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.

 

UK Supreme Court dismisses taxpayer’s appeal in Airtours

In a 3:2 decision, the UK Supreme Court has dismissed the taxpayer’s appeal in Airtours Holidays Transport Ltd v Revenue & Customs [2016] UKSC 21. The issue in the appeal was whether Airtours was entitled to recover, by way of input tax, VAT charged by PwC in respect for services provided by PwC to various financial institutions which were paid for by Airtours.

The majority reviewed previous domestic and Court of Justice judgments, including Redrow and Loyalty Management. In doing so, the majority agreed with the majority in Loyalty Management that Lord Millet’s observations in Redrow went too far, when he said that the question to be asked was whether the taxpayer obtained “anything- anything at all”. Rather, the question to be asked was as follows (at [50]):

…where the person who pays the supplier is not entitled under the contractual documentation to receive any services from the supplier, then, unless the documentation does not reflect the economic reality, the payer has no right to reclaim by way of input tax the VAT in respect of the payment to the supplier.

Applying this analysis, Airtours appeal failed for the following reasons:

  • it was not entitled under the contract (expressly or by implication) to receive any services from PwC; and
  • the Contract did reflect economic reality and was not in any way an artificial arrangement.

The dissenting judgements considered that the “narrow legalistic approach” of the majority was too narrow, was inappropriate in the circumstances, and gave too little attention to the legal relationship between PwC and Airtours and to the economic realities of that relationship.

The decision illustrates the difficulties that can arise in the context of VAT/GST and “tripartite agreements”. The decision also illustrates how minds may readily differ on the characterisation of a transaction for the purposes of VAT/GST, with strong dissenting judgments in both the Supreme Court and the Court of Appeal.

My analysis of the decision can be accessed here. A more detailed analysis of the issue of tripartite agreements can be found in a paper that I presented earlier this year at the Television Education Network GST Symposium in Brisbane – my paper can be accessed here and also under the “My Articles” menu.

Federal Court dismisses taxpayer’s appeal in Crown Estates decision

In Crown Estates (Sales) Pty Ltd v Commissioner of Taxation [2016] FCA 335 the Federal Court dismissed the taxpayer’s appeal of the decision of the Tribunal in Crown Estates (Sales) Pty Ltd and Commissioner of Taxation [2015] AATA 94. The Tribunal found that the taxpayer was not entitled to claim input tax credits in respect of acquisitions made in providing property management services to owner-clients because the taxpayer was acting as the agent of those owner-clients. My post on that decision can be accessed here.

The Court upheld the Commissioner’s objection to the appeal on the ground that the notice of appeal did not specify any question of law. The Court noted that an appeal can be made from a decision of the Tribunal only on a question of law and that the question of law must be specified in the notice of appeal.

The decision illustrates the difficulties in properly framing an appeal from a decision of the Tribunal.

The amended questions of law were stated to be as follows:

(1) Whether the Tribunal erred in properly construing and applying s 11.5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) in concluding that the Applicants did not make creditable acquisitions in the course of their dealings with suppliers of goods and services to properties owned by the clients of the Applicants.
(2) Whether the Tribunal erred in construing and applying the law of agency in determining that the Applicants acted as agents in the course of all their dealings with suppliers of goods and services to properties owned by the clients of the Applicants.

The Court considered that the questions of law did nothing more than solicit a broad and hypothetical enquiry as to the construction and operation of statutory provisions. They did not identify a question of law.

The Court observed that an additional reason why the Commissioner submitted that question 2 (expressly) and also 1 (by necessary implication) in the notice of appeal raised no question of law was that a conclusion that the taxpayer was an agent of the property owners was one of fact. The Court considered that questions as to the existence of agency are usually questions of fact and that those questions of fact emerge from settled legal principles. However, the Court considered that it was not impossible to conceive of a case where a question of law might be found in posing as a question that, having found particular facts, was the Tribunal obliged in law to conclude that an agency relationship existed? The Court noted that neither question of law was pleaded in this way.

The Court also observed that another way putting such a proposition would be to pose as a question whether, on the facts found, the Tribunal was obliged in law to conclude that it was the taxpayer which had made the creditable acquisition? Once again, that is not the way in which either question was pleaded.

The Court nevertheless addressed the issue raised in the appeal, which was whether the taxpayer had made “creditable acquisitions” for the purposes of the GST Act – i.e., whether the taxpayer was acting as a principal that acquired goods and services from third parties which it resupplied to its owner-clients, or was it dealing with the contractors et al. as the agent of the owners in each case.

The Court observed that the taxpayer chose not to give detailed evidence as to the circumstances appertaining to each and every creditable acquisition for each and every period in question to establish that the taxpayer was the entity that made the acquisition. Further, the Tribunal was not shown any evidence that suggested that the finding of agency was wrong – for example invoices or other documents evidencing or describing transactions in a way that suggested the third party and the taxpayer intended that goods or services would be supplied to the taxpayer as principal, rather than to a property-owning client.

The Court concluded that the relationship of principal and agent between the taxpayer and its client was the correct conclusion in law.

 

 

 

 

Tribunal finds applicant out of time to claim input tax credits

In The Trustee for SBM Trust and Commissioner of Taxation [2015] AATA 174 the Tribunal found that the effect of s 93-5 of the GST Act was that the applicant was not entitled to amend its BAS to claim input tax credits that related to acquisitions made more than four years ago. The Tribunal also found that it did not matter that the acquisitions were made before the commencement date of s 93-5.

The Tribunal accepted the Commissioner’s argument that the effect of s 93-5(a) was that the applicant “ceased to be entitled” to the input tax credits as soon as Division 93 became law – this was because the taxpayer had not taken those credits into account in the tax period in which the acquisitions were made or any other tax period during the subsequent four years from the tax period in which the acquisitions were made.

The Tribunal rejected the applicant’s submission that s 93-5 applies only to acquisitions made after 12 May 2009 (the date of its application). This is because the provision does not fix on the date of the acquisition, but on the timing of the lodgement of the GST return.

 

Tribunal finds taxpayer was not carrying on enterprise of land development

In Bryxl Pty Ltd as Trustee for the Kypu Trust and Commissioner of Taxation [2015] AATA 89 the Tribunal found that the taxpayer did not establish that it was carrying on an enterprise of land development and was entitled to input tax credits in respect of certain acquisitions.

The Tribunal observed that the documents provided by the taxpayer were unsatisfactory, some were incomplete, some simply absent and some appeared to be inconsistent with statements made to the ATO in the course of discussions following assessment. Given that the onus falls to the taxpayer to show that an enterprise was being carried on, in light of these observations the taxpayer faced a difficult task.

In particular, a critical issue appeared to be the circumstances in which the taxpayer purportedly purchased the land which was to be subdivided and sold. The taxpayer only put parts of the contract of sale into evidence, and those parts were did not support what was said in oral evidence before the Tribunal. Further, there was no objective evidence of any deposit being paid or that settlement ever took place. The title search produced by the Commissioner showed that the land remained in the name of the vendor. The Tribunal also found that the taxpayer could not raise the purchase price.

The Tribunal concluded that until such time that the land was conveyed to the taxpayer, it could not have commenced an enterprise involving the subdivision of that land. The Tribunal’s conclusion was as follows (at [59]):

The evidence in this case regarding Bryxl conducting a business or enterprise involving the subdivision and sale of land discloses that while Bryxl may have had the intention to carry out such a business or enterprise, the steps it undertook in obtaining a planning permit and a market valuation cannot properly be described as being steps taken in the course of commencement of an enterprise. Until such time as it acquired the right to deal with the land in such a way that subdivision and sale could occur, it is artificial to suggest it was conducting the enterprise involving the subdivision and sale of land. The steps taken were clearly precursors or preparatory to the possible commencement of business, whether that be subdivision of the land or a quick sale to a syndicate of buyers.

The Tribunal also found that the Commissioner had properly cancelled the GST registration of the taxpayer and affirmed the Commissioner’s imposition of penalties on the basis that the taxpayer was reckless.

Federal Court finds taxpayer is not entitled to input tax credits for remote housing acquisitions

In Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCA 94 the Federal Court dismissed an application by the taxpayer for a declaration that it was entitled to input tax credits in respect of acquisitions made in the course of providing remote housing accommodation to its workforce in the Pilbara mining region of Western Australia.*

The taxpayer claimed input tax credits for acquisitions made by members of its GST group in “providing and maintaining residential accommodation for its workforce in the Pilbara region”. The accommodation was leased to workers and there was no dispute that the leases were input taxed supplies under s 40-35 of the GST Act. The acquisitions included construction, refurbishment and maintenance costs. The taxpayer subsidised the rent payable by the workers and made a loss from providing the accommodation and the unchallenged evidence was to the effect that the cost of accommodation in the towns would be very high without the subsidy, and it would not be economically viable for most people to pay the full cost of the accommodation, making it difficult to attract, and retain, people to work in the Pilbara region.

The case concerned the construction of s 11-15 and the expression “creditable purpose”. The Court observed (at [2]) that “creditable purpose” has the statutory meaning given by s 11-5 and that:

  • section 11-15(1) provides that an entity makes an acquisition for a creditable purpose “to the extent” the entity makes the acquisition “in carrying on” its enterprise
  • section 11-15(2) provides that “however” an entity does not make an acquisition for a creditable purpose “to the extent that” the acquisition relates to making supplies that would be “input taxed”, or the acquisition is of a private or domestic nature

The Commissioner accepted that the acquisitions fell within s 11-15(1) (i.e., they were made in the course of the taxpayer’s enterprise) but contended that s 11-15(2)(a) operated to deny the claims because the acquisitions related to supplies that would be input taxed – namely the leases. The Commissioner contended that there was a direct and immediate connection between the acquisitions and the leases.

The taxpayer put two contentions:

  • the acquisitions were made wholly for a creditable purpose because the leasing of accommodation to workers was not an end commercial objective, but was wholly incidental to the mining operations and a necessary and essential part of the operation.
  • in the alternative, the acquisitions related to the leasing and to the end commercial objective, requiring apportionment – adopting a revenue based apportionment methodology gave an entitlement to credits of 99.88.

The Court observed that the taxpayer accepted that there was a connection between the acquisitions and the leases, but contended that this was not the “relevant connection”. For the relevant connection to be established, the making of the input taxed supply needed to be the “moving cause” or “purpose” of the acquisition. The acquisitions at issue did not not “relevantly relate” to the leases but to the ultimate mining operations of the taxpayer.

The taxpayer sought to support its contention that one must look to the “purpose” of the acquisition by referring to New Zealand authority. The New Zealand provisions involved the statutory test of whether the acquisitions were acquired for “the principle purpose” of making services that were taxable supplies or exempt supplies. The Court stated as follows (at [21]):

Rio Tinto accepted that the statutory test in New Zealand is expressed in different language but submitted that the scheme under the GST Act is not relevantly different in that the criteria embodied in the words “relates to” in s 11-15(2)(a) is the identification of a purpose of making a taxable supply which would be input axed, as distinct from a purpose of making taxable supplies. Rio Tinto argued that this construction of s 11-15 is supported textually, and by the scheme and policy of the legislation. It was argued that as, in this case, the provision of housing was merely a means to Hamersley carrying on its business, there was not a sufficient and material connection between the acquisitions in question and the making of input taxed supplies for the purposes of s 11-15(2)(a). I am unable to agree.

The Court (at [23]) observed that unlike the New Zealand legislation, s 11-15 does not use the language of, or require, or even direct, an inquiry into purpose. Further, whilst the entitlement to an input tax credit depends on an entity having a “creditable purpose” in making the acquisition, “creditable purpose” is a statutory construct and has a specific statutory meaning.

The Court (at [25]) considered that the language of s 11-15(2)(a) directs an enquiry into whether the acquisition has a nexus with input taxed supplies that an entity makes in carrying on its enterprise. Further, (at [26]) the Court considered that relationship must be “sufficient” or “material” and concluded as follows:

If an entity makes input taxed supplies, s 11-15(2)(a) operates to deny input taxed credits on those acquisitions. It is the objective relationship between an acquisition and making supplies that would be input taxed with which s 11-15(2)(a) is concerned, not the moving cause or principal purpose behind the acquisition. The purpose for which an acquisition was made may in some cases bear upon whether the acquisition has a relevant relationship with the making of supplies that would be input taxed, but it is the existence of a connection or relationship between the acquisitions and supplies that would be input taxed that is the statutory criterion directed by s 11-15(2)(a).

The taxpayer also contended that the legislative policy of the GST Act and Division 11 would be defeated by the Commissioner’s construction of s 11-15 because the taxpayer’s business is to profit from the making of taxable and GST-free supplies of iron ore, not the provision of accommodation. Also, the Commissioner’s construction would result in a cascading of tax on taxable supplies and unrecoverable GST being embedded in GST-free exports because the taxpayer’s leasing activities operated as a loss and the taxpayer could only recover the GST cost in the acquisitions through those taxable and GST-free supplies. The Court (at [30]-[34]) outlined the following responses to that submission:

  • the task of statutory construction does not seek to identify or assume the underlying policy of a provision and then seek to construe that policy – that is what the taxpayer sought to do here.
  • that it may be necessary for the taxpayer to subsidise the rent on the accommodation in order to attract and retain its workforce, with the consequence that the leasing activity is loss making, does not gainsay the application of s 11-15(2)(a).
  • it is the transaction that determines the GST outcome. In this case, the taxpayer has chosen to lease accommodation to its workforce with the consequence that s 40-35 applies and the provision of accommodation is an input taxed supply.
  • s 11-15(2)(a) should be construed consistently with the scheme of the GST Act under which GST is not payable on input taxed supplies that an entity makes and correlatively there is no entitlement to input tax credits on acquisitions that relate to such input taxed supplies. The acquisitions in question have a direct and immediate connection with the provision of leased accommodation and that direct and immediate connection constitutes a sufficient and material relationship  for the purposes of s 11-15(2)(a).

The Court found that the taxpayer’s alternative argument on apportionment did not arise for determination because the acquisitions related wholly to the provision of accommodation.

* As I appeared for the Commissioner, in this post I have endeavoured to not provide any analysis or comment on the decision, but rather to summarise the reasons for decision of the Court.

Commissioner issues ATO ID 2014/36 on operation of time limit in s 105-50 of Schedule 1 to the TAA

The Commissioner has published ATO ID 2014/36 ‘GST and changes in net amount where an entity has notified the Commissioner of an entitlement to a refund’ where he takes the view that the four year time limit in s 105-50 of Schedule 1 to the TAA does not apply to prevent unpaid GST from being taken into account in determining an entity’s entitlement to a refund under s 105-55. The ATO ID replaces ATO ID 2008/94 which took a similar view.

The issue arises in the following factual scenario:

  • an entity lodges and pays a net amount on its activity statement for a tax period
  • within 4 years of the end of that tax period, the entity realises that it omitted to claim an input tax credit and lodges a notification under s 105-55 of Schedule 1 to the TAA, thus preserving its entitlement to “a refund in relation to a net amount” for that tax period
  • at the time of revising its activity statement to record the unclaimed credit, the entity realises that it omitted to include an amount of GST for that tax period – the Commissioner did not given the entity a notification under s 105-50(3)(a) requiring payment of an “unpaid net amount” within 4 years

The Commissioner’s view is that the 4 year time limit in s 105-50 does not apply in the above circumstances, to the extent that the unpaid GST is less than the input tax credit, and that the unpaid GST is to be set off against the input tax credit.

The basis for the Commissioner’s view is that s 105-50 applies to an “unpaid net amount” and not to individual amounts of GST. While not expressly stated in the ATO ID, it also appears that the Commissioner considers that in determining an entity’s entitlement to a refund “in relation to a net amount” for a particular tax period under s 105-55, any amount of unpaid GST is to be taken into account in determining the extent of that refund.

Interestingly, the approach does not appear to work the other way, so that where an entity receives a notification under 105-50 in respect of unpaid GST, it is not entitled to offset any unclaimed input tax credits against that unpaid GST. This is because the 4 year time limit in s 105-55 expressly refers to an input tax credit that is attributable to particular tax period.

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.

Tribunal finds taxpayer partially entitled to input tax credits

In Ryan and Commissioner of Taxation [2014] AATA 818 the Tribunal found that the applicant was entitled to part of the input tax credits disallowed by the Commissioner as the result of an audit.

The Commissioner initially found that the applicant was not carrying on an enterprise (and therefore was not entitled to any credits), but after the proceedings commenced concede that issue and the claim before the Tribunal was solely on whether the applicant was entitled to claim credits for particular acquisitions. The central issue appears to have been whether the acquisitions were non-creditable as they were for private or domestic use.

The Tribunal allowed expenses such as legal and accounting fees, domestic air fares, certain taxi fares, car rental and accommodation charges. The applicants accepted that he had mistakenly claimed credits for the rent of his home and life insurance (input taxed) and international travel and water charges (GST-free). The Tribunal disallowed claims for home contents insurance, utilities, airfares of other passengers and various entertainment expenses, including tickets for events. The Tribunal allowed a portion of some expenses after the Commissioner conceded that a 1/3rd apportionment was appropriate.

 

International Cases Update – May-July 2014 – decision by Court of Appeal on VAT and tripartite agreements

In the period May to July 2014 the following decisions dealing with VAT and GST in the United Kingdom and New Zealand were handed down.

Of particular interest is the decision of the UK Court of Appeal in Airtours Holidays Transport Ltd v Revenue and Customs [2014] EWCA Civ 1033 which dealt with the question of whether the appellant taxpayer was entitled to recover input tax credits pursuant to a tripartite arrangement pursuant to which PwC was engaged to provide services. While the appellant paid for the services, the issue was whether any services were provided to the appellant. The hearing of the appeal was deferred pending the consideration of appeals by the Supreme Court in HMRC v Aimia Coalition Loyalty UK Ltd (formerly Loyalty Management UK Ltd) [2013] UKSC 15 and WHA Ltd v HMRC [2013] UKSC 24 (my analysis of those decisions can be found here and here, respectively). The Court noted that in those cases the Supreme Court confirmed the decision of the House of Lords in CCE v Redrow Group plc [1999] STC 161 (HL) but qualified the decision in a limited respect.

The services were provided by PwC in the context of a large-scale restructuring of the appellant, at a time when its business was in financial crisis. The First Tier Tribunal accepted the argument of the appellant (supported by PwC) that the services provided by PwC for which the appellant paid had been supplied for VAT purposes by PwC to the appellant. On appeal the Upper Tribunal concluded that the FTT was wrong in law in its construction of the relevant agreements and that, looking at the substance of the transactions, the appellant did not receive a supply of services from PwC, but rather that the Services had been supplied to a number of banks, to which the appellant was, at the relevant time, indebted. The Upper Tribunal also decided that the appellant received nothing of value from PwC to use for the purpose of its business in return for payment.

The Court of Appeal (2:1) dismissed the appeal by the taxpayer. As noted by one of the majority justices, the appeal raised a narrow point, but one of some difficulty on which it is possible to take different views. The dissenting judgment helpfully outlines the current state of the law and distills a number of propositions from the decision in Redrow and the recent decisions of the Supreme Court. My analysis of the decision can be accessed here.

United Kingdom

Court of Appeal

Upper Tax Tribunal

  • Revenue and Customs v Earlsferry Thistle Golf Club [2014] UKUT 250 – VAT – jurisdiction of Tribunal – appeal by recipient of supply against refusal by HMRC to repay VAT erroneously charged on exempt supply – VATA 1994, section 80 – exercise of Community law right to obtain repayment directly from HMRC – whether Tribunal erred in refusing application to strike out – Appeal allowed.
  • Revenue and Customs v Finnamore (t/a Hanbidge Storage Services) [2014] UKUT 336 – AT – Classification of supply of plot of land and storage container – Item 1 Group 1 Schedule 9 Value Added Tax Act – supply exempt – no – appeal allowed
  • Revenue and Customs v LOK’nSTORE Group plc [2014] UKUT 288 – VAT – input tax – partial exemption – company making taxable supplies of storage and exempt supplies of insurance – special method for calculating proportion of deductible input tax on overheads – whether special method produces fairer and more reasonable result than standard method – held yes by FTT – whether FTT erred in law in so concluding – held no – appeal dismissed
  • Noble v Revenue and Customs [2014] UKUT 252 – VALUE ADDED TAX – Edwards v Bairstow – whether First-tier Tribunal erred in law in finding that that supplies shown on invoices did not take place – no – appeal dismissed
  • Revenue and Customs v Pinevale Ltd [2014] UKUT 202 – Value Added Tax – Reduced rate supply – Energy saving materials – Insulation for roofs – Polycarbonate panels for conservatories – Panels supplied to create new roof – Panels supplied to replace existing panels – Whether energy saving materials comprising insulation for roofs – Appeal allowed
  • Revenue and Customs v Roger Skinner Ltd [2014] UKUT 204 – VALUE ADDED TAX – whether certain kinds of dog food were pet food – meaning of “meal” in expression “biscuits and meal” in zero-rating schedule
  • South African Tourist Board v Revenue and Customs [2014] UKUT 280 – VAT – input tax recoverability – s 26 VATA – reg 103 VAT Regulations – whether certain activities of appellant would be taxable supplies if made in the UK – whether supplies made for a consideration – art 2, Principal VAT Directive – Apple and Pear; Tolsma – whether appellant acting as a taxable person – economic activity – art 9, Principal VAT Directive

First Tier Tribunal

  • African Consolidated Resources Plc v Revenue & Customs [2014] UKFTT 580 – VAT – holding company – economic activities – taxable supplies – intra-group loan finance – intra- group management services- HELD – loan finance quasi- equity -not carried on on commercial basis –not economic activity – management services –insufficient link between fixed fee and services provided – not taxable supply – appeals dismissed.
  • Baldwin (t/a Ventnor Towers Hotels) v Revenue & Customs [2014] UKFTT 489 – VAT – Place of supply – hotel accommodation supplied to non UK travel agents; EC Sales Lists
  • Helmbridge Ltd v Revenue & Customs [2014] UKFTT 732 – VAT – input tax – five invoices – whether supply to appellant or to directors personally – whether benefit in kind or pecuniary liability – appeal dismissed
  • Itchen Sash Window Renovation Ltd v Revenue & Customs [2014] IKFTT 518 – VALUE ADDED TAX – reduced rate on supplies of energy-saving materials – weather stripping services supplied with other services generally related to renovation of windows – whether composite or separate supplies – held that where weather stripping services were invoiced for separate prices they were separate supplies, otherwise they were elements of composite supplies not attracting the reduced rate – penalty considered – held that in relation to all but one of the periods assessed the inaccuracy was not careless with two minor exceptions – mitigation reduction percentages also increased – decision in principle – appeal allowed in part
  • Lees of Scotland Ltd & Thomas Tunnock Ltd v Revenue & Customs [2014] UKFTT 630 – VAT – food – excepted items – confectionary – subset cakes – snowballs – sufficient characteristics to be classified as cakes – yes – appeal allowed
  • Norseman Gold plc v Revenue & Customs [2014] UKFTT 573 – VALUE ADDED TAX — input tax — whether appellant carrying on economic activity — whether expenses attributable to onward taxable supply — UK resident company providing management services to overseas subsidiaries — no agreement on amount of consideration to be paid by subsidiaries — no — whether taxable supplies made — no — whether assessments in time — yes — appeal dismissed
  • Oriflame UK Ltd v Commissioners for Revenue & Customs [2014] UKFTT 454 – VAT – Preliminary issue – Single supply made by appellant to its non-VAT registered sales consultants – Subsequent retail sale of goods sold by sales consultants – Direction that output tax on appellant’s due at “open market value on a sale by retail” – Whether “open market value on a sale by retail” should include delivery charges made to sales consultants – Appeal Allowed – Paragraph 2 Schedule 6 Value Added Tax Act 1994
  • Spencer-Churchill v Revenue & Customs [2014] UKFTT 635 – Value Added Tax  –  Whether a “one-off” service, for which the consideration received was arguably gratuitous was undertaken “in the course of business”  –  Appeal dismissed
  • Temple Retail Ltd v Revenue & Customs [2014] UKFTT 702 – VAT – time limits for assessment – whether assessment made more than one year after the HMRC officer had received “evidence of the facts sufficient in the opinion of the commissioners to justify the making of the assessments” – held, yes – appeal allowed.
  • Vodaphone Group Services Ltd v Revenue & Customs [2014] UKFTT 701 – VAT – claim for repayment of over paid tax – appellant sought to justify claim on a different basis to the basis on which claim originally made – whether that was the making of a new claim out of time –Reed Employment considered –  appeal allowed

New Zealand

Taxation Review Authority