New South Wales Supreme Court finds taxpayer made GST-free supplies of ambulance services under s 38-10(5)

Most cases where GST is an issue involve the Commissioner of Taxation as a party. However, that is not always the case because GST can be the subject of a commercial dispute between the parties. The recent decision of the New South Wales Supreme Court in Acquatic Air Pty Limited v Siewert [2015] NSWSC 928 is a further example.

The case involved a dispute about the sale of shares in a group of aviation companies, which included the provision of air ambulance services to regional hospitals and area health services. The case is complex but it appears from the judgment that the facts relating to the GST issue can be relevantly summarised as follows:

  • while the vendor owned and operated the business, the ATO made enquiries of the nature of the business and the absence of any payment of GST. The ATO appeared satisfied with the explanation provided to them that it was an air ambulance service and accordingly did not have to pay GST (i.e., the services were GST-free under s 38-10(5) as a supply provided by an ambulance service in the course of the treatment of the *recipient of the supply).
  • the share sale agreement was made on 22 July 2011 and the agreement contained warranties and representations that the accounts as at 30 June 2011 were accurate – the accounts disclosed no GST liability
  • on 23 July 2012 the ATO issued assessments in excess of $2.3m for unpaid GST in the period 1 July 2008 to 31 May 2012.
  • the company objected to the assessment, which was disallowed (other than to remit penalties) – but did not appeal the objection.

The issue concerning GST was whether the vendor had made a false representation or warranty in the share sale agreement, given that the accounts disclosed no GST liability when it was contended that there actually was a GST liability as at 30 June 2011.

The Court found that there was no false representation or warranty in the accounts. The Court then considered whether the company had a GST liability at 30 June 2011 at all. The Court noted that the assessment for GST was conclusive evidence of the existence of the liability, and that the company indisputably had a GST liability as from the date of the assessment – namely, 23 July 2012. However, the Court found that the issue was whether that GST liability existed at 30 June 2011, and that question depended on the correct application of the facts as at 30 June 2011, irrespective of the later assessment.

The Court noted that the ATO’s reasoning supporting the assessment involved two elements: the first was that as the company did not hold an Air Operators Certificate (AOC), it could not be providing air ambulance services; and the second was that the services were provided to the hospitals, not to the individual transported, and thus were not in the course of the treatment of the recipient.

As to the first point, the Court observed that  the GST legislation makes no reference to any requirement for an ambulance service to hold an AOC – nor for that matter any other licence or permit. Further, that there seemed to me no reason why an ambulance service could not contract with another entity for the use of vehicles or aircraft owned and/or operated by that other entity. And finally, even if the ambulance service were to cease to hold a relevant licence, it would not cease to be an ambulance service. In coming to this view, the Court noted that the ATO had issued an “interpretative ruling” [ATO ID 2005/185] that considered that an ambulance service is one that relevantly “is permitted to provide aerial ambulance services pursuant to section 27 of the Civil Aviation Act” – but found that this was not a requirement of the legislation.

As to the second point, the Court took the following view:

As to the second, the essential question is, who is the recipient of the supply – the hospital that contracts the ambulance service, or the patient. Often – probably usually – an ambulance will be called by a person other than the patient. Hospitals often arrange for specialist attendances and investigations on patients. It seems to me that in each of those cases, the recipient of the supply is, at least ordinarily, the patient – not the person who calls the ambulance, nor the hospital that arranges the specialist investigation. Likewise, it seems to me that the recipient of the supply of an air ambulance service, although it might be arranged by the hospital, is the patient. It is the patient, not the hospital, who is transported. It is the patient, not the hospital, who receives the benefit of the service. It is the patient who usually ultimately pays. But even if it is the hospital that pays, the GST Act recognises that the recipient of a supply is not necessarily the person who pays for it: s 9-15(2) provides:

It does not matter whether the payment … was made by the recipient of the supply.

For those reasons, and while minds may reasonably differ on the question, in my view, upon the proper construction of s 38-10(5), Wingaway was an ambulance service, and the services it supplied were supplied to the patients it transported, in the course of their treatment. Such services were therefore exempt within s 38-10(5), and as at 30 June 2011 – more than a year before the assessment issued – Wingaway did not have a liability for GST, even though such a liability arose upon the issue of the assessment on 23 July 2012.

The decision shows that the scope given by the Commissioner to the exemption in s 38-10(5) was seen by the Court as being too narrow.

Going forward, the Commissioner is not bound by the decision, as he was not a party. Also, the decision has no impact on the liability of the taxpayer to pay the assessment. However, one would expect that the Commissioner would address the decision by amending or withdrawing the ATO ID, or issuing a Decision Impact Statement.

Cases such as these are difficult for the Commissioner, because he does not have an opportunity to address the Court or to make submissions on the GST question. A good example is the decision of the New South Wales Supreme Court in Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83 where the Court took a view contrary to that given in a private ruling about whether the sale of a house with a development approval for the construction of a residential development was a taxable supply or an input taxed supply of the sale of residential premises. Ultimately, the Commissioner had to wait until the Full Federal Court in Sunchen Pty Ltd v Commissioner of Taxation [2010] FCAFC 138 disapproved of the Toyama decision some four years later.

Commissioner issues draft Determination on when the supply of a credit card is GST-free; High Court decision on refunds

Yesterday the Commissioner issued draft GST Determination GSTD 2014/D1 ‘Goods and services tax: in what circumstances is the supply of a credit card GST-free under paragraph (a) of Item 4 in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999?

The Commissioner takes the view that the supply of a credit card facility is a “supply made in relation to “rights within paragraph (a) of Item 4 in ss 38-190(1) as it is a supply of a thing comprising a bundle of rights that derives its value exclusively, or almost exclusively, from those rights.

The Commissioner considers that the supply will be GST-free under Item 4 to the extent that the cardholder will use the facility when he or she physically outside Australia and provided that the cardholder’s location outside Australia is integral to the use of the card.

The Determination acknowledges the following alternative views which are not supported by the Commissioner:

  • the relevant right is the right to tender the credit card and this right is used where the payment obligation is discharged (i.e., the location of the merchant) – the physical location of the cardholder is irrelevant
  • the relevant right is the ongoing use of the right to credit over time – the extent to which the cardholder is outside Australia  over the period of time will determine the relevant GST-free component.

Comments on the draft determination are due by 2 May 2014.

High Court decision

Yesterday the High Court handed down its decision in Thiess v Collector of Customs [2014] HCA 12. The Court agreed with the Supreme Court of Queensland that the taxpayer was statutorily barred from a claim to recover overpaid customs duty and GST.

The taxpayer imported a yacht and his customs agent mistakenly believed the yacht was 108 tonnes (it was actually 160 tonnes) and ascribed the wrong tariff classification which resulted in customs duty of $494,472 and GST of $49,447 being paid. The true position was that no customs duty or GST was payable.

After the prescribed period in the Customs Act, the taxpayer discovered the mistake and brought an action in the Supreme Court for the recovery of the customs duty and the GST. The claim was framed principally as one for one for money had and received, relying on the money having been paid under a mistake of fact, and in the alternative as one for restitution in equity or for equitable compensation.

The Court of Appeal determined that the Commonwealth had lawful defences to the claim: s 167(4) of the Act provided a defence in so far as the claim was to recover the amount of $494,472 paid as customs duty; s 36 of the Taxation Administration Act 1953 (Cth) provided a defence in so far as the claim was to recover the additional amount of $49,447 paid as GST. I should note that s 36 to the TAA was the predecessor to s 105-55 of Schedule 1 to the TAA.

The High Court unanimously agreed. The Court did not discuss s 36 of the TAA, noting that the taxpayer conceded that he cannot recover the amount paid as GST if he is prevented by s 167(4) from recovering the amount paid as customs duty.

Section 167(4) of the Customs Act provides as follow:

(4) No action shall lie for the recovery of any sum paid to the Customs as the duty payable in respect of any goods, unless the payment is made under protest in pursuance of this section and the action is commenced within the following times:

(a) In case the sum is paid as the duty payable under any Customs Tariff, within 6 months after the date of the payment; or

(b) In case the sum is paid as the duty payable under a Customs Tariff or Customs Tariff alteration proposed in the Parliament, within 6 months after the Act, by which the Customs Tariff or Customs Tariff alteration proposed in the Parliament is made law, is assented to.

The section provides a time limit on recover of overpaid customs duty and effects a statutory bar to recovery in similar terms to s 105-55 of Schedule 1 to the TAA for GST, although taxpayers have 4 years under that section.

The High Court also observed that the section removed any right at common law to recover overpaid customs duty and to introduce “a statutory action” for the refund of overpaid duty. Section 105-55 would appear to have the same effect, through its interaction with s 8AAZLF of the TAA and s 35-5 of the GST Act. If the taxpayer is barred from taking that statutory action (e.g., because of the passage of time), then no other action is available to the taxpayer to recover.

Full Federal Court hands down decision in ATS Pacific appeal

Yesterday the Full Federal Court handed down its decision in ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33. The Court dismissed the taxpayer’s appeal and allowed the Commissioner’s cross-appeal.

Justice Edmonds (who delivered the lead judgment – Pagone and Davies JJ agreed with his Honour) observed that the case involved the proper characterisation of the supply by Australian travel agents or tour operators to non-resident travel agents or tour operators in booking or arranging accommodation, goods and services for the customers of the non-resident travel agents or tour operators, namely the non-resent tourists. His Honour also noted that this issue had previous come before the Federal Court in Saga Holidays Ltd v Commissioner of Taxation [2005] FCA 1892; (2005) 149 FCR 41 (Conti J); on appeal Saga Holidays Ltd v Commissioner of Taxation [2006] FCAFC 191; (2006) 156 FCR 256 and observed that:

The advent of these two cases so early in the life of the GST says something about the difficulty of drafting legislation to give effect to the policy design of the GST, in the factual context of the way in which tours to Australia are packaged and sold to non-resident tourists, where the policy design is, undeniably, that “[g]oods and services consumed by tourists in Australia, such as meals and hotel accommodation are subject to GST under the general rules” (Explanatory Memorandum, A New Tax System (Goods and Services Tax) Bill 1998 (Cth) at 12).

Critically, the Full Federal Court rejected the appellant’s contention that the characterisation of the supply was to be determined having regard to the terms of the contract and considered that, at the end of the day, the determination of the characterisation of the supply in a case such as the present was a matter of practical or business reality. This approach can be compared with the recent decision of the UK Supreme Court earlier this month in Revenue & Customs v Secret Hotels2 Ltd [2014] UKSC 16 (considered in an earlier post) where the Supreme Court appeared to rely more heavily on contract law principles to characterise the supply made under similar circumstances.

My analysis of the decision can be accessed here. I published an analysis of the decision of the primary judge at the time of judgment and I have extended that analysis to include the appeal.

Tribunal finds product GST-free as the supply of a medical aid or appliance

Today the Tribunal handed down its decision in Snugfit Australia Pty Ltd and Commissioner of Taxation [2013] AATA 802 where the Tribunal found that the supply of a product known as a “SnoreBeGone” sleep positioning system was GST-free under s 38-45(1) of the GST Act as a supply of a medical aid or appliance.

The Tribunal applied the “essential character” test, which was the test applied to the classification of goods under sales tax legislation. The Tribunal considered that the test was equally applicable to the GST Act. The principle was stated as follows:

…the task…is to determine the essential character of the goods, what essentially the goods are, not some characteristic that the goods might have. Essential character derives from the basic nature of the goods, from what they are, though composition, function and other factors necessarily play a part.

The Tribunal agreed with the applicant’s contention that the product fell within the description “night time positioning equipment modifications” in Item 82 of Schedule 3. The Tribunal found that the product modified the shape of a mattress (being the night time positioning equipment) to accommodate the particular requirement of a person with a disability. As noted by the Tribunal:

A mattress is properly described as “night time positioning equipment” as it provides a surface which holds a person in a horizontal position, commonly for the purpose of sleeping at night. The essential purpose of the product is to modify that horizontal surface by changing its shape so that the person’s torso is held in an inclined position and the head is elevated from the mattress.

The Tribunal rejected the applicant’s alternate contentions that the product fell within the items described as “bed restraints”, “backrests, leg rests and footboards for bed use” and “cushions specifically designed for people with disabilities”. The Tribunal found that the essential character of the product was a device to position the body to prevent snoring.

I believe this is the first decision of a Tribunal or a Court dealing with s 38-45 and the classification of items in Schedule 3 listing items which are GST-free as the supply of medical aids and appliances. There have been decisions dealing with the items in Schedules 1 and 2 (food and beverages) – see for example JMB Beverages Pty Ltd v Commissioner of Taxation [2010] FCAFC 68.

The decision illustrates that the approach to the classification of products under the wholesale sales tax regime remains relevant in the context of the classification of products under the GST Act.

Tribunal hands down decision on “increasing adjustments” under Division 135 on the purchase of apartments

The decision of the Federal Court earlier this year in MBI Properties Pty Ltd v Commissioner of Taxation could be described as the “son of South Steyne”. Yesterday the Tribunal handed down its decision in The Hotel Apartment Purchaser and Commissioner of Taxation [2013] AATA 567 which involves the same apartment complex  and a decision which could be described a the “grandson” of South Steyne.

The case involved the taxpayer’s liability to “increasing adjustments” under Division 135 of the GST Act with regards to the purchase of two apartments in the Sebel Manly Beach Complex. The purchase was treated as a going concern and the Commissioner claimed that the taxpayer had increasing adjustments because of continuing input taxed supplies made in relation to the apartments. A further issue was whether the Commissioner was too late in making the assessment (the Notice to Pay was issued more than four years after the end of the tax period, but before the date of lodgement of the BAS). The Tribunal affirmed the Commissioner’s decision.

The Tribunal also briefly discussed the ability of a “partnership” (being an entity for the purposes of the GST law) to apply for review under Part IVC of the TAA.

My analysis of the decision can be accessed here.

Commissioner publishes draft Addendum to ruling on cancellation fees and two ATO IDs

Yesterday the Commissioner published a draft Addendum to GSTR 2009/3 dealing with cancellation fees plus two ATO IDs dealing with the supply and transport of goods into Australia and increasing adjustments for unredeemed vouchers.

Draft Addendum GSTR 2009/3DA states that it amends GSTR 2009/3 to take account of the decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41, which considered the GST treatment of fares received for flights booked but not undertaken by prospective passengers. The High Court found that the fares were consideration for a taxable supply.

The thrust of the addendum can be found in proposed paragraphs 176A and 176B, which provide as follows:

176A. When an airline ticket is issued and the terms and conditions of the ticket are accepted by the customer, the supplier (usually the entity operating the airline service) enters into a contract with the customer.

176B. Accordingly, where a fare is paid to secure an airline ticket governed by contractually binding conditions of carriage in which the airline promises (subject to exceptions) to transport the passenger, it is considered that the airline makes a supply for consideration even if the passenger is subsequently a no-show.

Comments on the draft addendum are invited by 22 May 2013.

In ATO ID 2013/20 – GST and supply of goods and the transport of those goods into Australia the Commissioner takes the view that where a non-resident supplies goods to a recipient in Australia, that entity is not making a GST-free supply of international transport under paragraph (b) of item 5 in subsection 38-355(1) when it delivers those goods to the recipient in Australia. Rather, the supplier is making a composite supply of delivered goods to the recipient in Australia.

This ATO ID provides a guide as to the Commissioner’s application of his views in GSTR 2001/8 regarding mixed or composite supplies. The Commissioner’s approach was as follows:

If the delivery services are integral, ancillary or incidental to the supply of goods, the supply is a composite supply of delivered goods. A composite supply of delivered goods is treated as a single supply and takes its GST status from the dominant part of the supply, being the goods. If this is the case then Item 5 of the GST Act will not be relevant and therefore will not apply.

However, if the supply of goods and delivery has separately identifiable parts that require individual recognition due to their relative significance in the supply, the supply is a mixed supply…If the supply is a mixed supply then the delivery services can be considered separately to determine if that part of the supply meets the requirements of being GST-free under Item 5 of the GST Act.

The Commissioner took the view that the delivery of the goods was integral, ancillary or incidental to the dominant supply of goods.

In ATO ID 2013/24 – GST and increasing adjustments for unredeemed vouchers the Commissioner takes the view that an entity has an increasing adjustment under s 100-15 where it writes back to current income the unredeemed stated monetary value of expired gift vouchers. The Commissioner found that this was the case notwithstanding that historical data showed that some of these unredeemed vouchers could have been redeemed for GST-free supplies.

Federal Court finds that supply of tour packages to overseas tourists was taxable

The Federal Court yesterday handed down its decision in ATS Pacific Pty Ltd v Commissioner of Taxation [2013] FCA 341 where it agreed with the Commissioner that ATS made a taxable supply to overseas travel agents where the travel agents arranged tour packages for overseas tourists in Australia comprising Products (being accommodation, goods and services) acquired and paid for by the taxpayer. The Court rejected the taxpayer’s argument that the supply was of the “booking and arranging” of the Products (for use by the tourists) and was GST-free as those supplies were not consumed in Australia. The Court did agree with the taxpayer’s alternative argument that the “margin” charged to the travel agents over and above the cost of the Products was GST-free.

The Federal Court also rejected the taxpayer’s contention that the Commissioner’s discretion to refuse to pay refunds of GST in s 105-65 of Schedule 1 to the TAA (being the form that applied prior to 1 July 2008) did not apply because the section only applied to “an actual taxable supply”.

My analysis of the decision can be found here.

Tribunal decision on whether a supply of a going concern; ATO issues draft Practice Statement on Division 81 of the GST Act

In 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). The Tribunal also found that the notice issued by the Commissioner under s 105-50 of Schedule 1 to the TAA was valid and that Commissioner may have treated the acquisition by the purchaser as GST-free was not relevant to the application. That view is undoubtedly correct, although it does appear strange that the Commissioner could maintain a different GST treatment for the parties. It may be that the purchaser was out of time to recover input tax credits. My analysis of this decision can be accessed here.

The ATO has released ATO Practice Statement PSLA 3618 (GA) (draft) “GST treatment of Australian taxes, fees and charges under Division 81 of the A New Tax System (Goods and Services Tax) Act 1999 from 1 July 2013.

The practice statement sets out the administrative approach the ATO will take where Australian government agencies determine the GST classification of supplies that they make for which Australian fees and charges are received as consideration.

The ATO’s approach is as follows:

  1. subject (3) below, Australian fees and charges covered by the Treasurer’s determination that satisfy the requirements of s 81-10(1) and/or regulation 81-15.01 are exempt
  2. if an entity classifies Australian fees or charges as being ‘exempt’ in accordance with the Treasurer’s determination, the Commissioner will not disturb the treatment retrospectively
  3. those Australian fees and charges that are listed on the Treasurer’s determination that are regarded as being consideration for a supply will not be eligible to receive this treatment
  4. if an Australian fee or charge that receives this treatment is subsequently considered not to be exempt, the Commissioner will require the treatment to be changed prospectively.

The draft has been published for comments, which are due by 19 April 2013.

Commissioner issues Decision Impact Statement for SDI Group Pty Ltd

Yesterday the Commissioner issued a Decision Impact Statement for the decision of the Tribunal in SDI Group Pty Ltd and Commissioner of Taxation [2012] AATA 763 where the Tribunal found that the applicant (vendor) and the purchaser of commercial property had satisfied the requirement that the parties agree that the sale was a supply of the going concern, notwithstanding that no such agreement was provided for in the Contract of Sale.  My post discussing the decision can be found here.

Before the Tribunal the Commissioner contended that the parties had not “agreed in writing” that the sale was the supply of a going concern, and that the tax invoice and Statutory Declaration prepared by the vendor referring to the sale being of a going concern were “unilateral documents”.  The Tribunal found in favour of the applicant on the basis that there was sufficient evidence that the applicant and purchaser agreed in writing that the supply involved a going concern.

In the Decision Impact Statement the Commissioner accepts that the finding of the Tribunal was open on the evidence and considers that the decision does not differ in principle from the requirements in GSTR 2002/5 ‘Goods and services tax: when is a ‘supply of a going concern’ GST-free.  Paragraph 181 of the Ruling states as follows:

The term ‘agreed in writing’ means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of the enterprise, is a ‘supply of a going concern’.

Before the Tribunal, the concern of the Commissioner appeared to be that the applicant could not point to a document evidencing an agreement in writing which was signed by the purchaser, the only documents available having been prepared and executed by the supplier.  The Decision Impact Statement deals with the finding of the Tribunal that the parties nevertheless “agreed in writing” that the sale was of a going concern as follows:

The ATO believes that it is the Tribunal’s view that, at the time the recipient executed the contract, the parties intended and agreed in writing that the supply was of a going concern.  Further, by the time of settlement, the parties had confirmed, through further correspondence, that intention.

We also believe that the decision does not support a view that unilateral documents are sufficient to constitute an agreement in writing as contemplated by paragraph (c) of subsection 38-325(1) of the GST Act.

I would agree with the Commissioner’s view that “unilateral documents” are not sufficient to constitute an agreement in writing.  However, what the decision of the Tribunal does appear to establish (and is arguably accepted by the Commissioner in the Decision Impact Statement) is that it is not necessary that each party actually sign a written agreement that the sale is of a going concern and that a document prepared by only one party may be sufficient to “evidence” an agreement in writing.  This may particularly be the case where such a document is provided by one party to the other party prior to settlement – for example, a tax invoice, a statutory declaration for stamp duty purposes, a settlement statement or even simply a letter of confirmation from the vendor.

Full Federal Court dismisses taxpayer’s appeal in Cyonara Snowfox

In Cyonara Snowfox Pty Ltd v Commissioner of Taxation [2012] FCAFC 177  the Full Federal Court unanimously dismissed the taxpayer’s appeal from the decision of the Tribunal ([2011] AATA 124) where the Tribunal held that in respect of a number of sales of real property:

  • the taxpayer could not chose to use the margin scheme
  • the taxpayer had not established that a supply had been GST-free as a supply of a going concern; and
  • the Commissioner was barred from recovering the GST because it had not issued a valid notice under s 105-50 of Schedule 1 to the TAA.

The decision is long (running to some 174 paragraphs) and deals with a number of contentions raised by the taxpayer in the appeal, including two Notices of Motion seeking to restrict the Commissioner’s recovery of the GST.  My analysis of the decision can be found here.