Category Archives: Appeals

International cases update – November 2011

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November saw a number of cases handed down in the UK relating to VAT – the Court of Appeal, the Upper Tribunal and the First Tier Tribunal.  The cases are listed below and they can also be accessed from the drop-down menu on the site.  My research disclosed no GST decisions in New Zealand or Canada during November.

Court of Appeal

18/11/11 – HM Revenue & Customs v London Clubs Management Ltd [2011] EWCA Civ 1323

  • creditable acquisitions, apportionment methodology for rent paid by casino where some services taxable and some exempt, whether appropriate to use turnover method or floor space method
  • Summary  – the taxpayer sought to change its attribution methodology from a turnover-based approach to a floor-space approach, the Tribunal accepted that the floor space approach was fair and reasonable (although it did find that this may not be so in all cases) as the costs incurred in relation to the taxable parts were incurred for the business as a whole – on appeal the Court noted that it would be very doubtful that the finding could be upheld in the absence of a finding by the Tribunal that the taxpayer’s catering activities had the potential to be a source of profit if the relevant overheads were apportioned as proposed, further, while the Court clearly had doubts as to this finding it was not open to the appellate court to disturb this finding
  • Comment – the Court identified three points of principle which may be relevance for this issue in Australia; first, close attention needs to be paid to the facts to understand the economic or commercial reality underlying the use of the relevant inputs, second, identification of the source or potential source of profit in a business may be an important feature of a business throwing light on whether or not the standard method or another method is a more fair, reasonable and accurate method of attribution; third, depending on the precise factual situation under consideration, it may be appropriate to exclude from the equation taxable supplies which are not, in themselves a source of profit.

Upper Tribunal

24/10/11 – Glaxosmithkline Services Unlimited v HMRC [2011] UKUT 432

  • Zero-rating – Whether “Lucozade Sport” zero-rated as food or standard-rated as beverage
  • Summary – this was an appeal from the finding of the First Tier Tribunal (such appeals are limited to errors of law) that Lucozade Sport was taxable as a beverage or a powder for the preparation of a beverage falling within the list of excepted items – the taxpayer relied on an earlier decision of the VAT Tribunal in SiS (Science in Sport) Ltd v Revenue and Customs Commissioners [2000] V & DR 195 which found that the product in question was zero rated because it was only consumed “by the athletes, sportspeople and others who characteristically take them for nutritional purposes” – it was found, on the evidence, that this was not the position for Lucozade Sport as it was drunk for the purposes of hydration, refreshment and pleasure.
  • Comment – this decision is a good example of the difficulties faced when trying to appeal a decision of fact made by a Tribunal (the same hurdles apply in appealing decisions of the AAT) – the scope for such an appeal was said to be found where the finding had been made “without any evidence or upon a view of the facts which could not reasonably be entertained”. The decision also shows (see [26]) the dangers of relying on previous decisions which are applicable to their own particular facts rather than laying down any principle.

First Tier Tribunal

15/11/11 – The British Disabled Flying Association v Revenue & Customs [2011] UKFTT 743

  • whether aircraft for use of disabled persons zero rated

10/11/11 – Harrier LLC v Revenue & Customs [2011] UKFFT 725

  • whether the supply of “photo books” a zero rated supply of goods or taxable supply of photographic services, whether single supply of goods or composite supply of goods and services
  • consideration – whether donations to good causes by company making catalogue sales were part of consideration for its supplies
  • whether iced tea concentrate zero rated as a “tea, mate, herbal teas and similar products and preparations and extracts thereof” or standard rated

Taxpayers file Appeals in GST refund cases

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The Federal Court Portal shows that on 28 November 2011 the taxpayers filed appeals against the decisions of the Tribunal (constituted by President Downes and Senior Member O’Loughlin) in MTAA Superannuation Fund (RG Casey Building) Property Pty Ltd and Commissioner of Taxation [2011] AATA 769 and National Jet Systems Pty Ltd and Commissioner of Taxation [2011] AATA 766 which were handed down on 31 October 2011.

The callover for both appeals is scheduled for 7 February 2012 before Justice Gray.

Given that Justice Downes was a member of the Tribunal, the appeal will be heard by the Full Court (s 44(3) of the Administrative Appeals Act).

Both matters concerned a claim for a refund of GST overpaid in respect of agreements which the applicant contended were GST-free pursuant to s 13 of the GST Transition Act.  In each case the Commissioner contended that:

  • the agreements were taxable
  • the notification lodged by the applicant was not a valid notification for the purposes of s 105-55 of Schedule 1 to the TAA
  • if a refund was available, the discretion in s 105-65 of Schedule 1 to the TAA entitled the Commissioner to refuse to pay the refunds
In the National Jet matter, there was also an application for an extension of time to object to a number of tax periods.  The Commissioner refused to grant the extension of time.

In both decisions the Tribunal found that:

  • the notifications lodged by the applicants were valid
  • the agreements were not GST-free pursuant to s 13 of the GST Transition Act
  • if a refund was available, no refund should be paid because this would give rise to a windfall gain to either the applicant or the recipient of the supply
  • for the National Jet matter, the extension of time should not be granted

One would expect that the Commissioner will file a Notice of Contention in both matters contending that the notifications were not valid.  This would be consistent with the approach taken in the appeal by the taxpayer of the decision in Central Equity Limited v Commissioner of Taxation [2011] FCA 908 where Justice Gordon found that a notification lodged in similar form was valid.

High Court grants Commissioner’s application for expedited Special Leave application in Multiflex

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On 21 November 2011 Justice Gummow of the High Court granted the Commissioner’s application for an expedited timetable for the hearing of the Application for Special Leave to appeal from the decision of the Full Court in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142.  The transcript from the application can be accessed here and my analysis of the decision of the Full Federal Court can be accessed here.

The application for special leave will be heard in Sydney on Friday 9 December 2011.

On 19 November 2011 Justice Edmonds of the Federal Court granted a stay of the judgment of the Full Federal Court until 13 December 2011.  If the Commissioner is successful in the application for special leave, he will no doubt ask the High Court to extend the stay.  My post on the decision to grant the stay can be accessed here.

Federal Court grants stay in Multiflex pending special leave application – expedition hearing on Monday

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In Commissioner of Taxation v Multiflex Pty Ltd [2011] FCA 1316, Justice Edmonds granted the Commissioner’s application that the orders of the Full Court in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142 be stayed pending an application by the Commissioner for special leave to appeal to the High Court. A discussion of the decision of the Full Court can be found here.

The stay did not come cheap for the Commissioner, who was required to pay half of the refunds in issue as a condition of the stay being extended to 13 December 2011 (with the hope that the application for special leave can be heard at the sitting on 9 December 2011 – the judgment states that the Commissioner filed an application for special leave was filed on 15 November 2011 and that an application for expedition of the application would also be filed).  The High Court list shows that the expedition application will be heard before Gummow J on Monday 21 November 2011 at 9.30am at High Court in Melbourne (by video link with Sydney).

The decision of Edmonds J is interesting.  His Honour appeared to take the view that the threshold for the Federal Court granting a stay was lower than for the High Court.  His Honour referred to the following statement of Brennan J in Jennings Construction Limited v Burgundy Royale Investments Pty Ltd (1986) 161 CLR 681 at 684:

A stay to preserve the subject-matter of litigation pending an application for special leave to appeal is an extraordinary jurisdiction and exceptional circumstances must be shown before its exercise is warranted. [emphasis added]

Nevertheless, his honour found that the threshold in the Federal Court would not seem to require ‘exceptional’ or ‘special’ reasons for the stay, merely a requirement on the part of the applicant for a stay pending the determination of an appeal to demonstrate ‘a reason or an appropriate case to warrant the exercise of discretion in his favour’.

His Honour made the following findings:

  • he was far from satisfied on the evidence that a stay was required to preserve the subject matter of the litigation;
  • there was a real prospect that the High Court would conclude that it was not appropriate to grant special leave;
  • the refusal of the Commissioner to pay the refunds would cause loss to Multiflex.

Notwithstanding the above matters, his Honour found that, marginally, the balance of convenience lay in favour of granting the stay on the conditions set out in the orders.

The Court also noted that if the High Court does not grant the Commissioner’s application for expedition, or if it is granted and special leave is given, it would be open to the Commissioner to apply for a further stay of the Full Court’s orders.  Given the statement of Brennan J referred to above, one might think that the Commissioner would face significant difficulties in such an application.

Case Analysis in Multiflex – off to the High Court?

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The decision of the Full Court in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142 has real implications for the Commissioner and how he administers the GST Act.  My analysis of the decision can be accessed here.

Also, colleagues who attended the judgment inform me that Counsel for the Commissioner informed the Court that the Commissioner would look to bring an urgent application for special leave to appeal before the High Court.  The Commissioner has also made an application to stay the judgment (i.e. to stay the order to pay the refund) and this application is to be heard by Justice Edmonds next week.

If the Commissioner does bring an application for special leave, along with the Qantas application, he will have two applications for special leave regarding GST.  So much for GST being a “practical business tax”.

Cases update – Commissioner ordered to pay Indemnity Costs and Role of Tribunal on review of Private Rulings

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Amongst the excitement of the appeal and decision of the Full Federal Court in the Multiplex case (I will post my analysis of the decision on Monday), during the last week there were two decisions handed down which also warrant a mention.  The cases do not directly involve GST, but are nevertheless important decisions.

Indemnity costs ordered against the Commissioner

In Commissioner of Taxation v Clark [2011] FCAFC 140 (10 November 2011) the Full Federal Court granted the taxpayer’s application that the Commissioner pay indemnity costs of the appeal as from the date on which an offer of compromise was made.  A similar order was made by the Federal Court in International All Sports Ltd v Commissioner of Taxation (No 2) [2011] FCA 1027 and my post on that decision can be accessed here.

The taxpayer was successful at first instance and during the course of the appeal by the Commissioner, made an offer of compromise of $5,000 plus the Commissioner’s costs of the appeal to date.  The Commissioner rejected the offer on the basis that it was significantly below the tax thought to be owed by the Commissioner – indeed, before the Full Court the Commissioner argued that the offer was “trivial”.

The Commissioner relied on a number of contentions, which the Court summarised into the following four propositions (at [20]):

  • the Commissioner is neither permitted nor obliged to take into account, in deciding whether to accept any of the offers, the outcome at first instance and the reasons given for that outcome;
  • the Commissioner asserts that his decision was taken in accordance with his own policies and procedures and that this assertion is an answer to the applications for costs on an indemnity basis;
  • the Commissioner has, by his prescription of policies and procedures, limited his own power to compromise litigation to which he is a party; and
  • any offer to settle, for the purposes of Order 23 of the Federal Court Rules, must involve the offer of a substantial amount, having regard to the amounts of the assessment in question.

While the Full Court did not reject the proposition that the Commissioner’s policies and procedures on settlement may, in an appropriate case, inform any exercise of the Court’s discretion on costs, the Court (at [28]) rejected the contention that these policies allowed the Commissioner to “escape the Court’s scrutiny of his conduct of litigation, including his conduct in refusing to accept offers of settlement”.  Interestingly, the Court made reference to the Commissioner’s response to the request for test case funding as being potentially relevant in considering this issue.

The Court rejected the other contentions by the Commissioner.  In doing so, the Court noted that the Commissioner faced significant problems in the appeal and that he should have taken those into account in the course of considering the offer.  In taking this view, the Full Court expected the Commissioner to take into account the same considerations faced by private taxpayers when conducting litigation.

This decision, along with that of Jessup J in International All Sports, have the potential to change the way taxpayers approach Part IVC litigation with the Commissioner.  One may expect to see a greater use of Offers of Compromise by taxpayers.  Also, it may put additional pressure on the Commissioner to agree to test-case fund more cases.

Private Rulings – the binding nature of the “arrangement”

In Yip and Commissioner of Taxation [2011] AATA 785 (4 November 2011) the Tribunal considered the scope of its role in an application to review a private ruling made by the Commissioner.  While the case involved Part IVA of the Income Tax Assessment Act 1936, the case is nevertheless important for GST as it considered the private rulings regime under Chapter 5 of Schedule 1 to the Taxation Administration Act 1953, being the same provisions under which taxpayers can now object to GST private rulings.

The following points can be taken from the judgment:

  • the private ruling is made on the “arrangement”, which means the set of facts that constitute the arrangement.
  • the taxpayer specifies what the relevant facts are that constitute the arrangement.  The Commissioner may request further information, but once the private ruling is made the Commissioner and the taxpayer are bound by it.
  • When making a private ruling, the Commissioner does not make findings of fact, he simply identifies facts that then states his opinion about the way in which the relevant tax laws apply to the applicant in relation to those identified facts.
  • If a taxpayer seeks a review of the private ruling before the Tribunal, the subject matter of that review is the arrangement as identified by the Commissioner in his private ruling.  Upon review, the Tribunal is limited to the facts that constitute the arrangement.  The Commissioner and the Tribunal are bound by those facts.
There are lessons from this decision for those taxpayers who are looking to request, or to object to,a GST private ruling, as well as for the Commissioner.  While it remains true that a private ruling is only effective to the extent that the facts of the arrangement reflect what actually happens, this decision shows that it is not open to the Commissioner, the Tribunal (or indeed the taxpayer) to “re-open” the factual basis of the private ruling once it is made.

Full Court to hand down judgment in Multiflex tomorrow at 2.15pm

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The Full Federal Court is to hand down judgment in the Commissioner’s appeal of the judgment of Jessup J in the Multiflex case at 2.15pm on Friday 11 November 2011.  Judgment will be handed down in Sydney in Court Room 22A.

The urgency of the matter is reflected by the matter that Federal Court only handed down its judgment on 30 September 2011 and we have a judgment on appeal some six weeks later.

See here for my brief discussion of the decision at first instance.

Update on taxpayer’s appeal in Central Equity

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A review of the Commonwealth Courts portal shows that the callover for the taxpayer’s appeal of the decision of Justice Gordon in Central Equity Limited v Commissioner of Taxation [2011] FCA 908 has been adjourned to 17 April 2012.

Also, the portal shows that the Commissioner filed a Notice of Contention on 4 October 2011.  When one has regard to the judgment, it is this likely that the Notice of Contention was filed in respect of the finding (albeit strictly obiter) that the refund notification lodged by the taxpayer was a valid notification for the purposes of s 105-55 of Schedule 1 to the Taxation Adminstration Act and the transitional provision in sub-item 16(2) of the Taxation Laws Amendment (2008 Measures No.3) Act 2008.  Notwithstanding the very clear finding of her Honour, it appears that the Commissioner is not willing to admit defeat on the notification issue.  The reasoning behind the Commissioner’s views on the validity of a notification can be found at MT 2009/1  ‘Miscellaneous taxes: notification requirements for an entity under section 105-55 of Schedule 1 to the Taxation Administration Act 1953″.

Commissioner’s appeal in Multiflex to be heard on 28 October 2011

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The Commissioner’s appeal to the Full Federal Court from the decision of Jessup J in Multiflex Pty Ltd v Commissioner of Taxation [2011] FCA 112 is to be heard on 28 October 2011 before Justices Stone, Edmonds and Logan.

Given that the decision was only handed down on 30 September 2011, there is less than a month between judgment and the appeal to the Full Court.  That very short time frame is consistent with the application made by the applicant at first instance for an expedited hearing (see [2011] FCA 789)