December 2005 for a price of $3.4m, settlement occurred on 23 December 2005.  On 21 March 2007 the taxpayer lodged a BAS for February 2007 in which it claimed input tax credits of $3.4m.  The Commissioner reduced the input tax credits to nil on the basis that he did not accept that the taxpayer was entitled to claim the credits.

The Tribunal

Three substantive matters were brought before the Tribunal:

• whether the taxpayer was entitled to “choose” to use the margin scheme for the sales of Lots 1 and 9, where that choice was made some two years after the taxpayer had worked out the GST payable on the supplies at the purchase price “plus” 10%.
• whether the taxpayer had discharged its onus of demonstrating that the sale of Lot 8 was GST-free as the supply of a going concern.
• whether the Commissioner was entitled to recover unpaid GST by operation of s 105-50 of Schedule 1 to the TAA – the taxpayer contended that the GST had ceased to be payable because the Commissioner had failed to give a notice requiring it to pay GST. Central to this contention was that the Notices of Assessment did not constitute valid notices for the purposes of s 105-50.

Before the Tribunal the Commissioner conceded that the taxpayer was entitled to input tax credits for the acquisition of Lot 202.

The choice to use the margin scheme

The first thing to note is that Division 75 was amended in 2005, with effect that the parties must now agree in writing before the supply is made to use the margin scheme.[10] The issue raised in the proceeding dealt with the provisions in force prior to that time, which allowed the supplier to “choose” to apply the margin scheme in working out the amount of GST payable on the supply.

The taxpayer’s contention was that the words “you may choose to apply the margin scheme in working out the amount of GST on the supply” should be construed so that the taxpayer retains this choice until the amount of the GST is “finally” worked out – this may be at the point of objecting to an assessment or during the course of a review of an objection decision before the Tribunal.

The Tribunal concluded that the scheme of the GST Act suggests that the time when a supplier would ordinarily “work out” the amount of GST on a taxable supply is the time of accounting to the Commissioner by lodging a Business Activity Statement which identifies the net amount for that tax period.  Accordingly, the choice to use the margin scheme must be made before the supply is made.

The going concern issue

The Tribunal found that the taxpayer had failed to establish, on the facts, each of the integers required by s 38-325 of the GST Act, for there to be a GST-free supply of a going concern.

The taxpayer contended that Lot 8 (which was partitioned into three units) was previously leased to entities which subsequently defaulted on the lease.  However, no evidence was put before the Tribunal that the leases were registered and only one of the three purported leases was put into evidence.  Oral evidence was given on behalf of the taxpayer, but the Commissioner contended that this did not discharge the taxpayer’s burden of demonstrating that it was carrying on a leasing enterprise prior to the sale of Lot 8. Further, the Commissioner contended that given the failure by the taxpayer to call witnesses the Tribunal should infer that such evidence would not have assisted the taxpayer: Jones v Dunkel (1959) 101 CLR 298.  The Tribunal found that such inferences should be drawn given the absence of appropriate witnesses and “perhaps, more importantly, critical documents”.

The Tribunal found that it was not satisfied that the taxpayer carried on a leasing enterprise at any time prior to the day of supply.  The Tribunal recognised that the taxpayer was “at various times, attempting to obtain a tenant to take a lease but Cyonara did not suggest that the enterprise of leasing could be carried on by merely seeking to obtain a tenant”.

The limitation issue

The Tribunal dealt with the limitation issue as a preliminary question ([2010] AATA 137).  The taxpayer contended that the Commissioner did not provide the taxpayer with a notice under s 105-50 within for years of the GST becoming payable.  Further, the Commissioner’s Notice of Assessment was not a “notice” because s 105-5 of Schedule 1 to the TAA provides that the liability to pay GST does not depend on, or is any way affected by, the making of an assessment. The Tribunal rejected this contention and found that the Notice of Assessment was a notice within s 105-50.

At the substantive hearing, the applicant raised an additional contention.  This was that because the Commissioner conceded that the taxpayer was entitled to input tax credits on the acquisition of Lot 202, the Notice of Assessment asserted an amount was payable which was incorrectly inflated by the amount of those credits.  Accordingly, while the Notice of Assessment was “capable” of being a notice for the purposes of s 105-50 of Schedule 1 to the TAA, it could not constitute a valid notice as it failed to require payment of the correct amount.  The taxpayer relied on principles found in the invalidity of bankruptcy notices.

The Tribunal rejected the taxpayer’s contention and relied on the principles derived from Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 and Deputy Commissioner of Taxation v McCardle [2004] 2 Qd R 495 that the function of the notice is to inform the recipient of the amount of the debt then known by the Commissioner to be payable notwithstanding that the amount may change by reason of concessions made later by the Commissioner.  Accordingly, the validity of the notice was not affected by the Commissioner’s subsequent conduct of change position on the question of entitlement to input tax credits.

On appeal

The choice issue

The Court found that the Tribunal did not make an error of law in its construction to s 75-5.  As noted by the Court (at [93]:

Section 75-5 has a clear purpose of providing a supplier with a choice of a method of calculating or “working out” the amount of GST payable in making a taxable supply of real property that avoids the unfairness of the amount of GST being worked out on the whole of the supply price where no input tax credits arise on the upstream acquisition, with a view to providing for the calculation of the GST on only the margin as described at [36] of these reasons.  The section is directed to a facultative methodological calculation in making a taxable supply, if the taxpayer chooses to engage the calculus of the method when making the taxable supply.  The Tribunal correctly determined the construction of s 75-5.

And further at [95]:

Under the amended form of s 75-5, the use of the margin scheme must be agreed in writing between the supplier and the recipient of the supply.  The vice agreed by the amendment and the adoption of the new provision are consistent with an underlying notion that the margin scheme, if it is to apply, was and is to apply at least by the date of supply, being the date of settlement.

The Court found that by the time the taxpayer lodged each BAS, it had well and truly completed “working out” the GST on each supply.  Also, in effect, the taxpayer was now seeking to apply the margin scheme with the result that a lesser sum would be payable to the Commissioner notwithstanding that on settlement the taxpayer received from the buyer an amount of GST calculated by the taxpayer on the whole of the purchase price.

The going concern issue

The Court noted that the difficulty confronting the taxpayer in the appeal (which was restricted to errors of law) was that the Tribunal was not persuaded on the balance of probabilities that the taxpayer had leased Lot 8 prior to the sale.  The reasons for this included the failure of the taxpayer to put the executed lease into evidence.  The following extract from the Court’s judgement (at [105]-[106]) shows the importance of providing contemporaneous documents and the difficulties faced by taxpayers when relying solely on oral evidence:

There were a number of reasons identified by the Tribunal in its exposed reasons for decision, and they included the failure, at the most fundamental level, of Cyonara to put the executed lease into evidence.  The executed lease is the best evidence of the contended document that is said to go to the foundation of its leasing enterprise.  Mr Smits gave oral evidence of the lease, the arrangements with Mr Hastings, the conversation (in or about December 2004 it seems) for Solartech’s surrender of the premises on 6 December 2005 and the surrounding contextual circumstances.

The Tribunal, however, is not bound to accept Mr Smits’ evidence as determinative of the question in issue and Cyonara cannot necessarily discharge its persuasive burden by Mr Smits simply “swearing the issue”.  The proof of the issue is made good in discharge of the dispositive burden by Cyonara adducing evidence that satisfies the Tribunal, on the balance of probabilities, that such a lease was entered into, for the relevant term, on particular conditions….

Also, in response to the taxpayer’s contention that it was not required to corroborate uncontradicted evidence and that, as a matter of law, a director’s evidence on the questions in issue is necessarily dispositive of the taxpayer’s burden in the absence of contradictory evidence adduced by the Commissioner, the Court said as follows (at [107]):

The discharge of Cyonara’s burden before the Tribunal is not made good simply as a function of the director giving oral narrative of a contended fact (without producing to the tribunal of fact the central document that speaks to critical aspects of the matter in issue), on the contended footing that oral narrative evidence must be persuasive because the Commissioner has not adduced evidence to contradict the director’s oral evidence.

The Court rejected the taxpayer’s appeal on this issue and found that the contentions rose no higher than an attempt to re-agitate the merits of the factual findings made by the Tribunal.

The limitation issue

The taxpayer’s appeal was limited to the question of whether the Tribunal was correct in finding that the Commissioner’s overstatement of the Notice of Assessment rendered the notice invalid.  Nevertheless, the Court found that the submissions put by the taxpayer sought to re-agitate the question raised before the Tribunal on the preliminary question (namely whether the Notice of Assessment should be characterised as requiring payment of unpaid GST within the meaning of s 105-50(3)).  The Court found that this issue was not properly before it.

As to the issue of the effect of overstatement in the Notice of Assessment, the Court made the following observations:

• the Commissioner makes an assessment and gives notice, acting in good faith and in discharge of his statutory functions.  The taxpayer may contend, and seek to demonstrate on the balance of probabilities, that the assessment in relation to one or more taxable supplies or creditable acquisitions in the relevant tax period is “excessive”.
• the Commissioner may amend the assessment because of further facts that emerge, either by the Commissioner exercising is compulsory information gathering powers or the taxpayer providing further information.
• it would be an odd result if a Notice of Assessment (and thus a notice for the purposes of s 105-50) was rendered invalid in respect of every aspect of its content at the date of issue, by reason of the Commissioner’s assertion in the notice of assessment that an amount of unpaid GST was payable which is later shown not to have been payable at the issue date, or is otherwise conceded by the Commissioner, at a later date, not to have been payable at the date of issue.

The Court found that the overstatement of the net amount in the Notice of Assessment (by reason of the later concession as to input tax credits) did not render the notice invalid for the purposes of s 105-50.  There is nothing in the statute to suggest such an outcome.

The Court rejected the taxpayer’s contention that, as a matter of construction of s 105-50(3), the notice of a requirement to pay the amount of any unpaid GST must necessarily mean notice to pay the correct amount of any unpaid GST and, like a bankruptcy notice issued under the provisions of the Bankruptcy Act 1966, a failure to recite a claim in the notice for the correct amount owing, renders the notice invalid.  The Court rejected this analogy on the basis that the Bankruptcy notice acted as final judgment or final order, whereas a notice of assessment is subject to the objection process.

Notices of Motion

The first Notice of Motion was for a declaration that any GST payable in relation to Lots 1 and 10 was not recoverable because of the operation of s 105-50 of Schedule 1 to the TAA.  The Court agreed with the Commissioner that the Notice was inappropriate and should be dismissed because the taxpayer had filed an application for review to the Tribunal.

The taxpayer filed review proceedings pursuant to s 5 of the Administrative Decisions (Judicial Review) Act 1977 challenging the decision of the Tribunal on the preliminary question re the construction of s 105-50.  The Commissioner filed a Notice of Motion seeking the dismissal of these proceedings.  The Court proceeded on the ground that the issues raised in the Review Application and the substantive appeal would be heard together, and on that basis considered the question of whether the Tribunal erred at law in adopting its construction of s 105-50 in the preliminary question.

After reviewing the scheme of Part 3-10 of Chapter 3 to Schedule 1 of the TAA, in conjunction with the GST Act, the Court found that a liability to pay arises under the GST Act and the provision of a Notice of Assessment operates as a “notice” by the Commissioner of his or her requirement that the taxpayer pay to the Commissioner on behalf of the Commonwealth the net amount of any unpaid GST – thus the Notice of Assessment operates as a notice for the purposes of s 105-50(3) so as to displace the prohibition otherwise arising under s 105-50(1).  The Court saw no error of law in the Tribunal’s construction.

Concluding thoughts

This proceeding raised a number of complex issues, all of which were found in favour of the Commissioner.

With regards to the margin scheme issue, one can see the reasoning behind requiring the supplier to make the choice to apply the margin scheme prior to the supply being made. The point being that there should be finality to the GST consequences at the time the taxpayer comes to complete its BAS.  This is consistent with the following observations of the Full Federal Court in Commissioner of Taxation v Multiflex Pty Ltd (2011) 197 FCR 580 at [25] (this decision was handed down after the Full Federal Court had reserved its decision):

Not only does s 17-15(1) provide that the amount “worked out” on the approved form is treated as the entity’s net amount for a period but s 17-15(2) also underscores the primacy of the amount so worked out by providing that the section has effect despite s 17-5.

With regards to the going concern issue, the case illustrates the evidentiary burden placed on taxpayers in proceedings before the Tribunal.  It is usually very difficult to succeed where reliance is placed on oral evidence – it is the production of contemporaneous documents which usually carries the day.

Finally, the limitation point was an interesting one.  In my view, the Tribunal and the Court were correct. If not, even a partial success in objecting to a Notice of Assessment  (or a partial concession by the Commissioner), would have the effect of invalidating the entire Notice of Assessment for the purposes of s 105-50, and potentially causing the entire GST liability to fall away if more than four years had passed. 

2.3     Federal Court

2.3.1     ATS Pacific Pty Ltd v Commissioner of Taxation [2013] FCA 341

The principal issue in this case was the nature and characterisation of the “supply” made by ATS to non-resident travel agents (NR Travel Agents) in the context of ATR’s enterprise, which was summarised by the Court as follows:

In essence, the relevant enterprise carried out by ATS was contracting for and making supplies to NR Travel Agents in relation to Products [accommodation, transfers, car hire, tours, meals and similar products], which were then provided to NR Tourists [non-resident tourists who travelled to Australia] by Australian Providers [the Australian based providers of the Products]. The NR Travel Agents generally selected the products through a website and software operated by ATS called Tourplan, and then compiled an itinerary for their NR Tourist clients that included the selected Products. Once the selection was made by the NR Travel Agent using Tourplan, ATS would book the requested Product with the Australian Provider, and charge the NR Travel Agent a fee that included the cost of the Product and a margin (the margin). ATS then paid the Australian Provider for the Product. The Product would be supplied by the Australian Provider to, and consumed by, the NR Tourist.

ATS contended that the supply to the NR Travel Agent was the provision of the service of booking/arranging services to a non-resident for use overseas –a GST-free supply. The Commissioner contended that ATS supplied the Products, or the rights thereto, to the NR Travel Agent – a taxable supply. If the Commissioner was correct, ATS contended that, in addition to the supply of the Products or the rights thereto, ATS provided the service of “booking/arranging services” and charged a margin for that service which was GST-free.

ATS also contended that the Commissioner’s discretion in s 105-65 of Schedule 1 to the TAA did not apply for tax periods prior to 1 July 2008 as there was no “supply” for the purposes of the discretion.

Facts

The facts were agreed between the parties and can be summarised as follows:

• ATS was an Australian resident taxpayer and was registered for GST.
• The business of ATS included (a) contracting with and making supplies to NR Travel Agents in relation to Products to be provided to NR Tourists; (b) contracting with Australian Providers, who were able to provide products to NR Tourists.
• The dealings between ATS and NR Travel Agents primarily occurred by electronic means, via the ATS website which allowed the NR Travel Agents to access the Australian Providers and to build a tour package by selecting particular Australian Providers and their Products and requesting that ATS book selected Australian Providers and Products at agreed rates.
• After confirmation of a booking, passenger information documentation was prepared by ATS or the NR Travel Agent to be given to the NR Tourist before commencing the tour.
• Once agreement had been reached between the NR Travel Agent and ATS as to the details of which products would be booked by ATS, ATS entered into contracts with the relevant Australian Providers whereby the Products were provided to the NR Tourist.  ATS contracted with the Australian Providers as principal, not as agent for the NR Travel Agents and the Australian Providers issued tax invoices to ATS. ATS claimed input tax credits for the GST component of amounts paid to Australian Providers.
• ATS paid GST on the consideration (including the margin) received for all its supplies to its NR Travel Agent clients, other than supplies in respect of accommodation booked in serviced apartments, which ATS treated as input taxed supplies.

The characterisation issue

It was common ground that ATS made a supply to NR Travel Agents. The primary issue was the characterisation of that supply, which could be any of the following:

• the supply of the booking and arranging of Products;
• the supply of the Products;
• the supply of a promise or performance; or
• the assignment of rights.

ATS contended that it only supplied booking and arranging services to the NR Travel Agents and that those that services were not consumed in Australia. Further, it did not supply rights to the Products, or supply additional promises to the NR Travel Agents to ensure that the Products were provided to the NR Tourists. Accordingly, the supply was the GST-free supply under s 38-190(1) item 2 of the GST Act.

The Commissioner contended that ATS promised the NR Travel Agents that the Products would be provided by Australian Providers. Alternatively, ATS itself acquired the rights to acquire the products form Australian Providers and assigned them to the NR Travel Agents, or alternatively, on-sold those rights.

In response to ATS’ emphasis on the contracts in determining the legal substance of the relationship between ATS and the NR Travel Agents, the Court observed (at [71]) that it was “it is not disputed that the proper characterisation of the supply…is not always answered by a mere contractual analysis and must be addressed having regard to the substance, purpose and commercial reality of the transactions” and referred to the decision in Saga Holidays.

ATS contended that when ATS booked an Australian Provider, ATS did not itself supply those products to the NR Travel Agent, but supplied the service of a booking. Further, it was the NR Travel Agents who promised the NR tourists that the Products would be provided. The Court observed that there were a number of difficulties with ATS’s contention:

• the NR Travel Agent had no contractual or other rights as against the Australian Providers, such rights were held by ATS, which gave the instructions and made the payments to the Providers.
• the reality of the situation was, so far as the Australian Provider was concerned, the Products were provided on ATS’ instruction, for the person nominated by ATS, and upon delivery of the Products, ATS paid for the Product. While the contractual arrangements did not expressly state that ATS would itself provide the Products, or would ensure that they were provided by the Australian Providers, the fact was that the only party able to ensure that provision was ATS.
• if the NR Travel Agent had received nothing more than an arranging service from ATS, it would have been in a highly vulnerable commercial position. If there was a complete or partial default by the Australian provider and the NR Tourist sued the NR Travel Agent, that travel agent would have no recourse against ATS and ATS would be entitled to keep its “booking fee”.

The Court accepted the Commissioner’s contention that in order to fulfil its obligations, ATS supplied the NR Travel Agent with a contractual right or promise that the Australian Providers would provide the Products to the NR Tourist.  The Court accepted the Commissioner’s contention that there was an implied term of the contract between ATS and the NR Travel Agent that ATS promised that the Australian Provider would perform its obligation to the benefit of the NR Tourist and that AST assumed an obligation that the relevant Product (eg, a hotel room) would be available.

Looking at the entirety of the transaction, the Court concluded (at [124]) that the commercial reality of the transactions, for example a hotel room, could be characterised as follows:

• ATS contracted with the Australian Provider and essentially obtained the right to occupy the hotel room for a period of X days;
• ATS incurred a contractual liability to pay for the room;
• When ATS confirmed the availability of the room with the NR Travel Agent at the quoted price, it was essentially promising, having paid for and acquiring that right, that when the NR Tourist arrived at the hotel, that tourist would be able to stay in that room and that it had already been paid for.
• ATS was liable to pay the Australian Provider and the NR Travel Agent paid ATS a single figure which represented ATS’ cost of securing the accommodation plus a margin which was expressed to be the fees or costs associated in arranging the service

Was the supply GST-free pursuant to s 38-190 

The Court found that the supply of accommodation services did not fall within s 38-190 as they were the supply of “real property” within the extended definition (being “any contractual right exercisable over or in relation to land”). The Court applied the reasoning in Saga Holidays (at [38]).

The Court also found that the supply of non-accommodation services did not fall within s 38-190 because the supply was properly characterised as the supply of services under an agreement with a non-resident in circumstances where the supply is provided, or the agreement required it to be provided to another entity (the NR Tourist) in Australia.

Finally, the Court found that the Products were consumed in Australia by NR Tourists, which provided sufficient connection with Australia for the purposes of s-38-190(2). The supply was effectively a right or option to acquire something (ie, the Products to be consumed in Australia) which would be connected with Australia.

The Margin

The Court accepted the ATS’ alternative argument that the margin received from the NR Travel Agents was GST-free under Item 2 of the table in s 38-190 as the supply of booking services to the NR Travel Agents.

The Court accepted ATS’ contention that there were two supplies encompassed by its contract with the NR Travel Agent. The Court rejected the Commissioner’s contentions, which were as follows:

• the invoice contains a single undivided sum.
• the margin was similar to any other retail product that is sold, a margin charged by a retailer over the cost price.
• even if there was a separate service provided, that was subsidiary or ancillary to the primary component of the supply, and should not be regarded as a separate supply.

The Court concluded that the arranging services constituted an object for the NR Travel Agents and a service for its own sake, and the arranging service was not merely ancillary or incidental to the supply of the Products.

The refund issue

ATS contended that it mistook that it was making a supply of rights to accommodation and non-accommodation services, rather than a mistake as to the GST treatment of supplies made by ATS. The taxpayer contended that s 105-65 of Schedule 1 to the TAA (in the form prior to 1 July 2008) did not apply because the section only applied to an actual taxable supply. ATS relied on the statement of Emmet J in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 that the provision “was limited to circumstances where there is a single supply that is not a taxable supply. It does not in its terms extend to some transaction that does not involve a supply within the meaning of the GST Act.”

The Court agreed with the Commissioner’s contention that KAP Motors should be distinguished as it was the nature of the ATS supply, rather than its existence, which was in dispute – the discretion therefore applied. The parties agreed that if the discretion applied, the appropriate course was to remit the matter to the Commissioner to consider whether to exercise the discretion.

Observations

The decision shows that the notwithstanding the recent statement of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 (at [27]) that the decision in Reliance Carpet “provided no support for the proposition adopted by the Full Court in the present case that it was necessary to extract from the transaction between the airline and the prospective passenger the “essence” and “sole purpose” of the transaction“, the principles of characterising a transaction and looking to its “substance and reality” appear to retain some relevance. Of course, the issue in Qantas was whether there was a supply “at all”, whereas the issue in this case was whether the supply was taxable or GST-free and whether there was one or two supplies.

The case was a partial win for both parties and both parties have appealed to the Full Federal Court.

2.3.2     MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56

The decision of the Federal Court in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56 is related to the decision of the Federal Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCA 13 (and on appeal (2009) 180 FCR 409).

The facts can be summarised as follows:

• South Steyne purchased a hotel and pursuant to a strata plan the hotel was subdivided into 83 individual apartments and the management lot (comprising the reception area, offices and car parking spaces).
• South Steyne transferred the management lot to Mirvac Hotels and granted to Mirvac Management a 10 year lease in identical terms in respect of each of the 83 apartments. Under the lease Mirvac Management was obliged to operate a scheme whereby each apartment was, together with all other apartments, to be operated as part of a serviced apartment business.
• By three separate contracts South Steyne sold 3 of the 83 apartments to MBI (a related company of South Steyne). Each apartment was sold subject to the lease and was stated to be the sale of a going concern.  Each contract permitted MBI to participate in the serviced apartment business. MBI elected to participate.

In South Steyne the majority of the Full Federal Court made the following findings:

• the supply of the 83 individual apartment leases was the input taxed supply of residential premises, rather than the taxable supply of commercial residential premises.
• the sales of the 3 apartments to MBI were GST-free as the supply of a going concern.
• MBI did not make any supply to Mirvac Management (whether under s 40-35 of the GST Act or otherwise) following its acquisition of the reversionary interests in each of the 3 apartments. Rather, the supply relating to the grant of the initial leases by South Steyne to Mirvac Management merely continued after MBI purchased the reversionary interest. Further, the GST treatment of the continuation of the initial lease was dealt with by Division 156 of the GST Act.
• The supply of a hotel room to a guest was a taxable supply of accommodation in commercial residential premises by Mirvac Hotels acting as principal and not as agent of Mirvac Management.

In MBI the issue was whether MBI had an increasing adjustment pursuant to s 135 of the GST Act in respect of the 3 apartments it acquired as a going concern on the basis that it intended to make input taxed supplies of residential premises. The essential argument of MBI appears to have been as follows:

• s 135 is limited to where the acquirer of the enterprise intends to make input tax supplies under the enterprise acquired as a going concern; and
• given the finding of the Full Court in South Steyne that MBI did not make a supply to Mirvac Management when it purchased the reversionary interest in the 3 apartments, s 135 had no application.

No supply by MBI upon the purchase of the reversionary interests in the apartments

Under Division 156, the GST payable on a taxable supply that is made for a periodic or progressive basis and for consideration that is provided on a progressive or periodic basis is attributable, in accordance with s 29-5, as if each progressive or periodic component of the supply were a separate supply. Section 156-22 makes it clear that these provisions apply to a supply or acquisition by way of lease. The Court observed that Division 156 applies only in respect to taxable supplies, and had no application to input taxed supplies.

The Court also observed that it was evident that the Full Court in South Steyne considered that Division 156 applied to the facts in that case and to the situation where there was seen to be merely a continuation of the initial supply under the lease from South Steyne to Mirvac Management when MBI purchased the reversionary interest in the 3 apartments. The Court noted that the Full Court made this finding notwithstanding that they also determined that the initial grant of the leases were not taxable supplies, but rather input taxed supplies. The Court saw this finding as “curious” given that Division 156 only applies to taxable supplies, but nevertheless considered that it was bound to follow the Full Court’s finding that the initial supply on the grant of the lease continued on MBI’s purchase of the reversion.

The Commissioner acknowledged that the Full Court’s observations on Division 156 created some difficulties, but contended that Division 156 had no application to this case.

The legislation and the arguments of the parties

S 135-5 provides as follows:

You have an increasing adjustment if:

(a) you are the recipient of a supply of a going concern, or a supply that is GST-free under section 38-480; and

(b) you intend that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies.

The contentions of MBI are outlined at [24], and the essential arguments appeared to be as follows:

• For the purposes of s 135-5 it should not be concluded that MBI intended to make supplies that were neither GST-free nor taxable through the enterprise acquired as a going concern because the section refers to the taxpayer’s intention in respect of its own activities and not the activities of another entity – this is supported by the reference in s 135-5(1)(b) to supplies that “will be” supplies that are neither taxable nor GST-free.
• MBI had no intention of making supplies of any character through the enterprise acquired by it (being the 3 apartments with leases to Mirvac Management) – its mere toleration of those leases did not constitute the making of a new or fresh supply.
• Division 156 has no application to s 135-5 – the Commissioner’s case effectively invites the Court to create a similar regime to that created by Division 156, but in respect of input taxed supplies.

The contentions of the Commissioner are outlined at [25], and the essential arguments appeared to be as follows:

• the intention in s 135-5(1)(b) is to be objectively determined and ascertained by reference to the nature of the enterprise to which the supply of the going concern relates and through which the supplies will be made.
• if the character of an enterprise that is to be supplied as a going concern is such that input taxed supplies are made through it, the recipient of that enterprise as a going concern is objectively taken to have intended that input taxed supplies will be made through that enterprise because that is the character of the supplies which the enterprise makes.
• there is no warrant to read into s 135-5(1)(b) a requirement that the relevant supplies have to be made only by MBI.
• it is not determinative that South Steyne made no further supplies after it supplied the serviced apartment business to MBI because, by their very nature, input taxed supplies of residential premises by lease are continuous or progressive supplies – it is sufficient that the supply continues to be made “through the enterprise” after its supply as a going concern.

Decision

The Court accepted the Commissioner’s submissions.

The Court found that s 135-5(1)(b) should not be construed so that it only applies to supplies made by the recipient and not a third party. This construction required the provision to be read as though it referred to “supplies made by you through the enterprise” – there was no basis to read those words into the provision. The Court acknowledged that practical difficulties may arise for recipients in ascertaining details to quantify the adjustment, but these theoretical practical difficulties did not provide a sufficient basis to read words into the paragraph which were simply not there.

The Court did not consider that the presence of the words “will be” in s 135-5(1)(b) advanced MBI’s case. All the paragraph required was that the recipient intend that some or all of the supplies made through the enterprise to which the supply of the going concern relates will be supplies that are neither taxable nor GST free supplies. Further, the words “will be” were sufficiently broad to cover the situation where supplies continue to be made through an enterprise, as in this case.

Finally, the Court accepted the Commissioner’s contention that the issue of MBI’s intention was to be determined objectively and by reference to the nature of the enterprise to which the supply of the going concern relates.

In the context of Division 156, the Court found that the non-application of Division 156 in the circumstances had no particular bearing on the determination of the relevant issues. The Court observed that the scheme of the GST Act is such that, in the case of an input taxed supply to which Division 135 applies, adjustments under that Division are to be calculated without reference to the attribution rules in Division 29 or the special rules in Division 156. The Court acknowledged that this meant that there was potential for “imbalance” to arise between successive reversionary interest owners over the term of the lease, but that practical possibility did not preclude acceptance of the Commissioner’s position. In this context, it appeared that the legislature was content to have the basic rules apply to leases other than those specifically covered by Division 156.

Concluding thoughts

A lesson in statutory construction

The case is an important example of statutory construction and of how difficult it is to convince a Court to effectively insert words into a statute that are not there.

The Court noted the observations of Stone J in Saga Holidays Ltd v Commissioner of Taxation (2006) 156 FCR 256 at [29] and [30] to the effect that, while it is appropriate to take into account that the GST Act imposes “a practical business tax” which provides relevant context under a purposive approach to interpretation, there is no special canon of construction that should be applied when interpreting the GST Act by reference to the phrase “a practical business tax”. The Court also referred to the recent decision of the High Court in Commissioner of Taxation v Consolidated Media Holdings [2012] HCA 55 at [39] where the High Court reiterated the fundamental proposition that the task of statutory construction must begin and end with a consideration of the text. At [39], the High Court stated as follows:

The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of a statutory text. Nor is their examination an end in itself.

The uncertain position of the acquirer of a reversionary interest in land

The decision does not resolve the vexed question of how the GST Act applies where an entity acquires the reversionary interest in land (ie, land which is the subject of a lease). It is clear that the Full Court in South Steyne found that the acquirer makes no fresh supply and that the supply made on the initial grant of the lease simply continues.

Section 156-5(1) provides as follows:

The GST payable by you on a taxable supply that is made:

(a) for a period or on a progressive basis; and

(b) for *consideration that is to be provided on a progressive or periodic basis;

is attributable, in accordance with section 29-5, as if each progressive or periodic component of the supply were a separate supply.

As appears to have been observed by the Court in MBI, where the supply of the lease was taxable, Division 156 may provide the solution as the GST treatment simply continues over the term of the lease. However, there are many unanswered questions, two of which are discussed below.

Issue 1  – What if the purchaser of the reversion is not registered for GST and not required to register?

The purchaser of the reversion makes no supply under the lease, but the effect of Division 156 appears to be that the taxable supply made on the grant of the lease continues upon the purchaser acquiring the reversion. Does Division 156 make the purchaser liable to pay GST on the continued supply under the lease? Interestingly, s 156-5(1) simply refers to “the GST payable by you on a taxable supply that is made“. The section is not limited to taxable supplies “made by you“. It would seem a strange result if a purchaser of the reversion who is not registered for GST incurs an ongoing GST liability.

Further, if the purchaser was liable to pay GST, to whom would the lessee need to look to for a tax invoice – being a document which is to be provided by the supplier?

Issue 2 – What if a registered entity acquires the reversion from an unregistered entity?

If the lease was granted by an unregistered entity, GST would not be payable on the lease. If the reversion was purchased by a registered entity, the purchaser would not make a fresh supply and the supply under the initial lease would simply continue.  Division 156 would have no application because it only applies to taxable supplies. This appears to lead to the strange outcome that the purchaser has no liability to pay GST on rental received under the lease.

2.3.3     ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795

The Federal Court accepted the taxpayer’s contention that the supply of shared and studio style apartments was the supply of “commercial residential premises” and therefore taxable, rather than the input taxed supply of “residential premises” (as contended by the Commissioner).

The central question was whether the complex, as a whole, fell within paragraph (a) of the definition of “commercial residential premises”, being “a hotel, motel, inn, hostel or boarding house” or paragraph (f) as “anything similar to residential premises described in paragraph (a)”.

The Commissioner contended that none of the words “hotel”, “motel”, “inn”, “hostel” or “boarding house” described accommodation “similar to that which would be expected for those who own or rent a house or apartment”.  The Commissioner contended that a resident of the premises in question rented his or her accommodation in much the same way as a person would rent any apartment for the purpose of exclusive or shared residence.  The policy of the GST legislation was that “those renting a house or apartment are to be on the same footing as person who own their own homes – neither is to pay GST in connection with such occupation”.

The Court considered whether the premises in question were similar to each of the types of establishment referred to in the definition of commercial residential premises.  The Court found as follows:

• there were a number of features which distinguished the premises from a hotel or motel.
• the premises bear a much closer resemblance to a hostel than a hotel.  While meals were not provided to residents as they might be in the case of a more traditional hostel, the Court found that this did not mean that the premises could still be fairly described as a hostel, or at least similar to a hostel.
• the premises were not similar to an inn or boarding house.

The Court also placed weight on the attributes specified at para 15.12 of the Explanatory Memorandum to the 2006 amendments to the definition as normally found in commercial residential premises (the Court also noted that Greenwood J referred to these attributed in Meridien Marinas Horizon Shores Pty Limited v Commissioner of Taxation [2009] FCA 1594 at [74]):

• are run by a controller for a commercial purpose;
• have multiple occupancy;
• are held out to the public as such;
• have a central management;
• provides services in addition too commercial accommodation;
• are used for the main purpose of accommodation.

The Court found that the premises met all of these requirements.  In doing so, the Court noted as follows:

It is true that in comparison with some other types of establishment referred to in the relevant definition, the level of services provided in addition to accommodation may seem slight.  But the services provided by staff to residents through the reception desk are by no means insignificant and, considered along with all other relevant matters, confirm my view that the Urbanest premises are properly regarded as commercial residential premises for the purposes of the GST Act.

The Court also noted that the fact that accommodation is the principal place of residence of the individual concerns does not mean that the supply is not taxable as commercial residential premises.  In such circumstances, the Court noted that the value of the supply may be substantially reduced for GST purposes by Division 87.

The elements of construction in this instance have been reflected in the drafting of the new commercial residential premises ruling, GSTR 2012/6. 

2.4     Tribunal

2.4.1     AP Group Limited and Commissioner of Taxation [2012] AATA 617

This involved the GST treatment of certain “incentive” payments by car manufacturers to dealers.  The decision follows from the earlier decision of the Federal Court in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 where car dealers successfully obtained refunds of GST paid on “holdback” payments paid to car dealers. In that case the Commissioner accepted that there was no supply made to car dealers.

A range of incentive payments were before the Tribunal.  In each case the Tribunal had to decide whether the payments were properly characterised as consideration for supplies made by the applicant.  The particular arrangements before the Tribunal were as follows:

• “fleet rebates” received from Toyota;
• “run out model support payments” received from Toyota;
• “transit/interest protection payments” received from Holden; and
• target incentive payments received from Ford (for achieving specified sales targets) and from Subaru (for achieving specified purchase targets).

The Applicant’s submissions can be summarised as follows:

• it must be determined what the payments were for, and that must be determined by reference to the entirety of the commercial relationships.
• the promises and obligations accepted by the taxpayer are not properly regarded as supplies that it makes to the manufacturer.
• there was no substantial relation, in a practical business sense, to any other supply, and the Commissioner’s suggestion to the contrary emerges as an “artificial construct” that must fail.
• the true character of the payments was that of a third party discount to the underlying vehicles purchased or compensation (in the case of the transit/interest protection payments).

The Commissioner’s first argument was essentially that by performing (or agreeing to perform) the obligations imposed by the Dealer Agreements and the various sales bulletins and incentive flyers, the applicant made a supply to the manufacturer and the incentive payments were consideration for that supply. In rejecting the Commissioner’s argument, the Tribunal noted as follows:

Given the breadth of the concept of supply – “any form of supply whatsoever”, and specifically “an entry into…an obligation to do anything” – it is not hard to see why the Commissioner submits that the Applicant made a supply to the manufacturer when it did, or agreed to so, any of those things.  But there is an air of unreality in such an outcome.  One could just as readily conclude that a retailed makes a supply to its wholesaler by taking on an obligation to pay for the goods it purchases, or that the wholesaler makes a supply not only of its goods, but also of the promise to deliver those goods in a timely fashion.  When one overlays on to the concept of “supply” the similarly broad concept of “consideration” – which includes not only payments but also any “any act or forbearance in connection with a supply” – it would follow, on this analysis, that the retailer probably makes a taxable supply to the wholesaler (of a promise to pay for the goods) and also that the wholesaler makes an entirely unexpected taxable supply of the promise to deliver goods on time.

…

In the context of the overall business relationships and contractual arrangements between the applicant on one hand, and the various manufacturers on the other we do not think that the Applicant’s acceptance of the obligations or the making of the promises is properly viewed as the making of supplies to the manufacturers.  Instead, they are part of the foundation underpinning the relationships, the background to the bargain the parties have made – in a sense, the rulebook by which the game is to be played.

If we are wrong with that, and the Applicant is to be regarded as making supplies to the manufacturers, we nevertheless do not think it is making taxable supplies to them.  The incentive payments are not made “for” or even “in connection with”, any such supplies. There is no nexus between the payment of the incentives and the making of the promises, the performance of the oblations, or the compliance with the manufacturers’ various rules and policies.  The Commissioner’s submissions do not grapple with the indisputable truth that, on his argument, the Applicant always carries on its business in a particular way (as it has agreed with the manufacturers to do), but it only gets paid for doing so in circumstances which warrant the payment of an incentive; otherwise the supply is provided for free.  We do not see how that can possibly be so.

The Commissioner’s second argument only related to some of the incentives before the Tribunal.  The argument was that the incentives were consideration for the supply of a vehicle to the retail customer.  The Tribunal agreed with the Commissioner in respect of the fleet rebate and run-out support payment and found that the payments were “in connection with” the supply of the vehicle to the customer.  The Tribunal found that there was not a sufficient connection for the retail target incentive payment as the incentive did not have a nexus with any one particular supply, but rather was paid in connection with supplies generally.

The result was that each party was partially successful. Both parties appealed to the Full Federal Court and the Court has reserved its decision.

2.4.2     Naidoo and Commissioner of Taxation [2013] AATA 443 (and The Private Tutor and Commissioner of Taxation [2013] AATA 136)

The Tribunal confirmed the Commissioner’s decision that the applicant was not carrying on an enterprise and was therefore not entitled to input tax credits.

Of greater interest is that the Tribunal rejected the Commissioner’s contention that the applicant was still obliged to pay GST in the relevant period by relying on s 105-65 of Schedule 1 to the TAA and the issue of a GST assessment for a positive net amount – even though the Commissioner formed the view that the applicant was not carrying on an enterprise.

A similar contention was unsuccessfully raised by the Commissioner in The Private Tutor and Commissioner of Taxation [2013] AATA 136. The Tribunal in that case also made some adverse comments on the Commissioner’s conduct in issuing assessments to the taxpayer for a positive net amount in an attempt to “claw back” GST while maintaining that the  taxpayer was not entitled to be registered for GST.

After that decision, the Commissioner released a decision impact statement stating that he “respectfully maintains his view” that he is entitled to rely on s 105-65 to retain refunds in such circumstances. The Commissioner also noted that the Tribunal had reserved a decision dealing with this question in another case and he would review his position generally once the Tribunal hands down its decision in that matter. That has now occurred and one would expect the Commissioner to review his position stated in the decision impact statement.

The facts

The relevant facts and issues can be shortly stated:

• the applicant was a partnership and was registered for GST for the tax periods between 1 April 2007 and 31 March 2011 and lodged activity statements. The activity statements were mostly for negative net amounts, save for three small positive net amounts.
• the Commissioner conducted an audit and determined that the applicant was not carrying on an enterprise during the relevant period and cancelled its GST registration.
• The Commissioner also found that the applicant was not entitled to input tax credits but was still liable for GST. As noted by the Tribunal (at [4]): (emphasis added) “The Commissioner formed the view that the Naidoo Partnership was still liable to pay GST in the relevant period relying on s 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA). Peculiarly, even though the Commissioner formed the view that the Naidoo Partnership was not carrying on an enterprise, he assessed the Naidoo Partnership to positive net amounts for the relevant tax periods.“

The operation of s 105-65

The Tribunal agreed that the applicant was not carrying on an enterprise and was not entitled to input tax credits. However, the Tribunal disagreed with the Commissioner on the effect of s 105-65, and stated as follows (at [6]):

With respect to the issue of the application of s 105-65 of Schedule 1 to the TAA, I have decided that it does not apply in the way that the Commissioner argued and that the net amount for each tax period in the relevant period is zero, not a positive amount. As explained in the reasons below, this is because s 105-65 does not alter the net amount that is worked out under the GST Act.

The Tribunal noted that its reasons were substantially the same as those given recently in The Private Tutor and Commissioner of Taxation. The Tribunal also noted that it gave the parties an opportunity to file further written submissions addressing that decision and detailed submissions were filed. In the decision the Tribunal helpfully outlines the submissions of both parties, in particular those of the Commissioner.

The primary contention of the Commissioner appears to have been that s 105-65 of Schedule 1 to the TAA is not merely a procedural provision, it is a necessary step in establishing a taxpayer’s substantive liability in respect of GST. In particular, s 17-5 of the GST Act, which deals with the determination of “net amount”, is not self contained and should be construed with the more generic provisions of the TAA. The Tribunal rejected the Commissioner’s contention for the following reasons:

• the GST Act provides for the working out of the net amount in a precise manner using clear and unambiguous language in s 17-5 of the GST Act.
• the Commissioner’s contention that “net amount” means the amount that is arrived at after considering all the relevant provisions that bear on the taxpayer’s legal obligation or entitlements are taken into account (including s 105-65) has no basis in the statutory framework and leaves the issue at large creating uncertainty.
• there is no disputing that the GST Act and the TAA are to be construed together, but it is difficult to see how s 105-65 can be worked into the statutory definition of net amount in circumstances where “GST” is also specifically defined in s 17-5(1) of the GST Act.
• S 105-65 can only operate after the net amount has been calculated.

In conclusion the Tribunal stated (at [96]):

I conclude that, contrary to the Commissioner’s approach, s 105-65 of Schedule to the TAA is not a provision which allows the Commissioner to alter the net amount calculated under s 17-5(1) of the GST Act. There is nothing in the statutory provisions of either the GST Act or the TAA which produces the result that the Commissioner contends for, nor do any of the authorities to which he referred compel such a conclusion. Indeed, none of the cases expressly canvass the operation of s 105-65 with respect to the net amount. Accordingly, in the face of the statutory provisions, s 105-65 cannot be taken into account in the determination of the net amount for a tax period. I prefer the view that s 105-65 operates after the net amount for a tax period is calculated under the GST Act.

Jurisdiction to review decisions on s 105-65

The Tribunal observed that s 14ZZ of the TAA provided the Tribunal with jurisdiction to review a decision made by the Commissioner with respect to an objection. In the context of GST, that is an objection on the grounds that an assessment of net amount is excessive. Given the finding that s 105-65 did not alter the taxpayer’s net amount, the Tribunal therefore had no jurisdiction to review the Commissioner’s decision under s 105-65. This meant that the taxpayer’s recourse must be found in judicial review proceedings under s 39B of the Judiciary Act 1903 or the Administrative Decisions (Judicial Review) Act 1977.

The Tribunal also noted as follows:

Whether or not this was intended to be the case when the legislation was drafted is unclear. The Commissioner may be correct in his view (at paragraph [159] of MT 2010/1) that it would be desirable for taxpayers to be able to challenge such a decision under Part IVC of the TAA and also able to obtain merits review in the Tribunal. However, this is of no assistance in circumstances where the statutory framework does not provide for this outcome.

The Tribunal noted that the Tribunal had, in the past, proceeded on the basis that it had jurisdiction (eg, Luxottica), but observed that the jurisdiction issue appeared not to have been previously the subject of deliberation. One must also raise the question as to whether the Tribunal has jurisdiction to consider matters relating to s 105-50 and s 105-55.

Exercise of the Commissioner’s discretion

The Tribunal also considered the question of whether the Commissioner should exercise his discretion in s 105-65 to refund the overpaid GST to the applicant. The Commissioner submitted that the discretion should not be exercised because the applicant would receive a “windfall gain” if a refund was paid.

The Commissioner appeared to contend that the entire of the GST paid by the applicant fell within s 105-65 (ie, including the entirety of the GST included in the activity statement). The Tribunal appeared to reject this contention and found that if it had jurisdiction to review the decision made under s 105-65, it would have only refused to refund the positive net amounts reported in the three activity statements lodged by the applicant.

Division 142

In the decision impact statement for The Private Tutor, the Commissioner noted that the draft legislation introducing Division 142 into the GST Act  (and repealing section 105-65) would likely remove any uncertainty as to the correct approach in cases like this one.

Division 142 would appear to remedy the issue of jurisdiction as the effect is that the overpaid GST “is taken to have always been payable” and would appear to directly impact on the taxpayer’s net amount.

However, if the Commissioner is correct in his view that Division 142 would remove an uncertainty, this may illustrate a harsh application of the proposed division. By incorrectly registering for GST, a taxpayer is exposed to repaying input tax credits falsely claimed, but the full amount of GST that was incorrectly payable as a result of being incorrectly registered is “taken to” to have always been payable. For example, assume a taxpayer incorrectly registers for GST and claims input tax credits of $100,000 and pays GST of $100,000. That taxpayer would have a net amount of nil, but if the Commissioner subsequently determines that the entity was not carrying on an enterprise, the taxpayer will be required to repay the input tax credits in full but remain liable to pay the whole of the GST unless the taxpayer can show that the GST was not passed on to the recipient or the overpaid GST has been reimbursed to the recipient.

It will take time for the full implications of Division 142 to be realised, but this may be just a taste of its potential full force and effect.

2.4.3     Brookdale Investments Pty Ltd and Commissioner of Taxation [2013] AATA 154

The Tribunal agreed with the Commissioner that the sale of land by the applicant was not GST-free as the supply of a going concern because there was no evidence that the parties so agreed in writing prior to the supply being made (ie, prior to settlement).

Was there an agreement in writing?

The Tribunal rejected the applicant’s contention that it was sufficient that the agreement be made after the supply was made (the vendor and purchaser each made statutory declarations some 5 years after settlement to the effect that the supply was of a going concern). In doing so, the Tribunal agreed with the previous views of the Tribunal that the agreement must be made before the supply is made:

• Midford v Deputy Commissioner of Taxation [2005] AATA 623 at [8]
• SDI Group Pty Ltd v Commissioner of Taxation [2012] AATA 763
• Re YXFP and Federal Commissioner of Taxation [2009] AATA 805
• Re Nitram Consutling Pty Ltd and Commissioner of Taxation [2008] AATA 1119 at [33]

The Tribunal accepted that an agreement may be evidenced in writing by two or more documents, but agreed with the Commissioner that there was real doubt whether the declarations could together constitute an agreement for the purposes of s 38-325(1)(c) – even if they had been executed before Settlement. The Tribunal also noted that the applicant had failed to call the deponents of the declaration, but failed to do so. Interestingly, the Tribunal did not appear to reject the possibility that an agreement may be able to be established by documents entered into by the parties after settlement – the Tribunal referred to the agreement being “evidenced in writing” – it may be that in some circumstances the existence of an agreement by the parties before settlement (eg, an oral agreement) can be properly “evidenced” by documents brought into existence after settlement. However, this was clearly not such a case.

Was the Commissioner’s s 105-50 notice valid?

The Tribunal also rejected the applicant’s contention that the Commissioner’s notice issued under s 105-50 of Schedule 1 to the TAA was invalid because it failed to identify the amount of unpaid GST. The Tribunal made the following findings on s 105-50:

• S 105-50 does not stipulate that any particular formality is required, provided the notice brings to the taxpayer’s attention that the Commissioner claims an entitlement to an unpaid net amount: referring to Federal Commissioner of Taxation v Prestige Motors Pty Ltd [1994] HCA 39;
• S 105-50 is directed at providing notice, not a formal claim or demand. All that is required is to bring to the taxpayers attention that the Commissioner is of the view that there is an unpaid net amount and sufficient information must be given that the Commissioner is claiming an amount due in respect of a particular tax period and for a specified period: referring to Revlon Manufacturing Ltd v Federal Commissioner of Taxation (1995) 96 ATC 4031 at 4053;
• A notice is not rendered invalid by reason of some later variation to an amount stated in it to be payable: referring to Cyonara Snowfox Pty Ltd v Commissioner of Taxation [2012] FCAFC 177 at 135.

In my view, these principles should also apply to a notice lodged by a taxpayer under s 105-55.

2.4.4     Sanctuary Australasia Pty Ltd and Commissioner of Taxation [2013] AATA 371

This is what I believe to be the first decision relating to s 8AAZLGA of the TAA, which allows the Commissioner to retain refunds (including GST) pending an investigation.

Section 8AAZLGA was introduced in 2012 after the decision of the Full Federal Court in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142, where the taxpayer successfully applied for an order of mandamus requiring the Commissioner to pay a negative net amount reported in the taxpayer’s BAS.

The facts of the case can be shortly stated. The taxpayer lodged an amended BAS which showed a refund entitlement. The Commissioner retained the refund and the taxpayer applied to the Tribunal for a review of the Commissioner’s decision to disallow the objection against the decision to retain the refund. However, before the application was made, the Commissioner issued an assessment to the taxpayer amending its net amount to “NIL”.

The Tribunal found that the taxpayer was not entitled to make the application because, upon the assessment being made, the taxpayer was no longer “a person dissatisfied” with a decision of the Commissioner. Once the assessment issued, there was no amount which the Commissioner was required to refund and so no “net amount” that the Commissioner was retaining under s 8AAZLGA. The proper course of action for the taxpayer was to object to the assessment.

The conclusion that the assessment overrides any refund entitlement by virtue of lodging a BAS is consistent with the view of the Full Federal Court in Multiflex where the Court observed as follows (at [26]):

The answer which the legislation provides to the Commissioner’s disquiet as to being obliged to make a refund based on a claimed net amount in a business activity statement which he knows to be wrong is straightforward. In such circumstances, he is entitled at any time to make an assessment of that net amount: s 105-5 of Sch 1 to the TAA. The net amount so assessed by the Commissioner necessarily supersedes whatever amount the entity earlier worked out on its approved form, if indeed it lodged such a form…Subject to the outcome of any subsequent objection or later appeal or review proceeding, the entity’s net amount will be the amount as assessed by the Commissioner.

That the taxpayer must go to the time and expense of lodging a further objection (this time to the assessment) illustrates one of the difficulties of s 8AAZLGA. Also, the decision shows that the prospects of the Tribunal actually hearing an application to review a decision to retain a refund under s 8AAZLGA may be low, given that by the time the matter actually gets to hearing, the Commissioner will likely have completed his investigations and determined whether to issue an assessment or release the refund.

One matter which does raise some concern is the contention of the applicant that the Commissioner did not give the applicant a notice of retention of refund as required by s 8AAZLGA(3). That sub-section states that the Commissioner “must inform the entity that he or she has retained the amount under this section”. The taxpayer lodged its amended BAS on 29 August 2012 and the Commissioner made a decision on 4 September 2012 to retain the refund. On 10 September 2012 the Commissioner informed the taxpayer that he was conducting an audit of its BAS for the relevant period – however, it is unclear whether the Commissioner expressly informed the applicant that it was retaining the refund pursuant to s 8AAZLGA. If the matter had proceeded to hearing, the Tribunal may have had to decide the difficult question of whether the failure to comply with the notice requirement invalidated the retention of refund.

2.4.5     Dandenong Motors Unit Trust and Commissioner of Taxation [2012] AATA 920

This was another case involving “holdback” payments and refunds of GST.

The taxpayer was carried on the business of selling motor vehicles and between 1 July 2000 and 30 June 2003 the taxpayer lodged activity statements which included GST in respect of holdback payments it received. For some tax periods:

• A positive GST net amount was reported and the amount of GST payable exceeded the GST referrable to the hold-back payments (Category A);
• A positive GST net amount was reported but that amount was less than the GST referrable to the hold-back payments (Category B);
• A negative GST net amount was reported after including the GST referrable to the hold-back payments (Category C).

Following the decision in KAP Motors (which was to the effect that s 105-65 of Schedule 1 to the TAA did not apply to GST overpaid in respect of “holdback” payments), the taxpayer lodged a notification pursuant to s 105-55 of Schedule 1 to the TAA on the basis that it had overpaid GST in respect of the holdback payments. The notification was lodged more than four years after the tax periods in which the GST was paid.

The total amount claimed was $218,125. The Commissioner paid a partial refund, being constituted as follows:

• All of Category A
• That part of Category B to which the activity statements showed a positive net amount
• None of Category C.

The Commissioner contended that the partial payment of refunds reflected the fact that before 1 July 2008, the GST system did not deal with refunds of GST uniformly. Specifically, the four-year limitation in s 105-55 of Schedule 1 to the TAA did not apply to prevent claims for a refund of overpaid GST where a taxpayer’s activity statement showed a positive amount but that the limitation did apply to the extent that a taxpayer’s activity showed a negative net amount (which would give rise to an entitlement to a refund under s 35-5 of the GST Act).

The Tribunal agreed with the Commissioner.

Section 105-55 was amended on 1 July 2008 to remedy the situation, and to impose a uniform 4 year limitation period on refunds.

2.4.6     Wynuum Holdings No 1 Pty Ltd and Commissioner of Taxation [2012] AATA 616

This case involved the acquisition of a property by the applicant in 2003 and raised the following issues:

• whether the Commissioner was out of time to recover what he considered to be over-claimed input tax credits (the “timing issue”);
• whether the applicant was protected from the Commissioner’s proposed adjustment by a ruling that the Applicant claimed the Commissioner had made (the “ruling issue”);
• whether the applicant was carrying on an enterprise at the time of purchase of the property (the “enterprise issue”); and
• whether the premises are properly characterised as “commercial residential premises” or “residential premises” (the “premises issue”).

The first two issues were dealt with by the Tribunal as preliminary issues and were resolved in favour of the Commissioner in Wynnum Holdings No 1 Pty Ltd and Commissioner of Taxation [2011] AATA 296.  If the Tribunal had resolved either of the preliminary issues in favour of the applicant the matter would have been ended.  However, the Tribunal’s findings made it necessary to consider the remaining two issues.  These issues were resolved in favour of the Commissioner in Wynnum Holdings No 1 Pty Ltd and Ors and Commissioner of Taxation [2012] AATA 616.

The facts

A joint venture arrangement was established to invest in a Village Life retirement village.  On 15 August 2003 the property was purchased by “Wynnum Holdings No 1 Pty Ltd as trustee for the Wynnum Holdings No 1 Joint Venture Trust” for the price of $4.27m (inclusive of GST).  The contract described the “present use” of the land as “Residential Pensioner Units” and the “Nature of Buildings” as “Residential Pensioner Accommodation”.

At the time of the acquisition of the property, the applicant was registered for GST and no later than 7 October 2003 the applicant lodged its BAS for the period 1 July 2003 to 30 September 2003 showing nil GST payable but claiming input tax credits of $388,182 being the GST included in the purchase price of the property.  The refund was credited to the Applicant’s Running Balance account on 31 October 2003.

On 23 October 2007, more than four years after the lodgement of the BAS, the Commissioner issued the applicant with a “Notice to repay incorrectly paid refunds for the tax period 1/7/2003 to 30/9/2003” (“the Notice to Repay”) claiming a refund of the input tax credits previously claimed and paid.  On 28 April 2008 the Commissioner issued a “Notice of Assessment” of net amount for that tax period showing an assessed net amount of $0.

The timing issue

The applicant submitted that the Notice to Repay and the Notice of Assessment were ineffective because of the operation of s 105-50 of schedule 1 to the TAA.  The argument was as follows:

• the “debt” claimed by the Commissioner became “payable” on the same date on which the Applicant became entitled to receive payment of the refund (i.e., the negative net amount) – i.e., on or before 7 October 2003
• the Notice to Repay did not, and could not, establish a liability on the part of the Applicant – the notice merely established the period in respect of which the Commissioner could raise an assessment
• the liability to repay was created by the Notice of Assessment
• the fact that the debt was created by an assessment means that the amount in dispute must either be a “net amount” or “an amount of indirect tax” – if so, the Commissioner must require its payment within four years or it ceases to become payable: s 105-50
• if the amount is neither a “net amount” or “an amount of indirect tax”, the Commissioner has no power to make the assessment

The Tribunal found that at the root of the applicant’s argument was “the somewhat ambitious attempt” to characterise the amount claimed by the Commissioner as either a “net amount” or an “amount of indirect tax” and by extension an “unpaid net amount” or an “unpaid amount of indirect tax”.  In rejecting the applicant’s contention, the Tribunal referred to the decision of Logan J in Russell v Commissioner of Taxation [2009] FCA 1224 where his honour said “Section 105-50 of Schedule 1 to the TAA has nothing at all to say where, as is now the case here, there is no controversy about an unpaid net amount, only a controversy about an entitlement to claim particular input tax credits”.

The ruling issue

The applicant contended that the conduct of an investigation by the Commissioner and the decision to credit the input tax credits to the Running Balance Account after advising the applicant by telephone of the successful completion of the investigation constituted the giving of a private ruling.  The Tribunal rejected this submission.

The enterprise issue

The parties agreed that someone was carrying on an enterprise at the time of the purchase of the property in 2003, but they disagreed on which entity was doing so.  The Commissioner submitted that it was the joint venture participants and the applicant submitted that it did so.

The Commissioner relied on the documents and submitted that the applicant was acting as a “nominee and bare trustee”.  The applicant accepted that these documents were relevant, but contended that the characterisation of an enterprise will be determined by what it does.

The participants in the joint venture executed a Joint Venture Deed and a Deed Poll.   The recitals in the Joint Venture Deed included the following “The Joint Venturers have agreed to become joint venturers for the Joint Venture for the purchase by them (in the name of the Trustee as their nominee and bare trustee) of the Property and the management and leasing business and possible re-sale of the Property as joint owners as tenants in common in their Respective Proportion…”. The Deed Poll had a similar recital and clause 2.1 therein stated as follows “The Trustee declares that the Assets held by or registered in the name of the Trustee are held by the Trustee as nominee for and as bare trustee for all of the Joint Venturers as tenants in common in respect to their share as set out in Schedule 2”.

In a letter to the ATO dated 29 November 2006 a representative of the applicant told the ATO the following:

[Wynnum] is the bare trustee for a small private property syndicate trust, [the Trust], which is a bare trust.  As such the bare trust and bare trustee merely act as a clearing entities (sic) and do not have any interest in the syndicate property, loan or equity.  The property is owned by the syndicate members as tenants in common and as such each member reports their share of income and expenses in their own income tax returns.

Oral evidence was given on behalf of the applicant as to duties performed by the applicant in addition to those which had been formally documented.

The Tribunal found that the answers given by the applicant to the Commissioner in 2006 and 2007 were consistent with the documents and they were more reliable than the oral evidence, which was inconsistent with the documents.  These earlier answers (and the documents) did not support the contention that the applicant was the entity carrying on the enterprise.

When one considers the content of the “foundation documents” prepared by the parties, and the initial responses to the ATO enquiries, the applicant was always faced with a difficult task in showing that the Applicant was more than a bare trustee or nominee.

The commercial residential premises issue

The applicant contended that the property was “commercial residential premises” within the meaning in s 195-1 of the GST Act.  The Commissioner contended that the property was “residential premises”.

The property was comprised of six buildings, five of which comprised accommodation units.  The sixth building contained a community centre and the manager’s apartment.  Covered walkways connected each building.  There was an extensive landscaped garden and a car park with 10 parking spaces.  The community centre comprised a dining area with adjoining commercial kitchen, a TV area, library, office and commercial laundry.

The Tribunal considered whether the property answered the description in (a) or (f) of the definition, being either a hotel, motel, inn, hostel or boarding house – or similar to any of those types of premises.  In doing so, the Tribunal followed the recent judgment of Nicholas J in ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795 where the following test was adopted:

The test to be applied for the purpose of determine whether [the premises] are commercial residential premises involves asking whether [it] is a hotel, motel, inn, hostel or boarding house or whether it is similar to – in the sense that it has a likeness or resemblance to – any of those types of establishment.  The application of this test necessarily raises questions of fact involving matters of impression and degree.

The Tribunal found that the property could not fairly be described as a hotel or motel – they are generally patronised  by travellers who ordinarily have their principal place of residence elsewhere and who need or desire accommodation while away for business or pleasure.  In the present case, those who occupied the accommodation units did so on a permanent (or at least long-term) basis, apparently as their principal place of residence.

The Tribunal did find that the property had some of the attributes of a “hostel” – with an on-site manager, a commercial kitchen and a communal area suitable for, and used as, a dining area for residents, a communal laundry.  The existence of segregated sleeping areas (rather than a dormitory) might be regarded as unusual in a hostel, but the Tribunal noted that this factor was not fatal to the taxpayer’s claim in ECC Southbank.  Also, that the property is occupied by “residents” was unremarkable.

However, the Tribunal also noted that here were factors that tended away from the conclusion that the property was residential premises, including:

• the occupants agreed to occupy the units for a “Periodic Term”, often for months or years at a time;
• a condition report is prepared at the commencement and conclusion of the term of occupation
• a cleaning fee is imposed when an occupant leaves
• the possibility of alterations of the unit by the occupant is contemplated
• the possibility of the keeping of pets is contemplated
• the occupants must separately arrange and pay for the connection of telephone, electricity and gas services to the units

Taken together, these factors were found to be “quite out of place” in the context of hotels, motels, inns, hostels and boarding houses, or premises similar to them.  While the Tribunal did not expressly find, it appears that the Tribunal considered that these factors were more connected with non-commercial “residential” premises where the occupant has more extensive rights over the premises (e.g., keeping pets, making alterations to the premises, exclusive possession) but also more extensive obligations (e.g. making good damage, cleaning expenses, connecting utilities).

The Tribunal also noted the Commissioner’s public ruling GSTR 2000/20 dealing with commercial residential premises.  Without reviewing the ruling in any detail, the Tribunal noted the difficulty in prescribing those factors which are relevant to the enquiry (GSTR 2000/20 sets out 8 “attributes” of commercial residential premises), where the enquiry is one of “impression” and “degree”.

The decision of the Tribunal, along with that in ECC Southbank, shows that it is often difficult to determine whether premises are “commercial residential premises” or “residential premises”.  Also, it is not appropriate to limit the enquiry to those attributes set out in GSTR 2000/20 (which mirror those in the Explanatory Memorandum), and of course, we now have GSTR 2012/6 to assist in interpretation.

2.5     State Courts

2.5.1     Duoedge Pty Ltd v Leong & Anor [2013] VSC 36

Facts

On 3 September 2009 the defendant entered into a contract of sale to purchase property for a price specified in the contract as “$916,000 GST inclusive”. The contract was in the standard REIV form (in Victoria) and the particulars of sale stated “GST: (refer to general condition 13) – the Price includes GST (if any) unless the words “plus GST” appear in this box.’ The box contained a hand written strike through its centre.

The defendant was the director of a company which intended to develop the land – that company was later nominated as the purchaser. On 28 October 2009, at the company’s request, the vendor provided it with a tax invoice showing a purchase price of $832,727.27 plus GST of $83,272.13. On 10 November 2009 the contract settled.

The company commenced its development on the land and in 2010 lodged a BAS claiming an input tax credit of $83,272. The ATO revised the BAS and rejected the claim to an input tax credit on the basis that the property was the supply of residential premises and therefore was not a creditable acquisition. The company requested that the vendor refund the GST component of the sale. The company knew that the vendor had not remitted GST on the sale to the ATO.

The findings of the magistrate

The magistrate found that the vendor should refund the GST amount to the company. In doing so, the magistrate found as follows:

•  it was arguable that the language used in the contract of sale was ambiguous or susceptible to more than one meaning and the Court was entitled to take into account ‘surrounding circumstances’ to interpret the contract
• a reasonable observer would conclude that the parties contracted on the basis that the price included GST – a reasonable observer would not have concluded that the purchase price included GST “if any”.
• at the time of executing the contract, both the vendor and the purchaser believed that GST was applicable to the sale
• there was an implied term in the contract that if the purchaser paid to the vendor a total price that included provision for GST of $83,272.73, and it was later discovered that GST was not assessable on the transaction, the GST component was refundable to the purchaser on demand – the claim was described by the Magistrate as “money had and received”
• the vendor would be unjustly enriched if it retained $83,272.73
• the contract should be rectified to given effect to the intention of the parties

Reasoning of the Judge on appeal

Justice Dixon allowed the vendor’s appeal, being satisfied that the Magistrate erred in law for the reasons set out below.

Implied term

It was not open to the magistrate to find that there was an implied term of the contract that, if GST did not apply to the sale, Duoedge would refund the GST amount of $83,272.73 and then to rectify the contract to give effect to the implied term.

The Judge found that the language used in the contract with respect to GST had a plain meaning. In a comforting statement for those real estate practitioners in Victoria (and to those involved in drafting the standard form REIV contract), his Honour observed as follows (at [22]-[23]):

What the parties needed to negotiate was the allocation of the risk that GST might need to be remitted to the ATO if the sale was a taxable supply. This is a common consideration as the printed terms of the standard form of contract in use in Victoria for property transactions makes clear.

The plain meaning of this contract is that the GST risk lay with the vendor. That this was the contractual intention appears from at least two places. It is clear from the particulars of sale that the agreed contract price was GST inclusive, although adding those words after the price is not the correct way to complete the standard form of contract. The absence of the words ‘plus GST’ in the box confirms the handwritten addition of the words ‘GST inclusive’. The parties have expressed the intention that the purchaser has no obligation to make a further payment in respect of any GST assessment that might later follow. In other words, the parties plainly intended that the risk that GST might need to be remitted to the Tax Office lay with the vendor. If the transaction did not involve a taxable supply, that risk was abated to the benefit of the vendor, who retains the full price that it contracted to receive for the property. Objectively assessed, this is what the terms relating to GST show to be the intention of the contracting parties. This construction is neither uncertain, nor ambiguous. To reverse the allocation of that risk to the purchaser, the words ‘plus GST’ are added to the box.

The Judge also found that the position of the purchaser was “opportunistic”. This is because the purchaser would receive the benefit of the refund of part of the purchase price, plus also the benefit of being able to use the margin scheme for the sale of the developed units – because of this, the . In light of this, the Judge found that it was not open to the magistrate to find that the vendor would be unjustly enriched if it retained the GST amount.

Rectification

The Judge found that the magistrate had not directed himself properly as to the principles for rectification. In this context, the Judge observed that the magistrate was satisfied that the parties were under a mistaken impression that the sale was a taxable supply – and that this was no more than a common “belief”. This was not an actual agreement. Accordingly, the findings were not to the effect that the common intention of the parties was that the actual price was $832,727.27 – and there was no evidence that the true intention was that the agreed price was $832,727.27 and that it was grossed up to $916,000 because the parties believed that the sale was a taxable supply and the vendor was liable to remit the GST to the ATO

Accordingly, the evidence of a “common belief” fell short of the requisite finding for rectification, namely that there was a common “agreement”.

Observations

This case illustrates the difficulties which GST can cause in drafting contracts. Also, the case illustrates the importance of the facts and the evidence adduced at trial.

 

Chris Sievers

Lonsdale Chambers

 

28 August 2013