Commissioner issues draft Determination on the operation of the 4 year limitation period to claim an input tax credit or fuel tax credit

On Friday the Commissioner issued Draft Miscellaneous Taxation Ruling MT 2018/D1 ‘Miscellaneous tax: time limits for claiming and input tax or fuel tax credit’. This is an important (and somewhat controversial) publication as it seeks to clarify the operation of the 4 year limitation period on claiming input tax credits in s 93-5 of the GST Act and on claiming fuel tax credits in s 47-5 of the Fuel Tax Act. Essentially, the Commissioner adopts a literal approach to the words of these sections, with the effect that if you do not claim input tax credits or fuel tax credits in your activity statement within 4 years – that entitlement expires – period. It does not matter if you have requested the Commissioner to amend your assessment, applied for a private ruling or objected to an assessment – if you have not actually claimed the credit, your entitlement to those credits expires.

Under this approach, taxpayers who discover that they may have an entitlement to recover input tax credits face the choice of claiming those credits in their activity statement (and becoming exposed to penalties and interest if the claim is incorrect) and engaging with the Commissioner to recover those credits through requesting an amendment to an assessment, applying for a private ruling or objecting to an assessment. If the second path is chosen, taxpayers must hope that this process will be completed within the 4 year period. If not – even if the delay is the fault of the Commissioner – or the delay is as the result of various appeal processes through the Courts (which turn out to be successful for the taxpayer) –  the taxpayer’s entitlement to input tax credits will be extinguished.

Comments are invited on the ruling by 25 January 2019.

In anticipation of the publication of this draft determination, at the Taxation Institute of Australia’s GST Intensive in September of this year I presented a paper which included a discussion of the operation of s 93-5 of the GST Act, as part of a general discussion about refunds and limitation periods in the context of GST. That paper can be accessed here. The discussion about s 93-5 is contained in the second part of the paper. The first part of the paper deals with s 8AAZLGA of the TAA and the Commissioner’s entitlement to withhold refunds pending verification.

Set out below is a summary of the draft determination, with some comments which are taken from my paper. For a more detailed analysis of the issues that may arise, including constitutional implications of the Commissioner’s draft position, please refer to my paper.

The legislation

Section 93-5 of the GST Act states as follows:

You cease to be entitled to an input tax credit for a creditable acquisition to the extent that the input tax credit has not been taken into account, in an assessment of a net amount of yours, during the period of 4 years after the day on which you were required to give to the Commissioner a GST return for the tax period to which the input tax credit would be attributable under subsection 29-10(1) or (2).

Section 47-5(1) of the Fuel Tax Act states as follows:

You cease to be entitled to a fuel tax credit to the extent that it has not been taken into account, in an assessment of a net fuel amount of yours, during the period of 4 years after the day on which you were required to give to the Commissioner a return for the tax period or fuel tax return period to which the fuel tax credit would be attributable under subsection 65-5(1), (2) or (3).

Meaning of “taken into account”

The Commissioner takes the view that the words “taken into account in an assessment” mean that the entity must include the claim for input tax credits or fuel tax credits in the calculation of the net amount or fuel tax amount. If you do not do so, after the expiration of 4 years the entitlement to that input tax credit or fuel tax credit is extinguished.

In this context, the Commissioner considers that you do not “take into account” unclaimed input tax credits by:

  • lodging an objection to an assessment;
  • requesting an amendment to an assessment; or
  • applying for a private ruling in respect to the entitlement o an input tax credit.

One question is whether an alternative construction of the expression is available, having regard is had to the broader context of the provisions. Once the GST or fuel tax credit return is lodged, it becomes a deemed assessment of the reported net amount or fuel tax amount. The taxpayer does not have the power to change that assessment to take account of additional input tax credits. Only the Commissioner has that power, whether as the result of an application to amend the assessment or an objection to the assessment. In this context, there does appear to be an argument that by engaging its statutory rights under the TAA to recover the unclaimed input tax credits for a particular tax period, it “taken into account” those input tax credits in the relevant assessment. If so, once the taxpayer has engaged those statutory rights, the time period in s 93-5 ceases to apply.

Support for this alternate construction may be found in the Commissioner’s approach to the operation of s 29-10 of the GST Act where an entity identifies unclaimed input tax credits. The entity can elect to claim those credits in its current Activity Statement (pursuant to s 29-10(4) of the GST Act) or to apply to the Commissioner to amend the assessment for the tax period in which the credits were to be attributed (pursuant to s 29-10(1) or (2)) or to object to the assessment for that tax period. This was the view of the Commissioner in ATO ID 2011/76 which related to the pre-self assessment regime in place before 1 July 2012 and I understand that the Commissioner remains of this view under the self-assessment regime. This is reflected in examples 2 and 3 in the draft Determination where the entity lodged an objection to an assessment in respect of unclaimed input tax credits. If it is open to a taxpayer to recover unclaimed input tax credits by requesting the Commissioner to amend the assessment in which those credits were attributable or to object to that assessment – and there is some doubt as to whether this path is open – it does appear arguable that in doing so the taxpayer has “taken into account” those input tax credits in the assessment. There is nothing else the taxpayer can do in the context of that assessment.

The effect of the Commissioner’s position

The effect of the position taken by the Commissioner in the draft Determination is that unless the entity claims input tax credits or fuel tax credits in an activity statement, upon the expiry of 4 years the entity’s entitlement to the credits expires. This is the outcome irrespective of the following matters:

  • the entity requested the Commissioner to amend the assessment before the 4 year period expires and the Commissioner has not processed the request by the end of the 4 year period;
  • the entity applied for a private ruling before the 4 year period expires and the Commissioner has not made a decision on the private ruling by the end of the 4 year period;
  • the entity objected to the assessment before 4 year period expires and the Commissioner has not made a decision on the objection by the end of the 4 year period;
  • the Commissioner made a decision on the private ruling or the objection before the 4 year period expires, the entity issued review proceedings under Part IVC of the TAA but the 4 year period expires before those proceedings were completed – including if the proceedings are currently before a Court or a Tribunal (and the taxpayer is ultimately successful in those proceedings).

The only way an entity can protect its entitlement to an unclaimed input tax credits or fuel tax credits is by actually claiming those credits in an activity statement and being exposed to penalties and interest if the claim is incorrect. This is a fundamentally different position to the pre-self assessment regime in place prior to 1 July 2012, where an entity could lodge a “stop the clock” notification under s 105-55 of Schedule 1 to the TAA to protect its entitlement on claim input tax credits without being exposed to penalties and interest.

The draft determination contains a number of examples which illustrate the effect of the Commissioner’s draft position.

Does “may” mean “must”?

There is a tension between s 93-5 of the GST Act and s 47-5 of the Fuel Tax Act and the provisions dealing with the amendment of assessments in Subdivision 155-B of Schedule 1 to the TAA and the operation of the review procedure in Part IVC of the TAA. The view of the Commissioner is that s 93-5 and s 47-5 override any rights that may accrue to a taxpayer under the TAA. This may well be the most controversial aspect of the draft determination – in particular if a taxpayer has validly engaged its review rights under Part IVC of the TAA and the 4 year period expires.

Subdivision 155-B of Schedule 1 to the TAA was introduced as part of the self-assessment regime for GST and Fuel Tax and provides for the amendment of assessments in a number of circumstances:

  • Section 155-35 provides that the Commissioner may amend an assessment within the “period of review”, being 4 years unless the period is extended under subsection (3) or (4). An extension may occur where the Commissioner has started to examine the affairs of the taxpayer in relation to the assessment, that examination has not completed and either the Federal Court orders an extension (subsection (3)) or the taxpayer consents to an extension (subsection (4)).
  • Section 155-45 provides that the Commissioner may amend an assessment at any time, if the taxpayer applies for the amendment during the period of review for the assessment.
  • Section 155-50 provides that the Commissioner may amend an assessment at any time to give effect to a private ruling if the taxpayer applies for a private ruling during the period of review and the Commissioner makes the private ruling.
  • Section 155-60 provides that, despite anything in the Subdivision, the Commissioner may amend an assessment at any time:
    • to give effect to a decision on a review or appeal; or
    • as a result of an objection made by you, or pending a review or appeal.

In the draft determination, the Commissioner takes the view that s 93-5 of the GST Act and s 47-5 of the Fuel Tax Act overrides these provisions and at [59] states as follows:

The Commissioner is bound to apply the law and can only assess a taxpayer in accordance with the law. The Commissioner cannot amend a taxpayer’s assessment to include a tax credit if and because of the limiting provisions, the taxpayer no longer has any legal entitlement to the credit. This is the case regardless of whether the Commissioner may still be able to make other amendments to the assessment as the period of review has not expired.

The difficulty I have with this approach with respect to the paths available to a taxpayer under section 155-45 (application for amendment) and section 155-50 (application for private ruling), is that the words of these provisions arguably support the view that the rights that accrue to the taxpayer are intended to survive the limitation period in s 93-5 of the GST Act and s 47-5 of the Fuel Tax Act. Provided the respective application is lodged before the end of the period of review, the Commissioner “may” amend an assessment “at any time”. It appears to be implicit in these words that the amendment may take place after the end of the review period – which would be after the expiry of the four year period. In the context of these provisions, there would appear to be an argument that “may” is to be construed as “must”. This was the approach of the High Court in Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51 in the context of the obligation on the Commissioner to refund overpaid stamp duty under the Stamps Act 1958 (Vic).

I have a greater difficulty with the Commissioner’s approach where the taxpayer has validly engaged the review procedure in Part IVC of the TAA. That review procedure can be described as follows:

  • The Commissioner must decide whether to allow the objection, wholly or in part, or to disallow the objection: s 14ZY.
  • If the taxpayer is dissatisfied with the Commissioner’s objection decision the taxpayer may apply to the Tribunal for review of the decision or to appeal to the Federal Court against the decision: s 14ZZ.
  • If the taxpayer applies to the Tribunal for review, when the decision of the Tribunal becomes final “the Commissioner must, within 60 days, take such action, including amending any assessment or determination concerned, as is necessary to give effect to the decision”: s 14ZZL.
  • If the taxpayer appeals to the Federal Court, when the order of the Court becomes final “the Commissioner must, within 60 days, take such action, including amending any assessment or determination concerned, as is necessary to give effect to the decision”: s 14ZZQ.

As can be seen by the consistent use of the word “must”, the provisions use mandatory language. Once a taxpayer has lodged a valid objection and Part IVC of the TAA is engaged, rights accrue to the taxpayer and obligations are imposed on the Commissioner. Where the ground of objection is that the taxpayer is entitled to input tax credits that have not been claimed and the objection is allowed, the Commissioner will be obliged to amend the assessment and pay the input tax credits to the taxpayer. Similarly, if, on a review or appeal of the objection decision, the Tribunal or the Federal Court determines that the assessment of the taxpayer is excessive because it was entitled to the input tax credits, the Commissioner “must” take action to give effect to that decision – in this case amending the taxpayer’s assessment to allow the taxpayer to recover the input tax credits. These matters arguably support the conclusion that Part IVC of the TAA provides taxpayers with an independent and important review procedure that operates outside the provisions of the GST Act.

My paper referred to an example based upon the Full Federal Court in Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCAFC 117; (2015) 235 FCR 159. That case arose under the pre-self-assessment regime and Rio Tinto issued proceedings in the Federal Court seeking declarations that it was entitled to input tax credits for the October 2010 tax period and that it was entitled to amend its GST return for that tax period. Assume that in December 2017 another mining company decided to re-agitate the issue with the aim of ultimately bringing the matter before the High Court and arguing that the decision of the Full Federal Court in Rio Tinto was incorrect. The company wishes to protect its entitlement to input tax credits while the matter proceeds but is not prepared to claim input tax credits for the last four years in its December 2017 activity statement and be exposed to penalties and interest if the claim is ultimately unsuccessful. Rather, it decided to lodge an objection to the assessments for the monthly tax periods from December 2013 pursuant to s 155-90 of Schedule 1 to the TAA.

Assume then that the Commissioner’s objection decision disallowing the objection is appealed to the Federal Court and then to the Full Federal Court – both find in favour of the Commissioner. In December 2020, five years after the objection was lodged, the High Court (after granting special leave) finds that the decision of the Full Federal Court in Rio Tinto was incorrect and that the objection decision was to be set aside on the basis that the company was entitled to the input tax credits. Section 14ZZQ of the TAA would then be engaged and the Commissioner would be required to “take such action, including amending any assessment or determination concerned, as is necessary to give effect to the decision”. However, in the five year period during with the matter proceeded through the courts, all of the tax periods in the objection fell outside the 4 year period in s 93-5 of the GST Act. On the basis of the Commissioner’s approach, s 93-5 would override the Commissioner’s obligations under s 14ZZQ of the TAA and the company will be deprived of the fruits of successfully engaging its review rights under Part IVC of the TAA.

My paper discusses the potential constitutional difficulties with such an outcome.

Conclusion

As noted in my paper, this is a difficult issue and there is a clear tension between s 93-5 of the GST Act and s 47-5 of the Fuel Tax Act and the provisions dealing with the amendment of assessments in Subdivision 155-B of Schedule 1 to the TAA and the review procedures in Part IVC of the TAA. While there is support for the Commissioner’s view in the words of the provisions, it may be questioned wither Parliament intended that those provisions were to deprive taxpayers of their rights to seek judicial process to challenge assessments nugatory.

 

Draft ruling issued on development leases with government agencies

Yesterday the Commissioner issued draft GST Ruling GSTR 2014/D5 ‘Goods and Services tax: development lease arrangements with government entities’.

The draft ruling outlines the Commissioner’s views on the GST treatment of arrangements between government entities and private developers that typically have the following features:

  • the private developer undertakes a development on land owned by a government agency in accordance with the terms of a written agreement between the developer and the government agency; and
  • the government agency supplies the land by way of freehold or grant of a long term lease to the developer, subject to the developer undertaking the development in accordance with the terms of the written agreement – that is, the developer becomes entitled to a transfer of the freehold or grant of a long term lease when the development is completed.

The ruling is comprehensive and considers the following matters:

  • the relevant principles for identifying and characterising the various supplies that are made for consideration under a development lease arrangement;
  • whether the grant of a short-term lease or licence (development lease) by the government agency to allow the developer to undertake the development on land is a supply for consideration;
  • whether, in completing the words on land owned by the government agency, the developer makes a supply of development services to the government agency for consideration;
  • whether the sale of the freehold or grant of the long-term lease of land by the government agency is a supply for consideration, and whether any consideration the developer provides for supply of the land includes undertaking of the development words on land owned by the government agency;
  • the extent to which the consideration for particular supplies made under a development lease arrangement includes consideration that is not expressed as an amount of money, that is, non-monetary consideration;
  • how the value of any non-monetary consideration provided for supplies made in the context of a development lease arrangement may be determined; and
  • the attribution, under Division 29, of the GST liabilities and input tax credit entitlements that may arise under development arrangements.

My analysis of the draft ruling can be accessed here.

Comments on the draft ruling are due by 9 January 2015.

Commissioner issues Decision Impact Statement for Mathieson Truck Hire

Today the Commissioner published his Decision Impact Statement for the decision of the Tribunal in Rod Mathieson Truck Hire Pty Ltd as trustee for the Mathieson Family Trust and Commissioner of Taxation [2013] AATA 496 where the Tribunal affirmed the decision of the Commissioner that the taxpayer was liable for GST on the entire amount of consideration payable for the sale of land, notwithstanding that part of the consideration was lent to the purchaser under a vendor finance arrangement and the loan was only partially repaid. My analysis of the decision can be accessed here.

The Statement considers that the findings made by the Tribunal are consistent with the principles set out in GSTR 2001/8, 2003/12 and GSTD 2004/4 and are consistent with the submissions made to the Tribunal, that:

  • for a taxpayer that accounts on a cash basis, attribution of GST or an input tax credit is determined by the meaning of ‘consideration’ and whether ‘consideration’ was received or provided and not by reference to the ordinary meaning of ‘cash’;
  • in a vendor financing arrangement, consideration is received by a supplier on a set-off of the loan against amounts owing to the supplier by the purchaser;
  • the postponement of payment of a debt does not constitute a loan where the recipient remains obliged to pay for the supply under the original supply contract; and
  • where there is a contract for sale of land and a vendor financing agreement, the financing agreement is not ancillary or incidental to the contract for the sale of land.

Commissioner publishes GST Determination 2012/3 – whether there is a Division 129 adjustment where a proposed M&A transaction does not eventuate or proceeds in a different manner

Today the Commissioner published GST Determination GSTD 2012/3 “Goods and Services tax: does an adjustment for a change in extent of creditable purpose necessarily arise for services acquired in relation to a proposed merger and acquisition transaction that does not eventuate, or that does not proceed in the manner contemplated at the time the services were acquired?”

The Determination is the finalisation of Draft GST Determination GSTD 2011/D3.

The short answer in the Determination is “No”.  In taking this view, the Commissioner is of the view that an adjustment under Division 129 cannot be determined simply by reference to the outcome of the transaction.  Rather, the focus is on how the particular services have been used (or are intended to be used).  As noted at paragraphs [4] – [6] of the Determination:

Services acquired in the context of proposed M&A transactions typically include due diligence and other advisory services.  In many cases, those services are applied in evaluating or preparing for a proposed transaction.  If there has been no change in the extent to which those services relate to an input taxed supply between the time they are acquired, and the time they are used in evaluating or preparing for a transaction, the intended use of the services and their actual use are the same.  Accordingly, there is no change in the extent of creditable purpose of the services.

One the other hand, there may be a change in creditable purpose if the services are applied or reapplied at a time when there has been a change in the intended transaction.

The termination of a proposed transaction would not ordinarily give rise in itself to a Division 129 adjustment because services are not applied or reapplied for a different purpose once the transaction is terminated.

In summary, if the intended transaction is by way of a share transaction (an input taxed supply), input tax credits will not be available for services acquired in relation to that transaction if it proceeds and also, no adjustment will be available if the transaction does not proceed.

To understand the impact of the Determination (and the scope for dispute) it is useful to have regard to the “Alternative views” section at paragraphs [52]-[58].  If the matter went before a Court, the resolution may well come down to whether  the literal construction is to be observed (favouring the “alternative view”) or the purposive or substantive view (favouring the Commissioner’s view).

In considering the competing views, it is helpful to reproduce paragraphs [53]-[55] of the Determination:

[53] An alternative view argues that an entity should not be denied input tax credits on acquisitions relating to intended input taxed supplied that do not in fact eventuate.  On this view Division 129 should operate to ensure that an enterprise that otherwise makes only taxable supplies does not incur irrecoverable GST on its inputs.  This view is concerned with judging creditable purpose by reference to supplies that are actually made, rather than by the use to which an acquisition is put.  On this view:

(a) where an intended input taxed supply is not in fact made, there has been no application of the thing to a non-creditable purpose, and Division 129 may operate to produce a decreasing adjustment; and

(b) where the acquisition is used in contemplation of a taxable supply or a GST-free supply, but an input taxed supply is ultimately made, Division 129 may operate to produce an increasing adjustment.

[54] This view is said to be supported by the difference in wording of the ‘creditable purpose’ test in paragraph 129-50(2)(a) (which uses the term ‘are input taxed’) compared to the test in paragraph 11-15(2)(a) (which uses the term ‘would be input taxed’ and incorporates nexus to intended supplies).  The difference in terminology is treated as significant and an ordinary reading of the words of paragraph 129-50(2)(a) is said to lead to a conclusion that it must refer to supplies that are in fact made.  This view argues that whilst Division 11 is concerned with the hypothetical, Division 129 is concerned with what has actually happened, and that if the test in the two divisions were meant to be the same, the same words would have been used.

[55] We think that the better view is that the tests in Division 11 and Division 129 are not intended to be inherently different, but merely that one is judged at the time of acquisition, and the other at the time of application. Although the definition of creditable purpose in Division 129 refers to supplies that are input taxed, in our view this merely reflects the fact that application of a thing will typically be contemporaneous with supplies made using the thing.  Further, as noted in paragraph 48, subsection 129-50(3) refers to supplies being treated for paragraph 129-50(2)(a) purposes as supplies that ‘would be’ input taxed.


I can see arguments in favour of both sides.  The Commissioner quite properly refers to the comments of Hill J in HP Mercantile Pty Ltd v FCT [2005] FCAFC 126 (at [46] and [48) as being consistent with his approach.  However, one only has to consider decisions such as Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] FCA 1886  and Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 to see the effect of a literal construction of the words of the GST Act.

ATO issues ATO ID on attribution and ss 29-10(4) – another example of “purposive” construction

The ATO has issued ATO ID 2011/76 which takes the view that ss 29-10(4) of A New Tax System (Goods and Services Tax) Act 1999 does not prevent an entity from revising a GST return for an earlier tax period so as to take into account an input tax credit for that earlier tax period.  The ID appears to confirm that where an entity discovers that it failed to claim an input tax credit for an earlier tax period, it can elect to either amend the GST return relating to that earlier tax period or claim the credit in the current GST return.

While this may be a reasonable outcome, it is one which is not readily apparent from the terms of the statute.  As noted in the ID, a literal reading of ss 29-10(4) might lead to the conclusion that the entity cannot revise the earlier period and must attribute the credit to the later period.  The ATO appears to take the view that an election by the entity to amend the previous GST return somehow overrides the mandatory language in ss 29-10(4).  While the extracts of the Explanatory Memorandum referred to in the ID may support the Commissioner’s construction, the dangers of relying on extrinsic materials to base a statutory construction contrary to the words of the statute were outlined by Logan J in Deputy Commissioner of Taxation v PM Developments [2008] FCA 1886.  As noted by his Honour (at [47]) “An assertion as to its meaning and effect in an explanatory memorandum circulated by or with the authority of the Minister introducing a Bill into Parliament, like the Second Reading Speech in respect of that Bill, is not a substitute for the language employed by the Parliament in the Bill as enacted…It is the duty of the courts to construe enactments, not to make them.  If, truly, the language of an enactment does not translate into law a meaning and effect that one might apprehend from secondary materials was intended it is for the Parliament to rectify that by further legislative provision”.