Tribunal finds letter by taxpayer constitutes a notification of entitlement to input tax credits

In North Sydney Developments Pty Ltd and Commissioner of Taxation [2014] AATA 363 the Tribunal found that a letter provided to the Commissioner was a valid notification for the purposes of s 105-55(1)(a) of Schedule 1 to the TAA in relation to input tax credits for tax periods ending December 2005 and January 2006.

Set out below are the principal events underlying the input tax credit claim as identified by the Tribunal and the conclusions of the Tribunal. As I appeared in the case I will not be providing an analysis of the decision.

The principal events were as follows:

  • May 2004 to November 2005: North Sydney lodged 17 monthly Business Activity Statements reporting GST purchase payments totalling $1,070,800, and no sales. The Commissioner accepted that North Sydney was entitled to input tax credits in relation to the amounts claimed in each statement.
  • December 2005: North Sydney did not lodge a Business Activity Statement for the month.
  • January 2006: North Sydney again did not lodge a Business Activity Statement for the month.
  • 16 February 2006: the Commissioner issued a “lodgement and payment” notice requiring North Sydney to lodge its December 2005 Business Activity Statement, and pay any liability amount it recorded.
  • 8 March 2006: a mortgagee appointed a controller to the substantial property, whose (not yet completed) development had been the reason for the $11.78m GST purchases reported in the Business Activity Statements lodged up to November 2005.
  • 24 March 2006: the Commissioner issued a further “lodgement and payment” notice requiring North Sydney to lodge its January 2006 Business Activity Statement, and pay any liability amount it recorded.
  • 23 June 2006: North Sydney was placed in receivership, and the receiver subsequently sold the partially completed development.
  • 3 September 2009 North Sydney wrote to the Commissioner. The letter reported the receiver’s appointment on 8 March 2006 and stated that “ASIC and the receivers” had taken possession of all North Sydney’s books and records, and refused to either return them or provide access to them. The letter continued with statements to the effect that:
      1. North Sydney was unable to complete the lodgement of Business Activity Statements for December 2005 and January 2006
      2. The letter was to “provide notice that substantial GST refunds are due for these months”.
      3. North Sydney would be unable to lodge Business Activity Statements for those months until it gained access to the necessary books and records.

After considering a number of authorities (including Central Equity Ltd v Federal Commissioner of Taxation [2011] FCA 908; MTAA Superannuation Fund (RG Casey Building) Property Pty Ltd v Commissioner of Taxation [2011] AATA 769; National Jet Systems Pty Ltd v Commissioner of Taxation [2011] AATA 766 and Brookdale Investments Pty Ltd v Commissioner of Taxation [2013] AATA 154) the Tribunal observed as follows (at [25]):

The common themes resonating through the decisions to which I have referred are the absence of any formal notification content requirement, a disavowal of amount specificity and the apparent sufficiency of a notice where it communicates a claim relating to a particular tax period in relation to a particular kind of tax liability. Implicit in the third theme, and variously expressed in the judgments and reasons, is a refusal to endorse any particular requirement for the details, grounds or even circumstances relied on to support the claim. 

The Tribunal’s conclusion was as follows (at [31]):

In my view, North Sydney’s 3 September 2009 letter did notify the Commissioner of “the refund, other payment or credit” to which TAA Schedule 1: s 105-55(1)(a) applied. It did so for two reasons. Firstly, the provision required no greater specification than the tax period involved, and the nature of the refund or input tax credit claimed. The letter, by describing the notification as relating to the expected outcome of Business Activity Statements for December 2005 and January 2006, satisfied the requirements of a complying notification. Secondly, if the letter required some greater degree of specificity in order to permit satisfaction that any subsequent claim was covered by the notification, the letter also satisfied that requirement. It did so because it indicated that the reason for the notification was the lack of access to the contemporary books and records in the possession of the receiver. On this view any subsequent claim would be limited to a summarised reproduction of the information in the purchase, payment and supply records maintained by the receivers. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tribunal hands down decision on what constitutes an enterprise

Yesterday the Tribunal handed down its decision in Davsa Forty-Ninth Pty Ltd as Trustee for the Krongold Ford Business Unit and Commissioner of Taxation [2014] AATA 337. The question was whether the applicant was entitled to input tax credits for the acquisition of motor vehicles and whether the applicant was carrying on an enterprise.

The interesting context in which the enterprise question arose was noted by the Tribunal in the first paragraph of the judgment:

The disputed claims arise in circumstances where the Applicant carried on activities described as a one man business by its principal who had a genuinely held belief that they would, or could, be profitable and that they constituted a business but on an objective view, the possibility of making profits or gains was close to, if not actually, zero.

After a detailed review of the facts and the legislation, the Tribunal found that an enterprise was being carried on. Unfortunately for the applicant, save for one vehicle, credits were ultimately not available because most the motor vehicles were used at least partly for a private purpose and no evidence was given to determine an appropriate apportionment and tax invoices were not held.

The decision illustrates that the question of whether an enterprise is being carried on involves a detailed factual enquiry and in many cases (as in this one), the decision will be finely balanced. There is no bright line test.

Some of the observations of the Tribunal in undertaking its enquiry included the following:

  • At [16]: In determining whether a business is carried on, possibly the rule should be that if there is a significant commercial purpose then there will be a business and without it, other matters need to be considered.
  • At [18]: Identifying whether an “enterprise” is carried on involves a lower standard than identifying whether a “business” is carried on.
  • At [22]: the qualification in s 9-20(2) that activities which constitute a private recreational pursuit or hobby is not an enterprise applies to all entities – however, there is a conceptional difficulty in an entity other than an individual carrying on a hobby unless an entity does so as a vehicle for an individual’s pursuit.
  • At [23]-[26]: the qualification in s 9-20(2) that activities undertaken  by an individual that do not have a reasonable prospect of profit or gain is not an enterprise is a discrete test which applies to individuals and partnerships comprising of individuals – this test does not apply to other entities.
  • At [27]-[29]: determining whether an acquisition is made in the course of commencement of an enterprise requires the identification of the essential character of the step taken and the essential character of the acquisition.
  • At [37]: Prospective profitability, and/or a strong likelihood of it, is a positive indicator of the most important criterion for whether someone is carrying on a business (and by extension an enterprise), namely intention to make profits. However, an objective view that profits are unlikely is not fatal to the analysis that a person is engaging in activities intending to make profits.

Having regards to the evidence, the Tribunal found that, while finely balanced, the Applicant had engaged in a series of activities that have sufficient indicia of business to be regarded as carrying on an enterprise, or to have been carrying out steps in the commencement of an enterprise.

Tribunal sets aside amended assessment aimed at recovering GST refund paid to applicant

On Friday the Tribunal handed down its decision in Swanbat Pty Ltd and Commissioner of Taxation [2013] AATA 891 where the Tribunal found that the Commissioner could not issue an assessment to recover a GST refund paid to the taxpayer more than 4 years after the relevant tax period, even though the taxpayer’s entitlement to the refund was exhausted by the operation of s 105-55 of Schedule 1 to the TAA.

This is yet another decision of the Tribunal dealing with the interaction between the GST Act and the recovery provisions in Schedule 1 to the TAA. Interestingly, the decision appeared to result in a partial win to both parties although it is likely that the taxpayer will be ultimately required to pay back the refund under the mistaken payment provisions in s 8AAZN of the TAA. My analysis of the decision can be accessed here.

The Tribunal also handed down its decision in The Married Couple and Commissioner of Taxation [2013] AATA 888. In this case the applicants purchased a rural property, which was vacant land, having been used as a cattle station. The couple constructed a residential building on the property and also did some other works, including clearing of some of the land. They intended to make the building available for short-term holiday letting. They also intended to grow olive trees on the property for production of table olives and olive oil. At one stage, Mr and Mrs C also intended to farm goats.

In or about early October 2009, Mr and Mrs C executed a partnership agreement and became registered for GST purposes, initially with a date of effect of 29 September 2009. However, the partnership’s registration was subsequently backdated by the Commissioner of Taxation, at the request of the Married Couple’s accountant, to 1 January 2007. This was because Mr and Mrs C wanted to claim input tax credits (ITCs) for their acquisitions, including in relation to the construction of the residential building.

The Commissioner conducted an audit shortly after backdating the GST registration of the Married Couple as a partnership and concluded that the Married Couple was not a partnership and was not carrying on an enterprise within the meaning of the GST Act. Also, the input tax credits that had been claimed by the partnership in respect of the tax periods between 1 January 2007 and 30 June 2010 (Relevant Period) were incorrect because the Married Couple was not carrying on an enterprise. Even if the Married Couple was carrying on an enterprise during the Relevant Period, the Commissioner stated that the acquisitions were not made in the course of carrying on an enterprise or even if they were, they were excluded from being acquired for a creditable purpose because they related to making supplies that would be input taxed supplies of residential premises.

The Tribunal found that the activities of Mr and Mrs C were essentially preparatory in nature, while there was an intention to carry on a business in the future. Similarly, their evidence reflected an intention that they were to carry on business as partners, but the business activities had not yet commenced. Accordingly, no enterprise was being carried on and input tax credits could not be claimed. The Tribunal also found that the property constructed was not commercial residential premises.

Tribunal finds applicant not entitled to input tax credits

In VGGL and Commissioner of Taxation [2013] AATA 867 the Tribunal affirmed the Commissioner’s objection decision that the applicant was not entitled to claim input tax credits for certain costs incurred by the applicant, who carried on a property development business.

The applicant operated a property development business and was also a director of a company which sold and maintained water filtration systems. The claims related to the following expenses:

  • Amounts incurred in respect of the construction of a townhouse, where the Contract of Sale expressly indicated that the sale was not a taxable supply and was not sold in the course or furtherance of an enterprise carried on by the applicant (two other townhouses had been sold as taxable supplies).
  • Legal fees in respect of proceedings brought by a shareholder of a company of which the applicant was also a shareholder.
  • Other expenses purportedly incurred in the course of the property development enterprise

Acquisitions relating to the construction of the townhouse

The Tribunal noted that the Contract of Sale specifically made it clear that the sale was not made “in the course or furtherance of an enterprise that the vendor carries on”. Further, a box on the contract was ticked, indicating that the sale was not a taxable supply and that the margin scheme would not apply. This could be distinguished from the contracts from two other townhouses sold by the Applicant which were clearly sold as taxable supplies.

The Tribunal observed that there was noting to suggest that any of these markings on the Contract were in any way inappropriate or failed to reflect the true position – noting that it appeared that the contract was prepared by competent solicitors who would have known the significance of the markings. The Tribunal observed that “the position seems to be that the Applicant intended from the outset that the sale of Lot 3 would not be a taxable supply and this was properly reflected in the markings on the Contract of Sale”.

Implicit in the observations of the Tribunal appears to be that the applicant failed to discharge its burden of showing that the sale was a taxable supply, particularly given the express terms in the Contract of Sale. I do not think that a taxpayer can “intend” that a sale is not a taxable supply or can contract out of the GST Act by including a term in a contract that the supply is not a taxable supply or that the supply is not made in the course of its enterprise.

Acquisition of legal expenses

In early 2005 the applicant sold one of the two issued shares in the company to B, which in April 2005 brought proceedings against the applicant alleging oppression and misleading and deceptive conduct. The applicant claimed an input tax credit for the legal fees.

The Tribunal found that the evidence did not provide a clear connection between the legal services acquired and the conduct of a business of property development. The applicant contended that the legal fees were largely incurred so as to protect the Applicant’s reputation as a director and that any adverse findings against the Applicant would have resulted in a complete collapse of the townhouse development. The Tribunal rejected this contention, finding that the reality was that the legal fees had nothing whatsoever to do with property development – rather they were connected a company whose business was in the maintenance and sale of water filtration systems.

Other expenses

The Tribunal found that the applicant was not entitled to input tax credits for the other expenses claimed. The applicant did not produce tax invoices and very little evidence was produce to substantiate the claims or to demonstrate how the expenses were creditable acquisitions.

Federal Court finds taxpayer not entitled to input tax credits pursuant to a litigation funding arrangement

On Friday the Federal Court handed down its decision in Professional Admin Service Centres Pty Ltd v Commissioner of Taxation [2013] FCA 1123 in which it found that the applicant was not entitled to input tax credits for the payment of legal fees of third party pursuant to a litigation funding arrangement.

This case involved a litigation funding arrangement involving the provision of legal services to a Michael Felson (formerly known as Nikytas Nicholas Petroulias) for the defence of his criminal proceedings. The Court (Edmonds J) considered that there was no doubt that the lawyers supplied legal services to Mr Felson and that he acquired those services under a taxable supply. However, unless the applicant also acquired those services under a taxable supply from the lawyers concerned, the Court considered that did not make a creditable acquisition and the applicant was not entitled to an input tax credit notwithstanding its payment of the relevant invoices.

The Court accepted that, in certain circumstances, one set of acts may constitute two or more different supplies of services and may give rise to two or more different acquisitions: referring to Secretary, Department of Transport (Vic) v Commissioner of Taxation [2009] FCA 1209; on appeal [2010] FCAFC 84 (“DoT”). However, the Court found that on the evidence, it was unable to comprehend how the payments made by the applicant to Mr Felson’s legal representatives were for the “acquisition” of anything by the applicant. Put another way, the lawyers engaged by Mr Felson made no supply to the applicant. The terms of the litigation funding deeds clearly stated that Mr Felson’s lawyers would be paid by the applicant but retained by the client. Mr Felson’s evidence was that he engaged the lawyers. There is no evidence of any arrangement between the applicant and the lawyers pursuant to which legal services would be provided to the applicant. Those services were provided to Mr Felson alone.

My analysis of the decision can be accessed here.

In other news, on Thursday the Tribunal handed down its decision in Zarev and Commissioner of Taxation [2013] AATA 777 where the Tribunal affirmed the decision of the Commissioner to partially disallow the applicant’s claim for input tax credits. In this case, the Commissioner initially determined that the applicant was not carrying on an enterprise and was not entitled to any credits. However, after receiving further information from the applicant the Commissioner accepted that the applicant was carrying on an enterprise but was only entitled to some of the credits claimed as a number of the acquisitions had no connection with the enterprise and were private or domestic in nature. The Tribunal found that the applicant did not substantiate those claims. The Tribunal also affirmed the Commissioner’s decision to impose a penalty of 50% on the basis that the applicant’s conduct was reckless.

Tribunal decision on creditable acquisitions; final GST Determination issued

Last week the Tribunal handed down its decision in Confidential and Commissioner of Taxation [2013] AATA 701 where the Tribunal affirmed the Commissioner’s decision that the applicant was not entitled to input tax credits as she had not demonstrated that an enterprise was being carried on and that the acquisitions were creditable acquisitions. Also last week the Commissioner published GSTD 2013/4 ‘Goods and Services tax: where capital assets that diminish in value over time are utilised in making a supply, can the consideration provided by the supplier to acquire those assets be taken into account in determining whether the supply is GST-free under subparagraph 38-250(2)(b)(ii) of the A New Tax System (Goods and Services Tax) Act 1999?’

Confidential and Commissioner of Taxation 

The applicant claimed input tax credits in respect of purchases made in the conduct of a services businesses. The credits were claimed in various tax periods between March 2009 and March 2012 and totalled $73,946 – no taxable supplies were recorded in these activity statements.

The evidence relied on by the applicant to substantiate the acquisitions and the activities which were said to constitute a business was limited to oral testimony and letters to the Tribunal. The applicant did not produce any documentary evidence to substantiate the claims, nor any corroborating evidence from another person. Between the date of the objection and the hearing, the applicant was requested on five occasions to substantiate the claims and to provide substantiating documents. Given these circumstances, the applicant clearly faced a difficult task of discharging the onus of proof of establishing that an enterprise was being carried on, that the acquisitions were made and that tax invoices were held.

The Tribunal came to the following conclusions:

  • There had not been sufficient evidence led for the Tribunal to undertake the examination required and/or to form the requisite views as to a reasonable expectation of profit or gain. This was so whether the enquiry was as to whether the steps taken were in commencing an enterprise or in carrying on the enterprise after commencement. This lack of evidence also precluded any inferences being made.
  • There is insufficient evidence that the purchases leading to the ITCs claimed by the Applicant were taxable supplies made by the vendors of the goods (although the Applicant asserted that she purchased and/or she held tax invoices in the periods in which the ITCs were claimed)

GSTD 2013/4

The Commissioner has issued GSTD 2013/4 ‘Goods and Services tax: where capital assets that diminish in value over time are utilised in making a supply, can the consideration provided by the supplier to acquire those assets be taken into account in determining whether the supply is GST-free under subparagraph 38-250(2)(b)(ii) of the A New Tax System (Goods and Services Tax) Act 1999?’

Subparagraph 38-250(2)(b)(ii) provides that a supply (that is not a supply of accommodation) made by an endorsed charitable institution is GST-free if the supply is for consideration that is less than 75% of the consideration the supplier provided, or was liable to provide, for acquiring the thing supplied.

In the Determination the Commissioner takes the view that the consideration the supplier provided for acquiring assets that diminish in value over time can be taken into account in determining whether a supply in that period is GST-free – to the extent that the consideration provided reasonably relates to that supply. The Commissioner also considers that the supplier should apply any reasonable methodology that reflects the proportion of the consideration that relates to each supply made.

The Commissioner takes a broad approach to the construction of subparagraph 38-250(2)(b)(ii), noting that a narrow construction would result in the provision applying only where the thing acquired is identical to the thing supplied. As noted by the Commissioner:

The purpose of section 38-250, expressed in the most general terms, is to make non-commercial supplies by charities GST-free. There is nothing in this purpose which would suggest a restriction on the class of supplies to which subsection 38-250(2) applies. A narrower interpretation of subparagraph 38-250(2)(b)(ii) would restrict the operation of the provision substantially and would not include most supplies by charities. However, there is nothing in the legislation or extrinsic materials that evidences an intent that the provision has such narrow scope.

Tribunal decision on whether an acquisition was made – a question of evidence

Yesterday the Tribunal handed down its decision in Confidential and Commissioner of Taxation [2013] AATA 624 where it affirmed the Commissioner’s decision that the applicant was not entitled to input tax credits in respect of the purchase from related parties of intellectual property and debtors. The Tribunal set aside the Commissioner’s decision that the an administrative penalty of 75% was to be applied for intentional disregard of the law, and found that the appropriate penalty was 25% for failure to take reasonable care.

The purported acquisitions arose from two agreements, both of which were in a similar form. The agreements provided for the purchase of certain assets from a related party and the terms included the following:

  • the assets were to be acquired under each agreement on completion;
  • title to the assets passed on completion;
  • the applicant agreed to pay the purchase price on completion
  • the applicant agreed to assume nominated liabilities at completion

Tax invoices were issued by the applicant with respect to both agreements.

The Tribunal found that the documents tendered and oral testimony did not establish that liabilities were assumed to the extent of the purchase price payable under the the agreements, nor did they establish that cash was paid. Further, beyond the assertion made by the applicant, the evidence that the applicant provided consideration for the assets to be purchased was limited – as a consequence, the Tribunal found that there was limited, weak and insufficient evidence on which to base the applicant’s claim that it made an acquisition under either agreement.

The Tribunal concluded that the evidence did not establish that the property to be sold passed from the vendors  to the Applicant in the relevant period, with the result that there were no supplies in that period and credits were not available.

The Tribunal made some adverse comment in response to the Commissioner’s contention that the:

[A]pplicant has failed to discharge even the most rudimentary step of proving it made a creditable acquisition because there is no evidence to indicate what was bought.

The Tribunal observed that this contention could not be accepted, noting that the agreements and tax invoices were included in the “T” documents filed by the Commissioner with the Tribunal, being documents which are relevant to the decision under review.

These observations of the Tribunal appeared to filter into the decision about penalties. The Commissioner imposed penalties of 75% on the basis of intentional disregard as the applicant maintained that each transaction occurred without any basis on which they could have occurred – the only reasonable inference was that the applicant knew that it had not made the acquisitions and yet proceeded with the claim for credits.

The Tribunal observed that it was apparent that the applicant was of the belief that the transactions had occurred and that the applicant had (potentially inadvisably) created transactional documents without understanding their effect and had acted in ignorance. In these circumstances, intentional disregard was not the appropriate standard – failure to take reasonable care was the appropriate standard.

The case is a good example of the onus of proof on the applicant to show that the assessment is excessive – in this case by showing, on the balance of probabilities that it made the acquisitions contended. The Commissioner did not appear to allege that the agreements were a sham, so the task before the applicant was to establish that the purchase price was paid (whether by the assumption of liabilities or the payment of cash). The applicant was not able to do so.

Commissioner publishes GST Determination on second hand goods

Yesterday the Commissioner published GSTD 2013/2 ‘Goods and services tax: when are second-hand goods acquired for the purpose of sale in the ordinary course of business under Division 66 of the A New Tax System (Goods and Services Tax) Act 1999’.

Section 66 of the GST Act entitles taxpayers to an input tax credit for the acquisition of second hand goods in certain circumstances, notwithstanding that the second hand goods are purchased from an entity which is not registered for GST. One of the requirements is that the second hand goods are acquired “for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business)”.

The Determination takes the following view:

  • the requirement will be satisfied where the second hand goods are acquired by an entity which is in the business of buying and selling second hand goods, and the goods are acquired for the purpose of being sold in the ordinary course of that business;
  • the requirement will not be satisfied where the goods are acquired only in order to be leased, or where there is simply an intention that the goods will ultimately be sold after they are no longer required
  • the requirement will be satisfied where an entity carries on a business involving the leasing and selling of second hand goods and:
    • the goods are acquired in the ordinary course of the business;
    • the contractual arrangements under which the second hand goods were acquired and leased contemplate that the entity will lease the goods back to the vendor for a defined term and then sell the goods at the conclusion of the lease term;
    • the contractual arrangements provide that the proceeds from selling the second hand goods will be compared with the residual value agreed upon commencement of the arrangements, in order to determine the extent of any indemnity payable by the lessee, or, entitlement of the lessee to participate in profits from the sale of the goods; and
    • the way the entity conducts its business objectively supports the conclusion objectively supports the conclusion that the second hand goods are in fact acquired for the purpose of sale.

The Determination acknowledges the decision of the Federal Court in Leaseplan Australia Limited v Commissioner of Taxation [2009] FCA 130. In that case it was accepted that neither a sole or dominant purpose test applied, and the test was whether the sale was “a purpose” for which the vehicles were supplied. In Leaseplan the Court found that the taxpayer had a dual purpose in acquiring motor vehicles, namely to lease them and to sell them at the end of the lease. The issue is therefore whether the evidence establishes the existence of a dual purpose. In Leaseplan the existence of the dual purpose was supported by the terms of the contractual arrangements between the parties which envisaged the sale of the vehicles at the end of the lease.

As noted in the Determination, the issue:

…requires careful consideration of the circumstances surrounding the acquisition of second hand goods, particularly where the acquirer carries on a business involving the leasing and selling of second-hand goods. In that context, consideration of how the entity conducts its business, and contractual arrangements under which it acquires and leases second-hand goods is necessary to determine whether subsection 66-6(1) is satisfied.

The Determination also states that the existence of a mere intention that the second-hand goods will ultimately be sold is not sufficient. For example, a tradesman buys a second hand ute for his business, with the intention that the ute will ultimately be sold.

The above matters do not appear controversial. However, when you read the Determination it appears that the Commissioner takes the view that second goods will only be acquired for a “dual purpose” of leasing and sale where the contractual documents expressly contemplate the sale of the goods (see the third dot-point above). In my view, this is an unduly narrow approach. In Leaseplan, the question was whether “the evidence” established the existence of a dual purpose in acquiring the vehicles. That the contract expressly provides for the sale of the vehicle at the end of the lease term certainly provides strong evidence of that dual purpose, but in my view it would be open to establish that dual purpose even where it was not expressly contemplated in the contract. For example, by evidence that the acquirer always or regularly sold the goods at the end of a particular period or evidence that the estimated residual sale value was a factor taken into account when negotiating the price paid for the goods.

Commissioner publishes PSLA 2013/3 on the treatment of input tax credits and s 105-65 of Schedule 1 to the TAA

Today the Commissioner published PSLA 2013/3 (GA) ‘Treatment of input tax credits claimed by a recipient of a non taxable supply where the Commissioner has a discretion to give a refund of the overpaid GST to the supplier due to the operation of section 105-65 of Schedule 1 to the TAA’.

The purpose of the Practice Statement is stated to be as follows:

To explain the circumstances in which the Commissioner will use his powers of general administration to allow a recipient to retain an input tax credit that is claimed where a transaction was incorrectly treated by a supplier as giving rise to a taxable supply.

The PSLA was originally issued as Draft PSLA 3521 – Treatment of input tax credits claimed by a recipient where the Commissioner does not give a refund to the supplier due to the operation of s 105-65 of Schedule 1 to the TAA.

The Practice Statement provides that a recipient will generally not be required to repay over-claimed input tax credits or pay any general interest charge related to the over-claimed credits where the following circumstances apply:

  • a supply has incorrectly been treated as taxable to any extent;
  • the supplier is registered for GST and has overpaid GST;
  • the supplier has issued a tax invoice to the recipient;
  • the recipient has over-claimed an input tax credit and would have been entitled to claim that input tax credit if the supply had been a taxable supply;
  • the recipient has treated the acquisition as a creditable acquisition when applying other taxation laws such as the income tax law and the fringe benefits law;
  • should the supplier request a refund, section 105-65 would apply such that the Commissioner need not refund the supplier the overpaid GST; and
  • the Commissioner has not given a refund of the overpaid GST to the supplier.

This approach is referred to as the ‘preserving the status quo approach’.

The status quo approach will not apply in the following cases (and the Commissioner will generally seek to recover the over-claimed input tax credits):

  • where the Commissioner exercises his discretion under s 105-65 to pay a refund
  • where the supplier reimburses the recipient for the GST incorrectly included in the price for the supply

As I noted in my discussion on the draft PSLA, the Practice Statement is interesting because it effectively operates as an administrative override of the provisions of the GST Act and the TAA, which cause the recipient to have a “GST shortfall” in  circumstances where input tax credits have been incorrectly claimed. The recipient is also exposed to recovery and the imposition of penalties and interest. The Commissioner considers that applying his general powers of general administration, “it is appropriate for the Commissioner not to take any compliance action to reverse a transaction” in the particular circumstances.

However, it should be noted that to the extent that the Commissioner does not (or chooses not to) follow the Practice Statement, the law will otherwise apply.  In this regard I not that the Practice Statement states that a recipient will “generally” not be required to repay input tax credits.

Where there is truly a “status quo”, in the sense that GST was paid and credits were claimed, one can see the administrative ease of such an approach and there would be appear to be no reason why the Commissioner should not follow the statement.  However, the matter may not be so clear where credits are claimed but for some reason the Commissioner is out of pocket (e.g., the supplier pays the GST and then goes into liquidation and the Commissioner is required to disgorge the payments as a preference claim).  In such circumstances the practice statement would afford the recipient no protection if Commissioner sought to recover the over claimed credits from the recipient.

Tribunal finds applicant not carrying on an enterprise

Yesterday the Tribunal handed down its decision in Clayton and Commissioner of Taxation [2013] AATA 428 where the Tribunal affirmed the decision of the Commissioner that the applicant was not entitled to input tax credits because it was not carrying on an enterprise.

In 2003 the applicant purchased rural land with the intention to start a business of eco-tourism. A business plan was prepared, the applicant conducted market research and in 2004 a development application was lodged with the local council for permission to construct four cabins and a reception building. Consultants were engaged to advise on how to site the cabins and how they should be provided with services like power, water and sewerage. A website was established and the applicant started to make improvements to the property as well as studying a diploma course in conservation and land management.

Having regard to the above matters, the activities of the applicant certainly looked like an enterprise. However, progress towards establishment of the business was slower than hoped and the local council was slow in processing the development application, with a decision not being made until 2008. The global financial crisis then struck in 2008 and the applicant decided to change the focus of their efforts and re-wrote their business plan to focus more on organising tours of the property and to offer environmental consultancy services.

The applicant did not have any paying tourists until 2012, which was after the period under review (being 2007 to 2011). Also, no consultancy services were provided during the period under review. Further, the cabins had not been built and there were no plans to do so in the absence of fresh capital.

The Tribunal acknowledged that a number of features of the applicant’s course of conduct had the hallmarks of a business, but found that the business had not come into existence by 2011. For a variety of reasons, some beyond the control of the taxpayer, the activities that occurred prior to 2011 were essentially preparatory in nature. Further, noting that the definition of “carrying on an enterprise” includes “doing anything in the course of the commencement or termination of the enterprise”, the Tribunal stated as follows:

17. Every business has to start somewhere. Where the business progresses from its foundations to operation within a reasonable time frame, it is easier to see how initial expenditures can be seen as part of a course of conduct that amounts to carrying on an enterprise. But where there is delay – where the momentum of the activities is lost – it becomes harder to make a connection between initial expenditure and the operations which result. That connection is even more difficult to establish where the business has not, or does not, commence trading in due course.

18. While there were some features of a business present during the period under review, the activities are better described as preparatory and exploratory in nature. They may yet lead to the establishment of an enterprise; one hopes so, for the taxpayers appear to be genuine in their desire to contribute to the growth of tourism in their local area. But that is not enough to meet the definition in the Act. I am not satisfied that they were carrying on an enterprise.